SS167: Zero Down Doesn’t Mean Zero Dollars

ss167-zero-down-doesnt-mean-zero-dollars

Many new real estate investors are interested in purchasing a rental property with no money down. In this episode, Charles discusses zero-down real estate deals.

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Talking Points:

  • Visit any real estate blog or any real estate investing social media group, and you will most certainly find posts about how to purchase a rental property with no money down. This strategy is possible by utilizing seller financing, subject to, assuming a mortgage, or financing the down payment with a private lender or credit card. However, these articles fail to mention that zero down doesn’t mean zero dollars.
  • If you just acquired a property with zero money down, in other words, you have 100% financed the property, no matter how the capital stack is structured. This is extremely risky. When interest rates rose quickly in 2022, the first ones who fell on hard times were investors with high leverage and floating-rate debt. If you borrowed funds for the down payment, that is likely a much shorter-term loan versus the owner financing used to finance most of the property purchase. This short-term debt will need to be addressed soon, and you are probably paying a much higher interest rate on this debt. This is why we rarely leverage properties over 70%.
    • As a side note, if I located an owner willing to sell a property with zero money down, why is that? Is the property in a bad area, which is always a hard pass, or did they run out of money, or have another unrelated issue arise that requires their attention; either way, I would like to know the story behind the property.
  • The second issue is that online blogs fail to mention that you always need to have a reserve fund when owning any property, along with the fact that every property I have purchased always needs some form of renovation, updating, and/or repairs after I purchased it. I doubt a zero-money-down property will be any different.
  • Thirdly, rental properties have very, very tight margins. Most rental properties have a profit margin of around 10% (when you factor in debt payments, taxes, insurance, maintenance, etc.), which will most likely be less when investing in an over-leveraged property. For example, if you purchase a 3-unit property, where every unit rents for $1,000 per month, and you collect less than $2,700, you are most likely losing money (when factoring in all financial outflows). If you do not have any reserve fund or money set aside for repairs, the deal could go sideways very quickly.
  • Fourth, to quickly generate an increase in property value, it is typical for the new owners to renovate the property, with the end goal of increasing rents, the NOI, and the value. It requires money to do this. The right lender might finance these renovations, but they will most likely not want to be in second position on the property, the second mortgage behind the seller who is financing it, because the chances of them getting repaid decrease dramatically.
    • But this also could be a great strategy for an investor with money but maybe not enough for a 25% down payment and renovation funds. If you have cash available for the property renovations, make a deal with the seller to seller finance the property for you with a zero or minimum down payment, and to secure his investment, you agree to do certain repairs within the first 3, 6, or 12 months. The better the property’s condition, the more secure the seller is if the new buyer walks away, which will most likely not happen if they invest a sizeable amount of their money.
    • A student of mine did this when they purchased a property that required a new roof. They told the owner to deduct the new roof cost from the down payment. If agreed, the new owner would replace the roof within 3 months of purchasing the property. They showed the owner a bank statement in their name with the new roof funds in it. That is an example of a great win-win. If the new owner walks away, the seller will have a new roof, and the new buyer limits their out-of-pocket investment.
  • Fifth, you still need to pay for the property. At some point, the seller will want their loan paid off; in other words, you will need to refinance the property. To do so without going into your pocket, you must increase the property’s value by 35%-45%. If you purchase a property for $100k, and your lender will lend up to 70% loan-to-value on a refinance, you must increase the property’s value to $143k or by 43%. Not counting all of the other fees associated with mortgages. You might get lucky with a seller who will stay on the mortgage until maternity, but, in my experience, this is rare. You also are probably paying a higher interest rate than you could get through a traditional lender.
  • The goal of this episode is not to dissuade anyone from searching out properties that are zero-money-down but to make sure, no matter how you purchase a property, you have a reserve fund set aside along with the funds required to repair and/or renovate the property. In addition to fact that the property will actually cashflow.

Transcript:

Charles:
Welcome to Strategy Saturday; I’m Charles Carillo and today we’re going to be discussing zero down doesn’t mean zero Dollars.

Charles:
Have you always wanted to invest in real estate, but didn’t have the time, didn’t know where to find the deals, couldn’t get the funding and didn’t want tenants calling you. Since 2006, I’ve been buying income producing properties and great locations that provide us with consistent passive income. While we wait for appreciation in the future and take advantage of tax laws while we’re waiting and unlike your financial advisor, we invest alongside our investors in every property we purchase. Check out to investwithharborside.com. If you like the idea of investing real estate, if you like the idea of passive income partner with us at investwithharborside.com, that’s investwithharborside.com.

Charles:
Visit any real estate blog or real estate investing social media group, and you will most certainly find posts about how to purchase a rental property with no money down.

