The Truth About No Money Down Real Estate

Anyone who has ever been a victim of insomnia has probably been subjected to the late night infomercials that promise “real estate riches with no money down.” An integral part of the infomercial is a series of sound-bites or testimonials from successful students telling how much real estate they bought and how quickly their lives went from rags to riches thanks to whichever fabulous course is being touted.

To be fair, you can make a lot of money in real estate and you can shorten your learning curve tremendously by buying some of these courses. You can also spend thousands of dollars and still be at a loss as to how to get started on your road to success. When you ask for help from the course sponsors, you are upsold to an expensive bootcamp or another series of DVDs and books.

Before you jump into an expensive course with both feet, take some time to investigate the courses out there and to find out exactly what is meant when someone says “No Money Down.”

No money down in almost every course I’ve ever subscribed to generally means “none of your money down.” That’s almost as good as no money down, but the money still has to come from somewhere.  Some of the ways you can do a no money down deal include: 100% financing (you still pay some fees and closing costs); using other people’s money (including but not limited to friends and relatives); “hard” or private money lenders; using cash advances on your credit cards; taking on a financial partner; negotiating a no money deal directly from the seller; lease option; and taking property subject to the existing loan.

The other half of the equation is the concept of “owning” or “controlling” properties. The enthusiastic and successful course alumni talk about owning a million dollars worth of real estate in a short amount of time. What they don’t talk about is how much is owed on the property. If they’re doing no money down deals, the amount owed is probably very close to the amount the properties are worth. Their balance sheet improves when and if the properties increase in value. During the boom, people made a lot of money due to the fast equity growth in many markets. After the bust, those paper profits disappeared rapidly (and then some!) and, while the 2013 uptick in equity growth is nice, it’s not much over the rate of inflation.

Over a long period of time, equity growth is what will make people truly wealthy. But until you sell the properties or refinance and take some of the money out of the property, you are looking at paper profits. And paper profits don’t put food on the table.

One of the terms you will want to listen for is “cash flow.” Cash flow is the amount of money the owner makes on an investment property after all the expenses are paid: mortgage, taxes, insurance, maintenance and repairs, vacancy rate, etc. A general rule of thumb is that a property will break even or possibly cash flow (depending on taxes, insurance, maintenance, etc.) if you can rent it for 1% of the purchase price. For example, if a three bedroom, two bath home rents for $1,200 in your area, you shouldn’t pay more than $120,000 for the house, unless you want to make a substantial down payment to bring the loan amount down to $120,000. The testimonials you hear on infomercials talk about the large monthly incomes generated by real estate investments. What you don’t hear is how much money goes right back out each month to cover the debt service on the properties.

Money is made in real estate when you go into the deal, not when you sell. True investors want to buy a property at the right price in order to have immediate cashflow and/or equity. Buying a property that doesn’t at least break even or cashflow and hoping that the market will bring the property values up is speculating, not investing. Equity growth is the long-term payoff for an investor, not a quick money strategy.

One of the complaints I’ve heard about one of the more famous late night gurus is that his strategies are so old that most are no longer legal. I have his course. Some of the techniques can no longer be used. But he has a lot of other good general information in his course. With experience, you can look at some of the old, now illegal strategies and apply them to the new market and new laws. Basic real estate investing is still basic real estate investing. There’s no need to be tricky, slick or overly creative.

There are all sorts of ways to do no money down deals. Whether a strategy is a new twist or an old workhorse, legality varies state to state. I recently spoke to a young investor who was eager to find “subject to” deals to flip to other investors or end users. “Subject to” means taking title to someone’s house and keeping the loan in their name. It can trigger the “Due on Sale” clause which is included in just about every loan that is made in the U.S. The seller runs the risk that the investor or the person the investor sells the deal to will not make the payments in a timely fashion or at all and ruin the seller’s credit. The young investor had bought a late night course and was eager to hit the ground running. He hasn’t stopped to find out the pitfalls of that type of deal; he doesn’t have the financial depth to cover the payments on the properties that he takes subject to, he runs the risk of committing loan fraud and will probably end up getting sued by a seller who will come back at him either for not making payments or for coercing him to sign over his house when he was in financial distress.

The courses you buy, the books you read, the seminars you go to are all just starting points. Each course gives another layer of knowledge and fills in gaps left by the previous courses. But you need to supplement the courses with real-world experience. One way to do that is to join and participate in your local REIA. Meeting with other investors will help you learn your local market, find out about other meetings and seminars and discover who is respected in the industry and who is not. (Shameless Plug: If you're not already a member, you can join West Florida REIA here: Membership Options

In my area (Tampa/St. Pete, FL) and most major cities, seminar companies sponsor “free” real estate seminars about every other month. The seminar usually lasts a couple of hours and it is a come-on to buy a course. I go to those every chance I get and leave my credit cards at home. It’s a chance to learn about strategies I may not be using or a niche market I hadn’t thought of working. It’s also a chance to network with fellow investors. One of the best courses I have ever bought, I purchased at a free come-on seminar. I had left my credit cards at home but knew by the end of the seminar that the course offered information I needed. I had a credit card statement in my car which had the card number on it. We guessed at the expiration date and I spent about $1,300 for three courses.  That was a lot of money to me back then. Which brings me to my next point.

No course is any good unless you take off the shrink-wrap and use it!  So many people make an impulse purchase of a course and never even open up the package. Then they’ll complain that the course was no good or didn’t work. Courses and seminars don’t work. You have to do the work. The courses just tell you how. When I got home with that $1,300 package of CDs I was a bit overwhelmed by how much I had just spent. I knew that I had to make my money back on it. Over the next three days I listened to the three courses, one after the other, twice in a row. Then I applied some of the techniques I learned and within a few months I had located a property that eventually netted me over $15,000. I have a friend who bought the same three courses.  She has never, never taken the shrink-wrap off the notebooks.

Thirteen hundred dollars was and still is a lot of money to me. But that fifteen thousand dollar profit is more. That’s why it’s called investing. But not everyone has that much money to start with. It’s ironic that you have to spend money to learn to buy real estate with no money down. If I can find a course at a discount, so much the better. I check my local library for books and tapes first. If I check a book out of the library that I feel has good information, I’ll buy the book, either retail or try to find it online as a used book. I also check EBay to see if any of the courses by my favorite gurus can be picked up for less money. I picked up a series of investing books that retail in the $15 range at the local Goodwill store for $2.50 each -- virtually untouched and unread.

Investing in real estate with little or no money down is done every day. But you increase your odds of success by first educating yourself on various techniques and lowering your expectations to realistic levels. As you start reading up on real estate, work out a plan for your real estate business. Do you want to buy and hold properties? How many do you want to hold or manage? Do you want to flip properties to someone else for a fee? Do you want to use banks, hard money lenders, lease options or whatever to acquire properties? Find the techniques you are comfortable using, get your paperwork in order and learn your local marketplace before going out and buying everything in sight. There’s no sense accumulating a real estate empire if you can’t hold on to it. Here’s one thing that is hardly ever mentioned in those late night infomercials: Do Your Homework. Real estate investing takes knowledge, experience and hard work. The courses that are out there are merely the tools you can use to make the work easier.