Zero Cash Down?

[KES]

I've just started to read about real estate investing and it looks like something I might want to try. Maybe I've picked up the wrong book ("How to Make Big Money in Real Estate in the 21st Century" by Tyler Hicks), I don't know. This guy recommends finding zero cash deals in which 2 mortgages are taken out, one for the 80% and one for the 20% down payment.

Just running some general numbers on properties in my area, it looks like a tough prospect to find properties with a positive cash flow after paying for both mortgages.

Has anybody ever done a zero cash down deal like that? Is this legit?

[birdman2003]

My buddy and his wife are looking at buying a house in the $150k range.  They are approved for an 80/20 loan.  80% of the house is financed at 3.3% for 15 years.  The 20% down payment is financed at 4.3% for 15 years.

I recommended he wait until he can do the 20% down payment in cash, and then finance the 80%.  But he sounds like he wants to do the 100% finance route....

[dragoncar]

If you have trouble flowing cash with 100% financing, I'm thinking the deal isn't that good.  But I'm not a real estate investor so there may be more to it than that -- google "forcing cash flow"

[waltworks]

Financing the entire thing can be fine, but you have to run the numbers on the rental. If by "cash flow" you mean "covers both mortgages plus a few bucks", that's not cash flow. That's a slow bleed for you as things break and tenants move out unexpectedly or whatever.

Nothing wrong with playing with other people's money, as long as you can pull it off and actually stand to make some yourself.

-W

[S0VERE1GN]

as long as you realize you're going into the deal equity negative and you'll need to own the house for at least ( AT LEAST) 5 years to get money out of it, you're fine.

Also: be sure to reserve a 100% financed deal for houses that are true bargains. if they're on MLS: its probably not a bargain. Leverage the realtors you know in town, find preforeclosures, and make friends with local banks that will keep you in the know on foreclosure properties you might be interested in. Often times you can do some cool financing tricks with places like this as well with little or no cash down.

[Alabaster]

I think you've got a bad book there. "Big Money" right there in the title? What does that tell you? It tells me the book is targeted toward people who 1) don't have money and 2) want a lot of it. If there is one thing I distrust, its books targeted to an audience that 1) doesn't have money and 2) wants a lot of it.

It is my opinion that the reason Dave Ramsey and others stress having (at the very least) 20% down for a home is to show that you have already put some effort into the deal. Really, if you can't buy an investment property outright, chances are you can't afford it. I've seen several threads here that advocate borrowing money to finance things at a lower rate and invest money at a higher return. Its great on paper, and if you've got the liquidity to cover the shit life throws at you, then perhaps it even makes sense. However, if you /need/ to borrow money to make a deal happen, then you've got a problem. What happens when things break, your tenants move out, the market fluctuates widely etc? These high % financing gimmicks let people get themselves into situations that they can't really afford. Ultimately, you'll be left with the responsibility for the mortgages. Don't let the desire to build your portfolio quickly jeopardize everything when things don't go according to plan.

Yes, I am very risk adverse.

Disclaimer: I feel its only fair to mention that I don't have any experience with these things. I'm about to graduate from college and start my life. Its just I have a real passion for finance so I've been reading up on it for a couple of years. I figure its best to do a ton a research ahead of time and get several perspectives before you get stuck in something with serious repercussions...

[arebelspy]

If you have trouble flowing cash with 100% financing, I'm thinking the deal isn't that good.  But I'm not a real estate investor so there may be more to it than that -- google "forcing cash flow"

+1.

Every deal should cash flow at 100%.

That doesn't mean you shouldn't put any down (often you should), but it does mean the deal should stand on its own.

[Johnny Aloha]

...but it does mean the deal should stand on its own.

As others have said, there are risks and drawbacks to the 0% down strategy.  But if analyzed and understood, 0% down can be a great tool.

I would recommend evaluating this type of loan in the context of your own market.  Personally, I took out a 0% down 30 year (VA) loan at 3.25% on a primary residence that will become a rental in the near future.  I did it for several reasons: the low fixed rate (I'm very comfortable with leverage at 3.25% for 30 years), very high demand in my area, and after purchasing other properties I didn't have enough for 20% down.  Instread of a small downpayment (5-10%), I used that money for renovations that add value.

[KES]

I think you've got a bad book there. "Big Money" right there in the title? What does that tell you? It tells me the book is targeted toward people who 1) don't have money and 2) want a lot of it. If there is one thing I distrust, its books targeted to an audience that 1) doesn't have money and 2) wants a lot of it.

My gut told me something similar a few pages in when I saw the exclamation points begin, "I want to show you how to do it!" and "Don't panic!"

I just kept reading because I thought I'd learn something, but honestly, I've learned more from this thread than that book.

