Is No or Low Money Down Too Risky for Buy and Hold?

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Is No or Low Money Down Too Risky for Buy and Hold?

Ezra Nugroho
Investor · Milpitas, CA · Member since 2014 · 116 posts · 103 votes

Hi BPers,

Generally it is well accepted maxim in BP that any buy and hold investors should have a reasonable amount of reserve for our properties just in case something goes wrong. 

With that in mind, wouldn't buying rental with no/little money down be too risky as well? BP has now published a book on this. I haven't gotten it yet, so I cannot tell if the book covers the risk mitigation for this strategy. I can understand how a flip may work well between a sweat partner and a money partner. But for a buy and hold? 

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Jeff S.
Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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@Ezra Nugroho how would that be risky? The less you put down the more cash you have. That is less risky for you. If you are able to walk away for some reason (think sink hole) and the bank doesn't come after you then you have less to lose.

It is risky for the bank. It is risky for whatever investor has loaned you the money because the less skin in the game the buyer has the higher the possibility you would give up if things go wrong.

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  • Elizabeth Colegrove
    Hanford, CA · Member since 2013 · 5k+ posts · 1k+ votes
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    We have done it 3 times over with 0 to 5% down. 2 houses with 20% down. I buy depressed houses  with as little in them as possible. My goal is for the tenants to pay them off. At the same time I do not refinance the houses to pull the money out. While I don't put alot of money into the house, I let the money stay in the house as we are in it for the long term.

    2Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
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    The amount down has little to do with reserves, you seem to be saying no money at all to put down or have in reserves, yes, that could be a real problem. What you put down effects the cash flow, but risk to you isn't really more to what it rents for, vacancy and paying its own way.

    I have not read the book yet, I have it, but I'm sure Brandon didn't get into risk management with leveraging, that's a tad advanced for residential I'd think. Long ago I picked up a few where I kept my fingers crossed that nothing major happened and it worked out each time. If the major items are in good shape and you get an opinion from an inspection, chances are you won't have a big issues within a year, consider how old the place is and what it is. But, yes, you should have reserves.

    Boils down to, how well do you sleep? LOL

    1Reply
  • Bill Sargeson
    Real Estate Broker · Burlington, NC · Member since 2013 · 95 posts · 52 votes
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    I don't believe in "buying" cash flow through a larger down payment, getting great deals is how I get my cash flow.  I use the same strategy as @Elizabeth Colegrove I go in with as little as possible....keep my cash in the bank....I love leverage and OPM(other people's money).  By doing this I keep my money and that allows me for very high reserves in case something happens and I sleep very well! :)

    2Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    No Money down refers to where you spend your cash...not how much cash you have.  It's a reference to "How" you use your cash, not how "much" cash you have access to.

    On top of that, the cash reserve doesn't have to be your cash...or even cash for that matter.  It could be a "cash like substance".

    Joe Villeneuve
    REcapSystem
    A2REIC

    1Reply
  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
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  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
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    Originally posted by @Joe Villeneuve:

    On top of that, the cash reserve doesn't have to be your cash...or even cash for that matter.  It could be a "cash like substance".

     Sounds like you're dealing in CO. with Brandon T. Cash like substance, LOL  ;)

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  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    @Bill Gulley  LOL. Nope.  I deal in Michigan and I've been using "cash like substance" as a description for "non-lien-able debt" for almost 30 years.

    Joe Villeneuve
    REcapSystem
    A2REIC

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  • Adam Kent
    Investor · Indianapolis, IN · Member since 2014 · 69 posts · 17 votes
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    Originally posted by @Ezra Nugroho:

    Hi BPers,

    Generally it is well accepted maxim in BP that any buy and hold investors should have a reasonable amount of reserve for our properties just in case something goes wrong. 

    With that in mind, wouldn't buying rental with no/little money down be too risky as well? BP has now published a book on this. I haven't gotten it yet, so I cannot tell if the book covers the risk mitigation for this strategy. I can understand how a flip may work well between a sweat partner and a money partner. But for a buy and hold? 

    Ezra, this is how a evaluate deals. For my buy and hold deals I am looking for positive cash flow on the property. When I run the numbers I just assume I took at a 30 year mortgage on the property. I use I spreadsheet I created. Also check out the BP analysis tools.  This is a valuation of the property. I put at least 20% down though. I am looking to have all of properties paid for quickly. I would hold cash reserves. Know the cost of HVAC, water heater, plumbing repairs, etc. In your area to figure out what you need to have in reserves.

    For a flip no money down is quite fine, just make sure you factor in your holding cost in your analysis of your flip. I am working on my first flip and I am taking the approach of over estimating rehab and holding cost to give myself a cushion on my reserves.

    0Reply
  • Bill Gulley
    Investor, Entrepreneur, Educator · Springfield, MO · Member since 2009 · 21k+ posts · 12k+ votes
    11y
    Originally posted by @Joe Villeneuve:

    @Bill Gulley  LOL. Nope.  I deal in Michigan and I've been using "cash like substance" as a description for "non-lien-able debt" for almost 30 years.