Charles:
This strategy is possible by utilizing seller financing subject to assuming a mortgage or financing the down payment with a private lender or credit card. However, these articles, a failed to mention that zero down doesn’t mean zero Dollars if you just acquired a property with zero money down. In other words, you have 100% financed property no matter how the capital stack is structured. This is extremely risky. When interest rates rose quickly in 2022, the first ones who fell on hard times were investors with high leverage in floating rate debt. If you borrowed funds for the down payment, that is likely a much shorter term loan than the seller financing used to finance the majority of the property purchase. This short term dent will need to be addressed soon, and you’re probably paying a much higher interest rate on this debt. This is why we rarely leverage properties over 70%.

Charles:
As a side note, if I located an owner willing to sell a property with zero money down, why is that? Is the property in a bad area, which is always a hard pass, or do they run out of money or have another unrelated issue, a rise that requires their attention? Either way, I would like to know the story behind the property, and that goes for properties that I’m buying with zero money down or properties that I’m traditionally financing. The second issue is that online blogs fail to mention that you always need to have a reserve fund when owning any property, along with the fact that every property I have purchased always needs some form of renovation updating and or repairs after I purchased it. Now, I doubt a zero money down property will be any different. The problem is that in a lot of these blogs and articles, they focus only on purchasing the property.

Charles:
They don’t focus on what happens after you purchase and what happens after you purchase. It is a lot of a lot of vacancy as you’re doing a lot of repairs before it gets up and running correctly. Thirdly, rental properties have a very, very tight margin and most rental properties have a profit margin of around 10% when you factor in debt, payments, taxes, insurance, maintenance, et cetera, which is most likely less when investing in an over large leveraged property. For example, if you purchase a property and it’s a 300 property where every unit rents for a thousand dollars per month and you’re collecting less than say, $2,600 a month, you’re most likely losing money on factoring all the financial outflows. And let’s say you do this over a year. If you do not have any reserve fund or money set aside for repairs, the deal could go sideways very quickly.

Charles:
Now, add to that, let’s just say one of those units is completely vacant. Now you have to be covering the difference while you are doing work to the property. So you have outflows for the work and outflows to cover the expenses while the unit is down. Fourth, to quickly generate an increase in property value is typical for new owners to renovate the property with the end goal of increasing rents, the net operating income and the value. This is traditionally as we call this the value add strategy, and it requires money to do this. The right lender might finance these renovations, but they’ll most likely not want to be in second position on the property, the second mortgage behind the seller who is financing it because the chances of them getting repaid now decreases dramatically. But this could also be a great strategy for an investor that has money, but maybe not enough for both the 25% down payment and the renovation funds.

Charles:
If you have cash available for the property renovations, you can make a deal with the seller to seller finance the property for you with a zero or minimum down payment, and then to secure his investment, you agree to certain repairs within the first three, six or 12 months. The better the property’s conditioned, the more secure the seller is. If the new buyer walks away, which is most likely not gonna happen if the new buyer invests a sizeable amount of their own money. Now, a student of mine did just this. When they purchased a property that required a new roof, they told the owner to deduct the new roof cost from the down payment. If agreed, the new owner would replace the roof within three months of purchasing the property. They show the owner a bank statement in their name with the new roof funds in it.

Charles:
This is an example of a great win-win. If the new owner walks away, the seller will have a new roof and the new buyer limits their out of pocket investment. Fifth, you still need to pay for the property, and this goes hand in hand with a zero down, doesn’t mean zero Dollars. At some point, the seller will want their loan paid off. In other words, you’ll need to refinance the property to do so without going into your own pocket. You must increase the property’s value by say 35% to 45%. For example, if you purchase a property for a hundred thousand dollars and your lender will lend up to 70% loan to value on refinance you must increase the property’s value to $143,000 or by 43%, not counting all the other fees associated with mortgages. And you mu you know, you might also get lucky with a seller who will stay on the mortgage until maturity, but in my experience, that is rare.

Charles:
They might stay on for 3, 5, 7, 10 years. But after that, people really want to, they wanna be done with the property. They’ve broken up their taxes over all those years and they’re usually older. They wanna spend some of the money that they’ve accrued in their lifetime. You also are probably paying a higher interest rates than you could get through a traditional lender. So you’re gonna want to have that motivation always to refinance. Now the goal episode is not to dissuade anyone from searching out properties that are zero money down, but to make sure no matter how you purchase a property, you have a reserve fund set aside with the funds required to repair and renovate the property. In addition you wanna make sure that you have that reserve fund for several months of your mortgage and for expenses. So I hope you enjoyed. Please remember to rate, review, subscribe, submit comments and potential show topics@globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs@syndicationsuperstars.com. That is syndication superstars.com. Look forward to two more episodes next week. See you then.

Announcer:
Nothing in this episode should be considered specific, personal or professional advice. Any investment opportunities mentioned on this podcast are limited to accredited investors. Any investments will only be made with proper disclosure, subscription documentation, and are subject to all applicable laws. Please consult an appropriate tax legal, real estate, financial or business professional for individualized advice. Opinions of guests are their own information is not guaranteed. All investment strategies have the potential for profit or loss. The host is operating on behalf of Syndication Superstar, LLC, exclusively.

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