Catch 22 of No Down Payment for Investment

[Ed Goble]

Here's the catch 22.  My house (primary residence) is paid off.  I have perfect credit.  Regular investment mortgages would be easy to get.....  if only I had a down payment, because they only cover 80% most of the time.  Because I have no debt, I have no savings.  As a matter of principle, I will not use equity from my primary residence to fund the acquisition of others, and it will take many years to save up a down payment to get in to my first investment property.

I talked to hard money lenders/private money people today, and they will not only not fund a second mortgage for the deficit, but they also charge a large down payment.  It seems that I have no recourse, and my hopes are dwindling.  It seems like the banks intentionally stack things against the little guy unless he puts it all on the line and risks everything to even get started, or work many years for a down payment.  It seems that private money lenders do not exist that will cover 100% of the cost  How is somebody supposed to break through this problem while not risking a house that is paid off and trying to stay out of debt in that house?  I'm starting to lose hope.

[Kyle J.]

@Ed Goble There’s no judgment in what I’m about to say, so hopefully you don’t take it the wrong way.

First, congrats on having paid off your house. Sounds like that’s a goal you set for yourself, and then achieved. And not many people accomplish that.

Now, having said that, if you have a paid off house, but no savings, then you’re house-rich but cash-poor. And while having a paid off house can be a good thing, it can also be a problem, especially if you don’t have any money and you want to continue (or start) investing. 

I understand the sense of safety and security a paid off house brings you, but frankly I’d rather have a mortgaged house and a boat load of cash in the bank. At least then I’d have options. 

Sure, with a paid off house you might always have shelter, but you can’t eat your house, or buy clothes with it, pay for your kid’s college education or even your utility bills. (At least not without leveraging it, which you’ve already said you’re not willing to do.) You can, however, do all those things with cash. And cash can be used to provide housing for yourself and your family too. It could even be invested to make more of it.

My point is, both have value. You’ve just made a choice that having a paid off house is more valuable to you than having cash in the bank. Nothing wrong with that per se. It’s your choice, and I’m sure you worked very hard to obtain that paid off asset. Much like a private lender worked very hard to earn and accumulate his/her cash in the bank that he/she loans out. 

So you see, it’s not a “Catch 22” actually. It’s just that it sounds like you’re wanting a private lender to risk 100% of the asset they worked so hard to accumulate (their cash), so you don’t have to risk any of the asset you worked so hard to accumulate (the equity in your house). And that’s just not generally how it works.

Most private lenders are going to want to see you risk a little of yours, if you expect them to risk a lot of theirs. Make sense?