Buying with No Money Down

I have seen a lot about a method of purchasing properties with No Money Down. Some people seem to have enough success with it that they sell their systems to others. Other people do not seem to have much luck with it at all. I recently found a link to a man who purchased 8 properties in one year using this method and he is now facing foreclosure and the fact that he may have committed mortgage fraud.


I have read through most of one book on the subject. “Nothing Down for the 2000s” by Robert Allen. The reason that I stopped reading the book is because every example of a no-money-down transaction that he gave seemed fishy. I read this book before I knew most of what I know today about investing. Since then I have also read a review of this man by John T. Reed that highlights illegal activities that the author has been convicted of.


If you look at the basics of the no-money-down deal, and take out of the equation the fact that mortgage companies may not like those deals, or whatever other legal or ethical issues there may be, and look purely at the profit and loss numbers the deals do not make much sense. The entire purchase price is a loan of some form or another. Therefore the entire purchase price of the investment needs to be paid back with interest. I have evaluated hundreds if not thousands of properties. I analyze them with the assumption that I am only putting down 20% of the purchase price. Even with this assumption most of the properties do not have a significant cash flow if any cash flow at all. So, if you put down $0 and have to make additional payments on that extra loan, the cash flow becomes even worse. It just makes no sense to me.


I believe leveraging debt is an important tactic for beginning investors to use to build up their portfolio, but eventually it is good to start to pay off that debt to maximize cash flow. There is a man who I have encountered on some forums that claims to purchase properties with all cash and no mortgage debts. Of course it takes a while to get to the position where you can afford to do this, and I am sure that there are limits to how much he can buy. But it is something that I will fantasize about being able to do myself one day.


As I write this I am thinking of a way to formulate not only the maximum cash flow, but also maximum return on investment for each property based on the amount of mortgage owed. It seems to be that there had to be an optimal level that will give you the most ROI and cash flow depending in the property.
Something to work on……

Mentoring

Popular opinion states that in order succeed as a real estate investor one of the things that you need is a mentor. Therefore a lot of the real estate gurus offer mentoring programs as part of their sales packages. I do not have a mentor, I am not actively seeking a mentor, and I think I will do just fine without one. However, if you look at it from a different perspective, I have several mentors all at once.

There is no single person that I look to for advice and guidance. There is no one person that I can phone with questions that has done what I am trying to do before me. But the resources that I have found and that I use regularly have taken the place of this single mentor for me. There are two discussion forums that I visit quite regularly, richdad.com and biggerpockets.com. If I have any questions, I look for the answers there. If I cannot find what I am looking for, I ask. Of course I also freely offer my opinions to anyone who cares to read them.

I suggest that everyone check out these forums, as well any others that you can find. I wish that I had more time to spend on them. It is the best source of advice that I have found so far. I consider everyone on those forums to be my mentor. Be sure to check out people’s profiles so that you have a sense of what they do and where they are coming from.

LLC Accounts

There is more involved in opening and LLC than just filing with the state. This week we went one step further and opened a business checking account in the name of the LLC. Even though the financial info for the LLC will be filed with our personal tax returns, this will make it that much simpler to keep track of our expenses and profits. The hope is that it will also legitimize business expenses in the eyes of the IRS. Or that is at least what our account advised us to do. We are also going to need to set up a savings account for any overflow if money (I like to think positively.) and any security deposits.


There is something that I read about once that I have just done some research on again. It is called Accredited Investor Status by the SEC. Some of the requirements for this status involve corporations that trade securities. But for individuals, you either have to have a net worth of $1,000,000 or an income over the past two years of $200,000 ($300,000 for spouses) with the expectation to continue at that level. There are a lot of investment companies out there (a lot of hedge funds) that want you to be accredited before you can invest in them. Some of these companies invest in real estate domestically and globally.


Why and I interested in this? I am looking in to the distant future, beyond just getting out of the rat race. Although anyone can start out investing in real estate there are still opportunities out there that are only available to seasoned investors. I am going to keep this accredited status in mind and file for it once I can qualify and then see what sort of other investment opportunities present themselves.

Commercial Mortgages

I am new to the world of commercial mortgages, but I have found it to be very confusing. I have talked with several brokers and direct lenders, and the all seem to have different standards and requirements. I have been given rates, for the same property, that were as high as 13.5% and as low as 6.75%. Some of them were willing to finance 90% LTV others would not budge from 80% LTV. All of them required some sort of basic documentation. Some of them weighted the property numbers more than our personal finances, while others were more concerned with our personal finances than the property.

I learned the basics about mortgages from the purchase of my home in 2005. Basically the bank will only lend you a percentage of the value of the home. This percentage is called the LTV-Loan to Value. The value used by the lender is the lesser of the purchase price or the appraisal value. For people buying a property as their personal residence, there are various programs that allow people to buy homes with a very high LTV and very little money down. It is much different for investment properties. Once the lender knows that you are not planning on living in the property that you are purchasing the rules change. People are not as vested in properties that they are not living in and therefore the risk of them not paying the mortgage increases.

Applying for any loan requires lots of paperwork. I knew that I had all of the paperwork that they required, but putting it all together proved to be more work than I had planned on. I have now learned to reorganize my files in order to have everything that the lender requires in one area, instead of a dozen places. I am planning to put together my own financial statement that I can update regularly with my personal information. The format and information contain will be a combination of some of the standard forms that lenders sent to me. I will give more details in a future blog once I have it all set up.

It also makes a big difference if the seller is organized and has all of the financials on their properties organized. One of the items that most lenders wanted to see was the profit and expense lists for the past year or two of the property as well as rent rolls. I am trying to keep this in mind as I set up all of the files and paperwork that I will need to manage this property. That way I will have less work to do when we decide it is time to sell this investment.

The Cash Flow Game

We attended another Real Estate Investors Association meeting this week. There was no speaker or topic. Instead we broke up into groups to play the Cash Flow Game. The Cash Flow Game is an invention of Robert Kiyosaki of Rich Dad, Poor Dad Fame. It is a board game that can be played by about 6 players at a time. Each player is assigned a profession and the basic financial parameters of that profession. There is a center circular track on the board that is called that Rat Race. That is where all of the players being, going round and round in the rat race. The object is to get your passive income to be higher than your expenses. Then you can get out of the Rat Race and on to the Fast Track. On the Fast Track, the income potential increases dramatically, and basically you have won the game.


The game makes several interesting points. The first being that your starting profession, doctor or janitor, has no bearing on how quickly you can get out of the rat race. The other important point is that as long as you keep playing, all players will eventually get out of the Rat Race. The game also requires that you keep a basic personal financial balance sheet. So, it is helpful to see how different kinds of investments affect your personal financials.


Even though the game is a bit pricey, $195, to purchase, I would recommend it as a useful tool to begin your real estate investing career. There is also a children’s version of this game that I am told is also very good. I have yet to try it myself since I do not have any children, but I do believe that it is important to teach children financial lessons early in life.