No Money Down Question

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No Money Down Question

Justin JohnsonPro Member
Fort Smith, AR · Member since 2018 · 122 posts · 70 votes

Hello and thanks for reading this. I'm a complete noob to increasing and am still currently in initial learning phase while saving up my capital for my first investment property (I will have met that savings goal on 4/24/2020).

I'm currently reading "The Book on Investing in Real Estate with No (and low) Money Down" by Brandon Turner and have questions (I always have questions).

In the book, Brandon talks about hard money lenders and how to use their loans to get deals both flips and buy-and-hold strategies. He mentions a close that he bought, his first flip, a real "fixer upper" type of house that banks wouldn't lend against. He went on to food a hard money lender and took out a loan for 100% of the property and bought it and attracted fixing it up. After 9 months, he decided to stop trying to sell it and rent it out and then refinance it for a regular, 30 year mortgage and let it cash flow. I get the idea of refinancing it to pay off the hard money lender, what I'm curious about is: Brandon bought this house with a hard money loan and held it for WELL over 9 months before he decided to refinance, how did he do this with "absolutely no money out of pocket"? Were there no monthly payments for the hard money that were having to be paid back? No "interest only" payments for all the months that the loan was held? How does this work?

Thanks,

JJ

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Dennis M.
Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
6y

Hard money should be used for flips but never buy and holds . It’s too expensive to keep that financing long term . No money down for newbies is a myth . I wish Brandon never wrote that stupid book . It has newbies thinking they can play investor and get into a property without any of their own money which is not only foolish .. but dangerous

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  • Joey Gedgaud
    Contractor · Fargo, ND · Member since 2019 · 24 posts · 6 votes
    6y

    You can create numerous amounts of different deals to fit your investment style or risk. For example, a short-term one year loan from a Hard Money lender might not have any monthly payments, but you must pay the full amount back at the end of the year with a 10% interest (an example). You do need to read the details because the yearly and monthly interest rates can be very different and change how much you make. Other deals may be based on the expected profit of the deal or a part of the rent or ownership. If the deal looks good on paper the more likely you can get a deal from a Hard Money Lender and its up to you to package that deal so it works for both of you. I recommend finding a few different lenders so you can match good deals with the right lender.  

    0Reply
  • Justin JohnsonPro Member
    OP
    Fort Smith, AR · Member since 2018 · 122 posts · 70 votes
    6y

    @Joey Gedgaud thank you so much. I haven't done any hard money (of regular loans for that matter) yet, I was just trying to understand this concept.

    2Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    Hi Justin,

    Yes, no money deals can be funded in a ton of different ways. Especially if you are talking about a private lender. In this situation Brandon was talking about a situation that the money does not need to be paid back until the sale or re-finance of the home. Or in more simple terms, when he was done with the rehab. What he was able to do after fixing up the property is re-finance at a way higher appraisal value. He probably banked some money, paid off the hard money person, and then his margins were still high enough to make some cash flow so he went that route instead of completely exiting the property. THE POWER OF NO MONEY DOWN is awesome! 

    2Reply
  • Justin JohnsonPro Member
    OP
    Fort Smith, AR · Member since 2018 · 122 posts · 70 votes
    6y

    @David Flores thank you! I've been reading so much lately and actively digging into concepts and asking many questions trying to learn at much as I can. I understand the whole buying a property with a non-mortgage loan because of the many times that banks won't finance and then turning around and refinancing the property with a traditional mortgage to pay off the other loan. I was just super curious about the hard lender, there's so much in my area (where I live and where I grew up) that banks wouldn't give a loan on. I know for certain that I will not be using hard money for my first deal! I am I no way ruling it out alli together though.

    0Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Justin Johnson

    I was in the same shoes you were not too long ago. Another No Money Down strategy that can work in any area but more common in others is Seller Financing. The most typical way this can be done is getting a normal mortgage from the bank and then the seller paying down your down payment. This is how I got my first 3 deals done. The seller carried or paid for 20% of the down payment and the remaining 80% was paid for by the bank. Its a very powerful way to invest because you can scale so quickly. Essentially you owe two loans, but is no different from hard money. The hard money lender in this case is the seller, but he/she is using the proceeds from the sale to setup your loan. Great tool for both sellers and buyers.

    No money down investing is something everyone should have in their back pocket. I started a podcast about it called “No Money Down Real Estate Investing” if you want to take a listen. It is on Spotify available on the free spotify version also. Message me if you have any questions.

