No-Money-Down Investing: feasible for a first-time investor?

Question

I am currently a senior in college and want to start investing in real estate soon after I graduate.  As I hear more and more about little-to-no money down investing, I wonder how feasible it is for someone who does not have much collateral.  I have a lot to bring to the table in terms of work ethic, computer skills, learning abilities, and financial education.

Do you think I should try to find good deals and find a partner or some sort of lender that would lend to me for a piece of the pie?  Or do you think I should try to save money until I can afford the downpayment myself?  3.5% for an FHA loan is not bad, after all.  I have been considering House-hacking my first property with a duplex.

Thomas S. · Answer

No money down is not possible in the real world for real people as has been pointed out. You will need 10K on a 100K property but...…..you need financing for the rest. To get financing you will need 2 years of employment in a job that pays enough to convince the banks to trust you to pay it back.

To partner you will need cash, lots of cash, or a proven track record of successful investments of your own.

So no you can not invest with no money and no experience. Run away from anyone that says you can.

Chace Fraser · Answer

Hi @Braden Mosley , welcome to BP! When it comes to little to no money down investing it depends on what you're looking to do... and there's always a way to do something with either a lot of money or little to no money. Money is merely a resource, and if you can replace that resource with others, like "work ethic, computer skills, learning abilities, and financial education" then you can reduce the amount of money you spend.

House-hacking is a wonderful way to get into buy and hold real estate investing with a relatively low financial barrier to entry. However, you will typically need cash for an earnest money deposit, down payment, and inspections. If you can find a program that will help with the down payment you'll still need funds for the EMD and inspections.

If you are using a low down payment, it's not really realistic to expect to be cash flow positive on a house hack.  When an investor is looking at being cash flow positive, they are typically putting down 20-25%. If you are in a high demand metro area, it's simply not realistic to expect to be cash flow positive if you are putting down 0-10%.

Now if that is all the capital you have, that is what it is....is it better to keep renting than to buy? Typically it is better to buy. Better to build your own equity through the debt pay down, enjoy the tax benefits of ownership, and garner the equity of an appreciating asset. You just can't expect to cash flow on an initial purchase with a low down payment.  Now with time and rent growth, what could be a negative cash flow property might very well become a cash flow king, but that takes patience.

Another way to increase cash flow would be renting out rooms in the unit you live in, either Airbnb or longer term.

Best of luck!

Stuart Tollison · Answer

@Braden Mosley I wouldn't say it's impossible to land your first deal with no money down, but it's going to be difficult.  The advice I've been given is that it's possible but it will need to be a GREAT deal. If you decide to go this route, I recommend contacting a Private lender or hard money lender and see what they typically look for. However, Even most private investors want you to have some skin in the game.

If you go the FHA route, I highly recommend a 203k rehab loan. I'm currently in the process of my first live-in flip using a 203k and will have equity in the property right off the bat. You can view the details of this first deal on my profile. It's not the best deal on paper right now, but with appreciation due to the high growth area, I should still end up with a pretty nice ROI. Plus, I'm learning a ton throughout this process!

Zack Karp · Answer

@Braden Mosley can't stress this enough...talk to a lender about your options.  This should be the first thing you do.  You may find that you don't need as much money as you think.  The right LO will help keep as much money in your pocket as possible.  For example, I have helped people buy 2-4 unit properties using NO MONEY out of pocket (you still have to verify funds, but don't actually need to use them).  Little tricks that the headset jockeys at the online call centers who were working at Jiffy Lube last year have no clue about how to truly help real estate investors.  The right LO and realtor as your partners makes all the difference in your long term ROI.

Best of luck!

Jeremy Williams · Answer

I can't speak to your area as I'm licensed in California (we do have teams in IL though) but you most likely have first time home buyer programs available in your state as well.  Some may offer assistance and lower costs.

FHA can work but if it's your primary residence and you're a first time buyer you can do 3% down conventional if you qualify. Mortgage insurance on the loan will drop off later when you build equity while an FHA loan will never drop it unless you refinance into another loan product.  If your credit is over a 680 you will typically have lower mortgage insurance costs going conventional.

With all that being said, speak to a local lender.  They should be able to get you on a game plan.

Chace Fraser · Answer

Hi @Braden Mosley to answer your question about EMD it's different in every market; in my market, the typical deposit is 1 percent. Plus, don't forget that the EMD goes towards your downpayment. For example, let's say you're purchasing a $100,000 property. If you put 1 percent EMD down ($1,000), and your down payment is 3.5 percent ($3,500), then you submit your EMD with your offer ($1,000 at time of offer) and submit the difference when you sign the closing papers ($2,500). Does that make sense?

I'm not sure what inspections and such cost in your area but here's a tip; PAY CASH!!! If you pay with a line of credit or a credit card it could affect you DTI enough that your loan may fail... which would suck. And on the same vein try and limit any large (credit) purchases during the process because those purchases can affect your credit enough to make the sale fail. I know of someone who lost out on a great deal because they purchased something for around $1,000 on a credit card while they had a sale pending...

No-Money-Down Investing: feasible for a first-time investor?

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