[Blindsquirrel]

  I did a no money down deal about 13 years ago, I took an 80% mortgage out and the seller gave me a 20% mortgage.  I paid way too much for the house because, hey, I do not have a dime in it! My yield is infinite! It was the dumbest house I ever bought, still have it and it has been rented continuously no problem, the value is way below my purchase price and probably about even to what I owe at the absolute maximum. It cash flows fine but the payments are an irritation and the amount I have made off the house is very low. You live and learn I guess. The financing was the only reason I bought that house which in retrospect is a pretty damn dumb reason. The down side of 100% financing is the 100% financing, you are on the hook for 2 mortgages and have picked up a ton of debt for meh cash flow in most cases. A couple of bad tenants can put you in a world of hurt very quickly in such cases unless you have a strong financial position which many folks sold houses no money down do not have. You may want to ditch that book and hang out on this board and over at Bigger Pockets.  I see you are in Columbus, there is a very active real estate investors association in Columbus, I think Steve Zehala is the president and he is very sharp! I would check them out to learn somethings. 

[KES]

Thanks a lot, Blindsquirrel. Yeah, the book is bad. Toward the end he talks more specifically about how to get a down payment loan and he says to never tell the lender that the loan is for a down payment; tell them it's for something they want to hear and then go ahead and spend it on that other thing AND the down payment. Crazy.

[Blindsquirrel]

KES, incidentally, not telling the lender about the other loan is more commonly known as mortgage fraud.  I do know a very good RE investor in Columbus, you may wish to buy him lunch.

[SDREMNGR]

I have never done a zero down deal, although I've done 5% down deals.  So I guess they are sort of the same.

There is no free lunch in this world and that goes for $0 down deals.  You lose leverage with lenders (they charge more).  Also your margin of error is smaller.  Due to your higher cash needs, if you don't cashflow, you could be screwed and lose your property.  But you paid $0 down you say?  Well, your credit could be shot and you won't be able to do any more deals.

The things you gain by doing 20% down is no PMI, more access to deals, cheaper interest rates for borrowed money, more peace of mind, etc.

The one thing that I do differently now vs. when I was a young(er) gun is to leave more room for error in everything I do.  It reduces the brain damage and stress of investing, and it makes it so you don't put your back up against the wall all the time.

I'm not quite at the all cash buyer level yet, but I can't wait until I am.  That's when you make less % return perhaps but you make more money and easier.

[Blindsquirrel]

   We went to cash only 2 years ago and could not be happier. No payments means you can jack your passive income up very, very fast.  Moving the gross up 20K and the net up 10K a year or way way more a year  is no problem once you pass the inflection point in the compound interest curve.

[S0VERE1GN]

deals that make sense at 100% financing are going to be found off of MLS most of the time. I would say if you really want to go all financed, and you want to do it for rental properties, I would look for an old land lord in your area whose looking to get out of the business. See if you can get OWC (owner will carry) financing from him/her and manage those property(ies).

[Handlebar Harry]

100% financing is a great tool if you want to have the cash available for renovations.

Example:

I just bought my first rental property last year. It was bought with 100% USDA financing at 4%. Along with the financing, I was also able to negotiate with the seller to pay all of my closing costs so by not tying up cash with the purchase, I was able to renovate the basement into a separate apartment. In my area I was able to demand rent upstairs that's higher than my actual mortgage payment. When I decide to move out and rent out the basement apartment too, my monthly cash flow will be approx $800. Of course, this may be difficult to pull off if you're not a DIY, but I was able to do all of the construction myself.

IMO 100% financing is a great tool for rentals, however I may not want to do it for a primary residence. Like some people have noted above it may take at least 5 years to reach 20% equity in the home which would eliminate PMI.

[escolegrove]

We bought two VA loans with 0 down and another with 5%. Our goal is to leverage the houses as much as possible since the rates are low and our tenants are paying the loans off when we transfer. They house due cash-flow.

[jmoney]

I see you're in Columbus and I wanted to mention that Ohio has a few of the best REIAs in the country. You just missed Pete Fortunato who came to Cincinnati this past weekend. His workbook has 200 pages of real deals like the ones you seek. Columbus has a group called COREIA that would really help you get started with other people in your market. In November there is also a convention with all the REIAs in Ohio. Last year Michael Gerber and Loral Langemeir came to speak.

Dayton has a fairly strong REIA group and Cincinnati has an even stronger one. Several big name speakers come to Cincinnati all the time and there are usually 8 meetings or more a month.

Anyway I think you can learn more from your local REIA than a book from someone who probably isn't in your market.

And to answer your question, no money down deals are rare and when you usually get them there is work to be done to the property so its not really no money down. They definitely can be done but it will take searching and negotiating. The best chance is a seller carry back from a motivated seller. In todays market ask what they will do with the money. Current bank interest rates are easily beatable with mortgage rates that would be attractive to you. If you pay 2% interest that's double what the bank pays. You might need to settle for 4-5% but I have got 0% before.

[Blindsquirrel]

 Hey JMoney, PM me if you like, I am in the Cincy area.