Everyone has heard a story or read about someone who bought a property without paying a single dime as a down payment. But how does this work?
There are several "classic" methods commonly used to purchase real estate with no money down. There are an infinite variety of situations in a real estate transaction that could lead to a deal with no down payment. But for the sake of reality, I will focus on those that are most commonly seen in the current market.
1. Seller second - The buyer obtains a new first mortgage for most but not all of the total purchase price. The seller finances the rest.
Purchase price: $100,000
Buyers loan: $90,000 (90% LTV) (new first mortgage)
Sellers finances $10,000 (in the form of a new second mortgage)
The buyer has borrowed 100% of the purchase price. Thus, you have100% financing, and no down payment was paid by buyer.
This is not a difficult strategy to employ if the seller has enough equity, is willing to hold a second, and the first mortgage lender approves.
One thing that is not mentioned in most articles about this strategy is the requirement for lender approval. The lender who is making the 90% loan will have to agree to allow the seller to take back a second mortgage. In cases where the buyer has better credit, this is usually OK with the lender. But if the buyer has a lower credit score, the lender may not approve of this. If your credit score is on the lower side, but you have good documented income, you may still qualify.
Herein lies the fundamental issue that makes it so difficult to write about your financing options and what to expect:
The fact is that lenders who are making the first mortgages on a property can change the rules or make new rules in the middle of a deal. Therefore every deal is different. Every buyer's credit and income are different and lenders vary in their underwriting requirements.
It is a moving target. So while it can be said that you can get a 100% loan to buy a property, there are usually specific credit requirements, income requirements, etc. It makes this game rather unpredictable.
Talk to your lender ahead of time and find out if creative financing options such as a seller second would be allowed. Make sure you have a lender who is used to working on investment property loans. Some mortgage companies only have programs for owner occupants. You need to go to a lender who specializes in loans for investors.
2. Another common way to obtain a no down payment loan is to utilize one of the many low or no down payment programs that exist. Many of these are intended for owner occupants, but some are available for investors. Again, it is important to talk to the right lender.
If you have an investment property that you want to sell, consider taking back a second mortgage for 5-10%. This is not a huge amount, and it can help you sell your property faster.
When it comes to finding a seller who will help you create a no money down deal, consider buying from an investor who is willing to be flexible. Some investors are willing to do creative financing simply because they understand that it helps them sell houses. It never hurts to make an offer that includes a seller second. You never know until you ask.
There are some points to remember when purchasing investment property with no money down. A key point is the comparison of monthly payments to expected rental income. When you are financing 100% of the purchase price, your payments will be higher. If you have a second mortgage payment to add to a first mortgage, your payment may be even higher. Be sure your rental income will cover the entire monthly payment.
3. More common among professional investors is buying wholesale properties, using hard money to purchase and rehab.
When the rehab is done, you get a new mortgage that pays off the hard money loan. Since this is a refinance, you can take cash out of the property. You may have to bring some money to closing on the hard money loan, but you get it all back when you refinance, so you end up with no money out of pocket. This becomes not only a "no down payment" deal, but also a "cash back at closing" deal.
It works like this:
Purchase price $100,000
Repairs $15,000
Hard money loan $115,000
Purchase and repair, then get new loan to pay off hard money.
New loan is based on 90% of After Repair Value.
For our example, the ARV is $150,000
90% of $150,000 is $135,000.
New loan for $135,000. Subtract hard money loan pay off of $115,000 leaves $20,000.
You keep the extra $20,000 in cash, tax free since it is a loan, rent your house out and let the tenant pay the loan back.
Your gross profit is $20,000 cash and $15,000 equity. Total gross profit $35,000. Not too bad for a couple months work.
Down payment by definition means specifically money that is used to "pay down" the total purchase price. This does not include money for closing costs, points, interest, and other items such as insurance. But if you are buying wholesale properties, fixing them and refinancing to pull cash out, you should be able to pay all your expenses and have a nice profit at the end of the day. (Just keep some of that cash in reserve for emergencies)
If you do 3 houses per year, and you only net $25,000 total, after paying all expenses on each of the 3 houses, you are still netting $75,000 cash and equity in about 6 to 8 months. Plus, if you are renting these properties, you are also creating additional streams of income through monthly cash flow as well as accumulating equity in each property.
This is a solid strategy to achieve a retirement nest egg and ongoing income for life in less than 10 years. If you look around at the real estate investors who are wealthy, the vast majority own rental property, be it residential or commercial.
They understand the concept of buying at a discount, then holding their properties for years. They get to the point where their holdings are worth double or triple the price paid. This is free money that you can earn simply by buying and holding long term.
There are wholesaling companies in every major city that specialize in selling fixer upper properties that fit with strategy number 3 in this article.
Look for their signs on the side of the road, their ads in the paper, or ads in local thrifty nickel type shopping papers.
Most deals do require some out of pocket cash, even if it is only temporary, until you refinance.
True no down payment opportunities are pretty rare these days, with interest rates at historic lows. If interest rates go back up, (and they will), we will see more creative financing and more "no down payment" opportunities in the future.
If you are in the Atlanta, GA area, or wish to buy property in the Atlanta area, you can contact me at service@realestatewholesaling.com
I have properties, land, financing sources and property management services for Atlanta investors.
Donna Robinson is a real estate investor, consultant, and author. Her articles are read by thousands of subscribers each month. You may read more of her articles on her website or subscribe to her free newsletter at http://www.RealEstateInvestorHelp.com
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