Creative Financing Tips?

[CL Ziegler]

Hi everyone,

I am interested in exploring some alternative "think outside the box" financing methods.

Is 'zero-down' borrowing possible for investors?

I'm interested in hearing any creative borrowing tips you have to offer, or experiences you may wish to share here. Thanks!

[Adam Johnson]

I am a huge fan of creative financing, and make use of it every chance I get.  Originally, my need to do zero-down financing was born out of only having "zero" available to put down.  This type of deal IS possible, but does require a creative mind to put a deal together.

One key factor to think of is that ultimately, the goal is to have zero of YOUR money down. Keeping that simple fact in mind can open up a huge number of options for you.

Here is a creative deal that I did several years ago.  Seller had a 4-unit property with below market rents that he didn't want to own any more, but his price was higher than I was willing to pay (still hadn't even figure out HOW I would pay for it).  Several conversations later I was able to determine that he was retiring in about 4 years and expected to walk away with about $ 15,000 net after his mortgage was paid off and closing costs covered.  We were still a little ways apart on the sale price.  I took a step back and looked at ALL of the factors involved.  I realized that he was about mid-way through a 30-year mortgage, so he was doing a pretty good job of paying down the principal with the monthly payments simply through natural amortization (he had a mortgage on it still).  I also determined that he didn't have much use for the money until he retired.

By doing some math, I determined that the difference between the price he wanted to sell and I wanted to by would be paid down as principal portion of his monthly payments over the next 4 years.  I structured a lease-purchase deal where I essentially paid his monthly mortgage payment for him and assumed full control of the property, good, bad and ugly.  I collected all of the rents, made all of the repairs along with telling him I would upgrade the electrical services and painting the exterior of the house.  He accepted my lower price when I showed him the math of how my proposal would work for him AND take away all of his landlord headaches.  I should also add that I calculated that after the rent bump I had in mind, I figured that the property would cash flow enough to cover all expenses PLUS pay for the electrical upgrade and painting if I set the money aside every month and didn't spend it.  I also factored that the cash flow and increase in value as a result of the repairs and higher rents would cover my required down payment later down the road.  Ultimately, he accepted.

To lock this deal in, I did actually commit a $ 1,000 earnest money deposit, but that was all.  The property value is around $ 80-85,000 now.  I have dealt with all of the tenant problems, I pay the payment like clockwork whether the tenants pay or not (I had factored in rent loss and vacancy in my figures, along with routine repairs).  All in all, not a bad deal.  Since we left the existing mortgage in place, that was technically not my money.  The TENANTS actually paid him the extra money he wanted by continuing to pay the mortgage down (we agreed on a sale price in advance, and the longer it goes with the mortgage being paid down, the more he puts in his pocket, but that isn't my money, it is the rent the tenants pay).  The TENANTS also paid for the electrical upgrades and painting, because that is all factored into the property P&L and cashflow.  Once I paid in the initial $ 1,000, all of the rest of the money is rental income.

Technically not a "zero-down" deal, but pretty darn close.  I have also used unsecured money to pay down payments, I have borrowed money against a vehicle I owned free and clear and turned around to use that as money to kick a deal off among other things.  In all cases though, I was able to accomplish nearly "zero-down" by realizing that the most important factor was using as much OPM as possible, and not being afraid to think of and propose ideas that at first glance freak people out.

One final thought, in EVERY deal I do, I am leveraging on a very solid, positive cash-flow deal with as many contingencies factored in as I can think of.  I figure on a lot of "what if this goes wrong" factors, and if the deal still makes sense, I go forward.  If it doesn't make sense, it never will and I walk away before committing to a deal that I have to buy myself out of.  I also don't figure on outside properties/income supporting the deal, every property has to carry it's own weight or it doesn't end up in my portfolio.