    Joe Villeneuve
    REcapSystem
    A2REIC

    Just sounds like something the DEA might be interested in Joe. LOL

    Non-leanable substance. :)

    0Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    Originally posted by @Bill Gulley:
    Originally posted by @Joe Villeneuve:

    @Bill Gulley  LOL. Nope.  I deal in Michigan and I've been using "cash like substance" as a description for "non-lien-able debt" for almost 30 years.

    Joe Villeneuve
    REcapSystem
    A2REIC

    Just sounds like something the DEA might be interested in Joe. LOL

    Non-leanable substance. :)

     I know.  When I'm speaking on it...it gets the audience's attention.  LOL.

    Joe Villeneuve
    REcapSystem
    A2REIC

    0Reply
  • Brandon McCombs
    Homeowner · Fairmont, WV · Member since 2014 · 95 posts · 19 votes
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    @Ezra Nugroho I just closed on a 9 unit apt building in October with no money down. I borrowed $10k from my step-dad for the inspection, earnest money and insurance deposit. I also was able to negotiate $60k in owner financing with sellers having 2nd deed of trust and my primary lender (a local bank) having 1st deed of trust loaning my LLC $198k.

    I did the owner financing because without it and borrowing extra (sale price was $239k) I wouldn't have had any capital to make repairs and cover maintenance while I readied 4 of the vacant apartments to be rented. All my cash is tied up in my first property until I can sell it. Luckily the bank and the sellers loaned me what they did so I have a cushion until I get the occupancy up.

    So, not having any money down isn't necessarily an issue (it can hurt cash flow though) but you definitely need to have reserves and, in my case, I needed capital to do some repairs and upgrades.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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    Hi @Brandon McCombs 

    You used OPM.

    OPM includes IRA loans, JV Partners, Family, etc.

    Nice job.

    1Reply
  • Brandon McCombs
    Homeowner · Fairmont, WV · Member since 2014 · 95 posts · 19 votes
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    Yes. The nice thing about OPM is that, as long as the source isn't a formal bank or at least the same bank, I can perform more of these transactions because I'm spreading the risk across multiple entities. I live in a small town though so relying on owner financing every time may or may not take me that far but there are larger companies around here that own real estate and are large enough they can owner finance. So when I'm ready I plan to offer that idea to them in the hopes they agree so I can acquire more properties without always needing to involve my bank.

    0Reply
  • Brian Gibbons
    Investor · Sherman Oaks, CA · Member since 2008 · 6k+ posts · 3k+ votes
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    Brandon that's awesome because if you focus on owner financing and get a good repetition for paying on time then you get testimonials from people that like and trust you which goes along way to getting more business think of getting video testimonials on the website that they're happy with your payment history and they like the way you do business

    1Reply
  • Jeff S.
    Specialist · Portland, OR · Member since 2010 · 3k+ posts · 1k+ votes
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    @Ezra Nugroho how would that be risky? The less you put down the more cash you have. That is less risky for you. If you are able to walk away for some reason (think sink hole) and the bank doesn't come after you then you have less to lose.

    It is risky for the bank. It is risky for whatever investor has loaned you the money because the less skin in the game the buyer has the higher the possibility you would give up if things go wrong.

    3Reply
  • Ezra Nugroho
    OP
    Investor · Milpitas, CA · Member since 2014 · 116 posts · 103 votes
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    @Jeff S. Of course you know that in most states, mortgages are recourse loans. But I can see your perspective that the risk is held by other entities too. 

    0Reply
  • Jerry W.Pro Member
    Moderator
    Investor · Thermopolis, WY · Member since 2012 · 4k+ posts · 4k+ votes
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    @Ezra Nugroho  actually the less you put down to buy a property the more you have left in the bank.  reserves are important.  The trick is cash flow.  If the property will make you positive cash flow with the entire thing financed it is a good buy.  I love no money down deals.

    1Reply
  • Joe VilleneuvePro Member
    Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votes
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    @Ezra Nugroho I look at it this way.  Let's say you bought a property for 100k.

    If, you put 5,10 or 20% down on a property you'd have $5, 10 or 20k in your own money into that property.

    If, you put no money into it, you would have...well, no money tied up in it.

    Your risk is in losing something.  The only property you have something to lose is the first one.

    There's a reason lenders want you to put money into properties before they lend you some of their money.  They don't want to be the one taking all the risk.

    Joe V

    0Reply
  • Larry Turowski
    Flipper/Rehabber · Rochester, NY · Member since 2014 · 1k+ posts · 1k+ votes
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    @Ezra Nugroho Let's not forget the deal.  It has to be a deal.  It is not just about buying with little or no money.

    I do not exactly buy with no money down but I have bought a couple of properties for cash that I rehabbed and refi'd out of for more than I had into them.  I only did this because I knew I could sell them for more than I had into them, and I knew they would cash flow.

    The same would be true of other no-money-down strategies.  It would still have to be a deal.

    1Reply
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