We got started in real estate investing with no money and acquired not one, but three duplexes. Looking back, it was probably not the wisest decision, but glad it turned out okay.
I don’t exactly remember when I first read about the no money down concept, but what I do remember is thinking “There is no way I can make that happen”.
In these books they talk about getting money from private lenders, owner financing, friends, family, hard money lenders, credit card cash advances and other loans. In my head, that sounded like a cool concept, but unattainable for me. “I could never do that” I mean, who would lend money to me? And how risky would that be anyways? I had no actual investing experience and more importantly no freaking idea on how to get started. Was I supposed to just go to to Joe Doe and be like, “I need you to lend me some money”.
For years, I had a plan to make this happen. I was going to learn all I could, write a business plan, pay all of my debt and get coaching from others all while saving up for a down payment.
Six years later, after all the books, watching other people doing it and helping them doing it, I still had no actual business plan, was in debt and had $0 savings. All I wanted to do is start and at that point, fear and the lack of money was stopping me.
Today I realized, it was more fear than anything else. Remove fear from the equation and the money followed. “Where there is a will, there is a way” is a pretty accurate quote for this.
Here is the deal, books, blogs, or podcast can’t replace experience. There is no way I can put in words what went into my mind when I finally decided to pull the trigger. To be honest, I can’t even remember because I had no freaking idea myself. I just knew it was time to do take action. I’ll just tell you what I did to get my first investment.
Now, before I do. I want to paint a clear picture of my real estate background. Keep in mind that understand that it took me years to get there. I don’t want to paint an incomplete picture because a lot of the risks I took were calculated risks based on my specific background and comfort level.
I am an accountant that has worked primarily with real estate businesses so I had a somewhat advanced understanding of the math needed to analyze real estate deals.
I had 7 years of experience assisting real estate investors with property management. These investors bought undervalued/off market low income Multi-Family properties, renovated them, increased rents and refinanced.
I read at least 20 books on the subject, took real estate analysis courses, listened to hours of podcasts, and was keeping up with the trends.
Because of my experience, a low income multi-family property that needed rehab work was my preferred route. These properties require more work, but have higher potential of return.
At my starting point, I knew what to do once the property was acquired. Management was my thing, but what I didn’t know was how to acquire the actual property especially without money. All of these investors I worked with had plenty of cash at hand.
Here is what I did have: Consistent Income Stream, Understanding of the type of property I wanted to buy, good credit and some understanding of the numbers.
Here is what I needed: The perfect property, money for down payment and a mortgage lender that would work with my conditions.
How to find the perfect property
This was probably the hardest because the first thing I needed to do for my strategy was to find a property that needed work, but not too much work. I wasn’t willing to start with a full rehab on my first try.
I engaged a realtor to set me up with an MLS search.
I continued searching on Realtor.com and that is where I first saw the duplexes. I quickly searched for these in the MLS search from my realtor and emailed it over to her.
We were only going to buy one, but they were selling the other two right next to each other and it just seem so convenient. There was just one slight problem. We couldn’t afford all three (or so we thought).
Initially the plan was that we would partner with my dad to buy one duplex or triplex. He would live in one unit and get an FHA loan with 3.5%. Now, we needed to figure out how to get all three.
Finding the money.
“How can I afford it?” was the question I asked myself for almost a week.
After managing multi-family properties for years, I had been fantasizing about the time where I would own my little multi-family building. Everything in me was telling me this was my opportunity to turn this idea into a reality.
My dad would continue with the initial plan and buy duplex #1 with an FHA loan.
At that point I had to put my creative hat and figure out how to buy the other two. All of the hours spent reading real estate books were finally coming to play. What I needed was a lender willing to give me a loan with borrowed down payment.
The first thing I did was looking for what they call a “private lender” which is basically a non-bank institution (like an investment fund) that lends you money on real estate assets similar to the way a bank would, but at higher interest and fees. (Click here for more info on private/hard money lenders). I found a broker that worked with these type of transactions and she connected me with a lending company.
Generally, banks require that you have your own money for the down payment and you must prove this cash was yours. The thing about private lenders is that they can be more flexible. This particular lender did not care about the origin of the funds as long as we had good credit and the property was a good deal.
At that point, we just needed to find an additional $100k for the down payment . After looking for options, we were able to secure two personal loans from SOFI.com and Wells Fargo totaling the $100k with an average interest rate of 11%.
You are probably thinking that we are insane, right? Truthfully, I agree. 100% financing for the two duplexes was a scary thing, but I just knew I had to get them. I ran the numbers over and over. It was the riskiest thing I had ever done in my life. Assuming no rents were collected, we had to make $4,500 in monthly payments to support this debt. This is not counting the fact that we still needed to come up with the funds to renovate the properties.
Fortunately, the properties had $3,100 in rents coming and we were able to rehab while still having some cash coming in.
One of the things that helped us make this decision was the fact that we were really in top of our personal finances. We knew exactly how much we could afford to take on and what we could do to mitigate in the event that everything went south.
Now that is all said and done, it is easy to forget all of the sacrifices we made. We cut our a lot of our luxury spending. We stopped the nail salons, reduced the visits to restaurants, cancelled pool service, house cleaning, among others. One wrong move and we would have been in deep financial trouble.
The rehab was mainly financed with credit cards. We maxed out our $13k business credit card. Additionally, for months, we put all of our personal expenses towards our credit cards and paid only the minimum so that we could reserve the cash to put toward rehab expenses that couldn’t be paid with a card.
In total we spent $30k in rehab cost for both duplexes (not including my dads duplex) and this was mostly financed.
Was it stressful? Super! Was it worth it? Yep! Would I recommend this to everyone? Nope!
The truth is there is a lot places where this could have gone wrong and we got lucky. The tenants could all have decided to stop paying rent and we would have had to evict them all while having to fund 100% of the monthly payments. The units could have taken longer to rent or we could have had a major unexpected repair. There were days where I regretted all together. We worked long nights, we were running out of credit and cash.
After rehab was set and done, I sat down to analyze the post-renovations projections and freaked. I remember calling my dad and telling him
“I messed up and I cost us a lot of money. This duplexes were a mistake.” I didn’t think the properties would appraise high enough to provide us with any cash. The insurance cost was eating up all of our cash flow and we could not find financing that would make sense. Then when we did find financing, COVID came and of course I panicked even more. The lender that was going to do our refinance backed out. We couldn’t find anyone that would give the loan amount we wanted which was 80% of the appraised value.
Eventually, I found an alternative insurance solutions that cut our annual cost by $2k (per duplex), each duplex appraised $70k higher than purchase price and we found a lender that gave us a loan on 70% of the new appraised value of $245k which resulted on us getting $30k per duplex in cash after the refinance costs. It was not exactly what we wanted, but it was better than we thought considering we were in the middle of a pandemic.
We were going to use the proceeds to pay down some of the personal loans used to acquire the duplexes, but decided that we would put the money back to work to buy another property.
If you are wondering, would I do this all over again? 100%. In fact, I did do it again.
So, can you buy real estate with no money down? Yes. However, it was not that simple. We still needed money to pay for the monthly minimum payments in the credit cards and personal loans. It was stressful and it could have easily gone wrong (almost did) and cost us thousands of dollars.
We highly recommend to anyone thinking of taking this route to carefully evaluate their financial position before jumping into a deal like this. No money down deals are risky and you need ask yourself, how much can you afford to lose?