3 Classic No Down Payment Strategies For Buying Real Estate
http://www.realestatebuz.com/articles/4411/1/3-Classic-No-Down-Payment-Strategies-For-Buying-Real-Estate/Page1.html
Donna Robinson
Donna Robinson is a licensed agent, real estate investor and consultant, located in metro Atlanta, GA. She is a respected authority on the subject of real estate investing and property evaluation. Get Donna's free newsletter for real estate investors at http://www.REIUonline.com By Donna Robinson
Published on 12/20/2008
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. These 3 are the ones most commonly used.
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 used.
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: $80,000 (80% LTV) (new first mortgage)
Sellers finances $20,000 (in the form of a new second mortgage)
The buyer has borrowed 100% of the purchase price. Thus, you have 100% financing, and no down payment was paid by buyer.
This is not a difficult strategy to employ if the seller has enough equity and is willing to hold a second mortgage. In the current market with tight credit and fewer buyers, this strategy is the only way that many sellers can sell, thus making it more desirable to many sellers.
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 still exist. Many of these are intended for owner occupants, but some may be available for investors. When searching for investment property financing, it is important to talk to a lender who handles investment loans.
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 things 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.
If you are planning to occupy the home, be sure you can afford the total payment.
3. More common among professional investors is buying wholesale properties, using hard money to purchase and rehab.
When the rehab is done, the buyer will usually obtain a new mortgage that pays off the hard money loan. Since this is a refinance rather than a purchase, you can take cash out of the property with this loan. You may have to bring some money to closing for the hard money loan, but ideally you'll get it all back and more, when you refi, 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
Bring cash to closing for Hard Money points and closing costs.
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 before other expenses are deducted. Our goal is to end up with more cash in hand than we spent to get in the deal.
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 fix and sell 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 9 months. Plus, if you are renting these properties, you are also creating additional passive income through monthly cash flow, while accumulating equity in each property.
This is a solid strategy for small investors who wish to build a retirement nest egg and and a substantial monthly income, in 10 years or less. 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. No, this is not as easy as it sounds. If it were, everyone would be wealthy. It will require persistence and determination.
In today's challenging housing market, the opportunities to buy at low prices are better than they have been in years. The key here is to keep the buy price low, keep costs under control, and don't over finance a property. This will protect your financial stability over the long term.
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 used.
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: $80,000 (80% LTV) (new first mortgage)
Sellers finances $20,000 (in the form of a new second mortgage)
The buyer has borrowed 100% of the purchase price. Thus, you have 100% financing, and no down payment was paid by buyer.
This is not a difficult strategy to employ if the seller has enough equity and is willing to hold a second mortgage. In the current market with tight credit and fewer buyers, this strategy is the only way that many sellers can sell, thus making it more desirable to many sellers.
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 still exist. Many of these are intended for owner occupants, but some may be available for investors. When searching for investment property financing, it is important to talk to a lender who handles investment loans.
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 things 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.
If you are planning to occupy the home, be sure you can afford the total payment.
3. More common among professional investors is buying wholesale properties, using hard money to purchase and rehab.
When the rehab is done, the buyer will usually obtain a new mortgage that pays off the hard money loan. Since this is a refinance rather than a purchase, you can take cash out of the property with this loan. You may have to bring some money to closing for the hard money loan, but ideally you'll get it all back and more, when you refi, 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
Bring cash to closing for Hard Money points and closing costs.
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 before other expenses are deducted. Our goal is to end up with more cash in hand than we spent to get in the deal.
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 fix and sell 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 9 months. Plus, if you are renting these properties, you are also creating additional passive income through monthly cash flow, while accumulating equity in each property.
This is a solid strategy for small investors who wish to build a retirement nest egg and and a substantial monthly income, in 10 years or less. 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. No, this is not as easy as it sounds. If it were, everyone would be wealthy. It will require persistence and determination.
In today's challenging housing market, the opportunities to buy at low prices are better than they have been in years. The key here is to keep the buy price low, keep costs under control, and don't over finance a property. This will protect your financial stability over the long term.