Stop! Before Making a Large Down Payment, Read This

We run a family company, buying and selling homes on terms only—no banks, little to none of our capital (or anyone’s capital!), and never signing personally on loans. Between our own properties and our partners, we handle six to 12 transactions every month.

I want to discuss an issue that I’ve been asked for advice about several times: “I ran out of down payment money after my first few deals. What now?”

How to Stretch $2,500 to Create Amazing Cash Flow & Wealth

On a monthly basis, I would say that during at least one or two of the 20 or so strategy calls we have with our partners, someone brings up the fact that they bought property and used their funds for a down payment. Now they have no more resources to buy that way.

Buying conventionally with 20 percent down (or even 5 or 10 percent) is just not necessary. Frankly, it’s a poor way to utilize your hard-earned money.

It is very typical for me to visit our partners in their market to work on their business, go on appointments, and strategize. A few months ago, I was in Arkansas with Jen, and we were driving to and from different properties. She was asking me all kinds of great questions. One of them was, “So if you had $20,000 right now, how would you utilize that?”

I said, “I definitely wouldn’t utilize it all!”

Confused a bit and a little frustrated, Jen looked at me and said, “Alright. Now I’m curious.”

As I mentioned initially, my company and I buy everything on terms. For us, that means lease purchase, owner financing, or subject to existing loans. Our custom contracts have a $10 deposit built into them.

I told her, “Because you’ll probably react with, ‘That’s not possible,’ for the sake of this discussion, let’s use $100 as a standard deposit. Sometimes when investing in our self-directed IRA or 401(k), we do use $100 instead of $10.”

I told her she’ll need $2,500 to create approximately $600,000 in income, and she could do that over the next 12 months by securing 12 properties, which is only one per month. If she wanted to be more aggressive, she could hustle and get it done in six to eight months. But either way, that $600,000 would start coming back to her within 90 days and would continue on for 24 to 48 months.

If I have your attention, keep reading.

How to Buy or Sell on Terms

When buying or controlling property (we’ll use single families here but you can apply it to any property or asset), we exit/sell them via rent-to-own to buyers who need time. They typically need that time in order to repair or enhance credit or to save more for a down payment needed to buy a house. When doing such, we create three paydays per deal. Those three paydays for us average $75,000 per deal, and for our students around the country, average a low of $45,000 and a high of $125,000.

For the sake of this article and the summary of my discussion with Jen, I am using $50,000. (We were driving, and I was doing quick math for her. My brain doesn’t do complex math too easily without a calculator.) First, let me briefly explain the three paydays. As either a new investor or seasoned investor, you can benefit immensely from these paydays.

Payday #1: Nonrefundable down payment from your buyer. We average around $28,000 on this payday.
Payday #2: Difference between what you’re paying on the underlying mortgage (stays in sellers’ name) on a lease purchase or what you’re paying the seller who holds a mortgage for you with an owner financing deal. (All our owner financing deals are on free and clear properties, and our payments are principal-only—no interest.) We average $308 to $1,000 monthly on this payday.
Payday #3: Cash out on the backend, which is made up of your principal paydown throughout the term (18 to 48 months on average), as well as your markup from what you paid and what you’re selling it for. We average $36,000 on this payday.

Let’s say it takes you an entire year to buy or control 12 properties. In my first six months of doing terms-only deals, I did 13. Tying up 12 properties at $100 each is only $1,200. I said earlier $2,500. I’d like you to have at least $1,200 set aside for your first month before payday No. 2 kicks in, just in case you need to set up a phone system, a website, or anything else for your business. If not, it’s a small buffer, which is smart.

We write most of our lease purchase deals for “on or before 36 months” for a myriad of reasons, which would require another article to explain. And we write our owner financing deals typically for 48 to 60 months. For the sake of this example, let’s use a quarter at 24 months, a quarter at 36, a quarter at 48, and a quarter at 60 months, because when you’re new, you’re more likely to do lease purchase than you are owner financing.

How to Invest Your Down Payment Money a Smarter Way

In addition to using a lower than normal $50,000 average, for the sake of this example, let’s use $300 for payday No. 2.

End of 1st Quarter

$300 spent on down payment
$900 net cash flow created monthly
$150,000 total income to cash out on or before 24 months

End of 2nd Quarter

$600 spent on down payment
$1,800 net cash flow created monthly
$150,000 total income to cash out on or before 36 months

End of 3rd Quarter

$900 spent on down payment
$2,700 net cash flow created monthly
$150,000 total income to cash out on or before 48 months

End of 4th Quarter

$1,200 spent on down payment
$3,600 net cash flow created monthly
$150,000 total income to cash out on or before 60 months

STOP Doubting Yourself

Approximately half of you who read that had a knee-jerk reaction that sounded something like, “Yeah, but will it work in my area? Yeah, but will it work for me?”

STOP that. Yes, it will.

Now, go off and create $10 deposit deals, and you’ll create all of that for just $120.00. We do it consistently every year and some years in many multiples of 12.

Do you think large down payments are a thing of the past? Would you finance on terms? Why or why not?

Comment below!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.