No Money Down Real Estate Investing
This post is about buying real estate without any cash. I have often heard that this was possible and back in the “good old days” it was. Then the economy fell apart and as part of the reconstruction the lending rules changed. I was faced with a challenge. We had already purchased several properties the old fashion way with cash down. The problem at this point was we ran out of down payment cash.
I started to research creative (legal) ways to invest in real estate. I had a conversation with an experienced local investor that gave me an idea. I discussed the idea with my mortgage broker and it past the test as something that could work.
I am quite conservative by nature, so I figured I would try a less expensive property as my first one. That way I could limit my risk.
The following is the process I followed and how it worked out:
1. The idea – what I found out was that if the purchase price and the renovation cost did not total more than 80% of the appraised value, you could get an 80% mortgage. That would mean $0 out of pocket.
2. Identify the type of property we needed to find – I decided to look for a single family home in need of repair. It had to be a low price (under 125K) and in an up and coming area.
3. We found a two bedroom bungalow in Spryfield. It was a rental property, however, the owner died and the family did not want it. The house was just reduced and the tenants were removed. We made a cash offer and were able to purchase the property for $64000. We liked this house because it had good bones, located in a mature area on an R4 lot. We used a line of credit to pay for the house. You can also do a purchase plus improvements mortgage, private lender, or a few other ways to finance the original purchase. It is all about the numbers, so even if you have to use expensive money up front, if the math works, it could be a good deal.
4. Take possession and get to work. It is important to have a team of contractors ready to go. We were able to do a quick close and thanks to our awesome renovation team we were able to have it renovated and ready for a tenant in three weeks.
5. Find a tenant. It definitely helps with the appraisal if you have a lease in place. The lenders do not usually like projected rent, especially if it is on the high side. We were able to screen and place a tenant in the newly renovated house for $800 per month. Which was market value for the area at the time, with the added bonus of being fully renovated. We had a lot of interest in the property as soon as we placed the ad.
6. Secure financing. We brought the details of the deal to our mortgage broker. He secured us a loan based on our projected appraised value.
7. Appraisal – We know this area very well and the project was small, so we did not do a pre-appraisal. If you are doing a larger project or are not 100 percent familiar with an area, I would recommend getting a pre-appraisal and a post appraisal done.
8. Receive the mortgage funds and pay back the line of credit.
Here are the numbers on our first project:
Purchase price $64000
Deed transfer tax 960
Legal for purchase and re-finance 1200
Interest on line of credit 1200
Property tax before re-finance 500
Total cost of project $84960
Mortgage funds 96000 (80% of 120K appraisal)
Net profit $11040
Mortgage & Prop. tax 578
Total expense $660
Cash flow $140
I consider this first project a success. It does not have huge cash flow, however, we were able to buy a cash flowing property and put money in our pocket. We have purchased three more properties this way, since this first one. I was so excited when I got my cheque for the mortgage funds on this first property, I made a copy of it and hung it on my wall for inspiration. I realized that anything is possible as long as you are willing to make the extra effort, do not take no for an answer and never give up.
Until next time,
Michael P Currie