    3Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y

    Hard money should be used for flips but never buy and holds . It’s too expensive to keep that financing long term . No money down for newbies is a myth . I wish Brandon never wrote that stupid book . It has newbies thinking they can play investor and get into a property without any of their own money which is not only foolish .. but dangerous

    6Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Dennis M.

    No and low money down. House hacking is the number one way every investor should get started. Putting large amounts down as a down payment is way riskier than not. Think about it, when you put down 100k that is your own personal risk. If the market turns u lose your own money, that is never coming back. If you are leveraged and have an LLC you are protected from risk. Real investors try not to use any of their own money. Its one of the first things you learn in finance that you should never use your own money for big investments. This applies to every investment.

    1Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Dennis M.

    I agree hard money is not intended for buy and holds

    1Reply
  • Dennis M.
    Rental Property Investor · Erie, PA · Member since 2018 · 6k+ posts · 9k+ votes
    6y
    Originally posted by @David Flores:

    @Dennis M.

    No and low money down. House hacking is the number one way every investor should get started. Putting large amounts down as a down payment is way riskier than not. Think about it, when you put down 100k that is your own personal risk. If the market turns u lose your own money, that is never coming back. If you are leveraged and have an LLC you are protected from risk. Real investors try not to use any of their own money. Its one of the first things you learn in finance that you should never use your own money for big investments. This applies to every investment.

    Look I did not say leverage is A bad thing  . It must be used wisely and there is a huge difference from a foolish risk and a calculated risk  . Also House hacking is not free . Also I said for -newbies- no money down is bad . 

    0Reply
  • Account Closed
    Rental Property Investor · Canton, OH · Member since 2017 · 1k+ posts · 1k+ votes
    6y

    @David Flores

    I love the power of leverage...but keep in mind, leverageeven if through an LLC, can often have risk since many loans are signed as a "member" of the LLC and "personally" (unless it's a non-recourse).

    0Reply
  • Mark Safrin
    Lender · Lakewood, NJ · Member since 2019 · 247 posts · 101 votes
    6y
    Originally posted by @David Flores:

    @Dennis M.

    I agree hard money is not intended for buy and holds

    It depends on the loan. There are a few private lenders such as us who offer 30 year, fixed, fully amortized loans. For those who are not eligible for, or don't want to use conventional mortgage lenders its a popular choice. The numbers just have to work.

    2Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Benjamin Hurwitz

    Do you still require 20-25% down payments for this alternative lending?

    0Reply
  • Mark Safrin
    Lender · Lakewood, NJ · Member since 2019 · 247 posts · 101 votes
    6y
    Originally posted by @David Flores:

    @Benjamin Hurwitz

    Do you still require 20-25% down payments for this alternative lending?

    Indeed. Our long terms loans are not a "No Money Down" strategy unless it's indirect such as a motivated seller second (we allow a second lien position to our first).

    0Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Benjamin Hurwitz

    Understood, i am assuming your premium is in the interest rate to cover the extra risk.

    0Reply
  • Mark Safrin
    Lender · Lakewood, NJ · Member since 2019 · 247 posts · 101 votes
    6y
    Originally posted by @David Flores:


    Understood, i am assuming your premium is in the interest rate to cover the extra risk.

    Well there is also a couple of points at closing... and the credit score has to be reasonable. We also don't lend more than 80% LTV etc... so we cover our risk.

    We don't compete against conventional lenders, so of course our interest rates tend to be higher. Having said that, rates have decreased recently so we are currently offering 5.99% for the absolutely perfect loan and borrower. Most of my long term loans recently tend to be in the mid 6s to low 7s fully amortized.

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @David Flores:

    @Dennis M.

    No and low money down. House hacking is the number one way every investor should get started. Putting large amounts down as a down payment is way riskier than not. Think about it, when you put down 100k that is your own personal risk. If the market turns u lose your own money, that is never coming back. If you are leveraged and have an LLC you are protected from risk. Real investors try not to use any of their own money. Its one of the first things you learn in finance that you should never use your own money for big investments. This applies to every investment.

    for those starting out there is no way they are going to get around personal guarantee's unless its seller financing and seller is not too aware ( which is often) so maybe not a monetary risk but certainly a fico risk and risk of a judgement against them personally..  NON recourse loans are usually had with LARGE down payments I know a lender that will do true non recourse but they want 35 to 50% down for rentals. but its true non recourse.  And for large loans in the millions  so for most starting out they are not looking at multi million dollar loans they would never qualifty for anyways.

