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