    House hacking a 4 plexs is the absolute first thing a wood be rental property owner in my mind should buy as a personal resi and use the fHA loan product get into the deal with 5% down or so and great rates.. then build on that ..  at this point in the market 100% leverage or no money down leaves one with NO real options if you need to exit your upside down the day you close and will stay that way for years.. unless there is appreciation that is significant..  If we are talking lower end C D rentals the play there is to buy them cheap like we know can be done and pay cash for them and let them stack up.. that's how you make money in the low end rental game ZERO debt..

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  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Jay Hinrichs

    A FICO risk is much less significant in my opinion then a large down payment. FICOs can be healed and there are ways to invest without a good FICO score in the worst case scenario. Your money as risk though is not going to come back. Also, putting 5% down is not much different then being fully leveraged. Only difference at 5% is your taking a “FICO” risk and risking your own capital. For example if the market turns 20% you now have just lost your down payment and you are in risk of defaulting. I personally would much rather be in a situation of just risk of defaulting. The thing is though my advice is to get involved with caps above 10% on seller financing deals. If you can find these your rental property should always be producing more than your expenses including first and secondary loans. Thus, in the rental game you should be protected from down turns and the home price/appreciation should be your second concern. Cashflow would be priority in seller financing deals, not appreciation.

    Bottom line is you have capital investors and leveraged investors. If you want to scale you need to learn both. Not sure what you mean by “stack up” if your buying properties with zero debt. In order to “stack up” properties you would need a massive amount of capital (millions) or you would not be able to scale without debt investing.

    I am sure others will come on here supporting their opinion. But if you run your numbers carefully and use leverage as a tool it is WAY more powerful than using your own capital.

    2Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @David Flores:

    @Jay Hinrichs

    A FICO risk is much less significant in my opinion then a large down payment. FICOs can be healed and there are ways to invest without a good FICO score in the worst case scenario. Your money as risk though is not going to come back. Also, putting 5% down is not much different then being fully leveraged. Only difference at 5% is your taking a “FICO” risk and risking your own capital. For example if the market turns 20% you now have just lost your down payment and you are in risk of defaulting. I personally would much rather be in a situation of just risk of defaulting. The thing is though my advice is to get involved with caps above 10% on seller financing deals. If you can find these your rental property should always be producing more than your expenses including first and secondary loans. Thus, in the rental game you should be protected from down turns and the home price/appreciation should be your second concern. Cashflow would be priority in seller financing deals, not appreciation.

    Bottom line is you have capital investors and leveraged investors. If you want to scale you need to learn both. Not sure what you mean by “stack up” if your buying properties with zero debt. In order to “stack up” properties you would need a massive amount of capital (millions) or you would not be able to scale without debt investing.

    I am sure others will come on here supporting their opinion. But if you run your numbers carefully and use leverage as a tool it is WAY more powerful than using your own capital. 

    I fully understand the concept of leverage believe me I do..  but with long term buy hold with little to no equity.. does not take much of a nose dive in bad tenants or vacancy to crumble the castle.  also with max leverage you have minimum income.. with cash in low end properties you have max income with no risk of debt.. you can weather the storm.. real estate is a long game.. those that get over leveraged with max debt are the first to crumble when things don't go right.. and believe me your fico is very important long term to scaling as well.

    the number one failure in the business world is companies that are undercapitalized.. and in my opinion if you don't really have any capital and cash backing you have no business buying real estate and especially owner financed. since your putting the seller in jeopardy they are usually not to aware of the consequences.. and to get a seller to go out and put a loan in there name then you wrap that loan or take it sub too and you have no real cash you can see who loses in that scenario its the poor seller and now there credit gets creamed if they don't have the ability to make payments on a house they do not own anymore..  I know people who have done this model and scaled up as you said and it all came crashing down and a few ended up in prison..  So just putting the other side of the coin out there.

    REal estate is a long game and should be played that way.. not hey I can get into deals with no money and buy 50 in a year with no cash no experience etc.. its good for selling guru programs or advertising a pod cast but in practice highly risky way to go about it.

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    2Reply
  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Jay Hinrichs

    There is risk in every investment and leverage is not a new concept. Whether you risk your own capital or others capital, the risk is there. The best investors are more leveraged than not. Actually the best investors NEVER use any of their own money. I have worked as a financial analyst for a big 4 firm for years on M&As and IPOs. I understand finance more than your average investor.

    And trust me, if someone is a decent investor (in any kind of investing) leverage is your best friend. I do not advocate for not having money on hand or over investing where your capital cant support maintenance/cap ex. I think you are putting words in my mouth.

    I liked the little jab though ;)

    0Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @David Flores:

    @Jay Hinrichs

    There is risk in every investment and leverage is not a new concept. Whether you risk your own capital or others capital, the risk is there. The best investors are more leveraged than not. Actually the best investors NEVER use any of their own money. I have worked as a financial analyst for a big 4 firm for years on M&As and IPOs. I understand finance more than your average investor.

    And trust me, if someone is a decent investor (in any kind of investing) leverage is your best friend. I do not advocate for not having money on hand or over investing where your capital cant support maintenance/cap ex. I think you are putting words in my mouth.

    I liked the little jab though ;) 

    our average BP member who is starting out with little or no money can hardly be equated to big time wall st MA and IPO investors LOL.

    those folks have teams of the brightest minds working for them Like you probably..  our average BP member all on his own does not have the same education and support..  there are simply two sides to these equations.

    But for real world leverage when I was in the Timber business I could get Lumber MIlls to front 100% for timber deeds I put together charge NO interest and no points and get repaid by simply delivering logs with no PG.. that was during a very competitive and hot log market that since has gone away at least in the northwest.. But they don't do it for every gypo logger who comes along you had to have experience and such so the mill knew you could execute.. big difference than being a beginner.. and these loans were a low of 200 to 300 and we did them up to 2 to 3 million.. once the mill was paid off the remainder was ours.. turn times 60 to 120 days profits from 50k to well over 1 mil.. its was a glorious time.. although all ordinary income so we paid a boat load of tax but who cares when your making massive fully levered profits.

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  • David Flores
    Rental Property Investor · Morgantown, WV · Member since 2016 · 235 posts · 135 votes
    6y

    @Jay Hinrichs

    Agreed, but the concepts of finance should be and can be equated to every investment.

    Not coming on here to argue though, just trying to help people understand no money down investing, the precautions to take, and how to correctly do it as many people are interested in this subject and guidance as you mentioned is key. I have successfully used the strategy and all my cash flow far out produces all my expenses. During downturns I am protected through my high margins (only need a couple units rented to breakeven). I am also invested in student rentals and unless these large universities go up in flames the social economic situation is very low risk. Rental demand is and will always be extremely high. We look for markets that have 80%+ rentals.

    By the way, bigger pockets has a book about this subject, this is not a voodoo concept. They do an excellent job on explaining no money down investing, precautions to take, and how to do it correctly. And I doubt Bigger pockets (the website we are all on) is putting stuff out there that doesn’t work just to draw in interest and put people at risk.

    As to everything there is a structure you need to have in place to successfully do things. I would not hand out aimless advice.

    If you don’t have experience with it that is fine, but attacking a concept that is well documented and proven is not good for the bp community either.

    1Reply
  • Jay HinrichsBusiness Member
    Real Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
    6y
    Originally posted by @David Flores:

    @Jay Hinrichs

    Agreed, but the concepts of finance should be and can be equated to every investment.

    Not coming on here to argue though, just trying to help people understand no money down investing, the precautions to take, and how to correctly do it as many people are interested in this subject and guidance as you mentioned is key. I have successfully used the strategy and all my cash flow far out produces all my expenses. During downturns I am protected through my high margins (only need a couple units rented to breakeven). I am also invested in student rentals and unless these large universities go up in flames the social economic situation is very low risk. Rental demand is and will always be extremely high. We look for markets that have 80%+ rentals.

    By the way, bigger pockets has a book about this subject, this is not a voodoo concept. They do an excellent job on explaining no money down investing, precautions to take, and how to do it correctly. And I doubt Bigger pockets (the website we are all on) is putting stuff out there that doesn’t work just to draw in interest and put people at risk.

    As to everything there is a structure you need to have in place to successfully do things. I would not hand out aimless advice.

    If you don’t have experience with it that is fine, but attacking a concept that is well documented and proven is not good for the bp community either. 

    Gotcha,,, just like to have open discourse on these subjects,  its not all wine and roses and its a fact 100% leverage is and can be a risky move in rental real estate.. to couch it as anything other than that I think personally is just not telling both sides of the equation.. 

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  • Jahmelie Durrant
    Member since 2019 · 1 post · 0 votes
    6y

    @David Flores Very interesting!

    0Reply
  • Brandon Keener
    Member since 2019 · 16 posts · 3 votes
    6y

    As a newby myself, this was a great question

    also just finished reading this book, it def leaves out alot of information IMO. I feel like i have a million new questions about variables, intricacies, etc that aren't mentioned at all. HA

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