You probably won’t like what I have to say this week. But, the brutal reality is that you can’t spend everything you make and expect to get rich. Period. If you are slipping further and further into debt each month and you think real estate investing is going to save you, I have bad news for you. It won’t.
I know… those guys on late night television introduced you to people who got out of debt and quit their jobs just 60 days after taking their real estate investing course. Let me tell you first hand that if those testimonials on t.v. are even real, those people are the exception, not the rule.
You can, and we believe you WILL, create massive amounts of wealth through real estate investing. Set your goals, find properties that meet those goals with plenty of good research and then hold onto them for at least five years…preferably longer. It works… look at the richest people in your city. Of those that are self-made, I bet at least 25% of them did it through real estate. We always go through the richest people in Canada, and Power List for Vancouver, and this number holds up.
The trick is to learn what you’re doing, and then accelerate your investments after you have built a base of knowledge and equity. It’s not the only way to make millions in real estate…but it’s the way that requires less money, has the least amount of risk, and induces the least amount of panic attacks.
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“Are you a saver or a spender? As I see it, the wealth seeking world is divided into two camps. In one, you have the wealth accumulators: men and women who are cautious about spending but eager to save and invest. The other camp is populated with spenders: men and women who are obsessed with things. They spend all their spare money, and often much more than that, buying things that say “rich” but actually impoverish them. To become wealthy, first you need to build a small nest egg by spending less than you earn. Simple, huh? But not if you don’t have the self-discipline to do it.”
Michael Masterson, Automatic Wealth
We started out with $16,000. Thankfully Julie was a saver. When she graduated from University and started working as a sales rep she continued to live like a student. And, she put every extra penny she had into paying down her student loan. When that was paid off, she proceeded to save the extra money. Her plan was to go back to school for her MBA so she wanted to have as much cash in the bank as possible to pay for school.
When we met, I had a property with my Mom that we’d purchased years before, but didn’t have much else. After years and years of being a student, I wanted to enjoy the money I was making. I drove a nice new financed Volkswagen and enjoyed my nights out in Victoria. I didn’t spend money excessively, but I was carrying credit card debt and didn’t have savings. Julie shared her visions of “retirement at 35” with me, and I got excited.
It didn’t happen overnight, but it only took a few months to change my situation. I quickly paid off my credit card debt, and started putting a few hundread dollars away each month in savings. And, we started shopping for our first investment property.
Our first investment was a lot easier to do thanks to Julie’s school savings. But, you don’t need money to buy your first property.
I will get into the details in a bit, but as far as we’re concerned, there are only 3 ways you should consider coming up with a down payment on a property, but the good news is that only one of them requires that you have money saved:
1. Your own savings (cash out stocks, GIC’s, and even retirement savings in some cases)
2. Equity in your home
3. A partner with cash.
Here’s the hard reality that you won’t like to hear though. Finding a partner will be next to impossible if your own finances are ugly. If you have no experience investing in real estate, you are deep in debt and you are trying to get rich on my money, what exactly is in it for me, as your potential partner? It just sounds risky to me.
But, if you come to me and say “Dave, I have found this property that I think is a great investment. I don’t have any money because when I graduated from University two years ago, I had $30,000 in student loans. I only have $5,000 left to pay off, but I really want to get started real estate investing and I think this deal will be great,” I will be more interested in working with you.
See what I am saying? This person has no money, but they have the right mindset about money. They are in debt for a good reason AND have been diligent about debt repayment.
You HAVE to get control over your finances before you buy a real estate property. Even if you have nothing for a down payment. You need to change your lifestyle so you are living beneath your means. From now until the end of January track every single penny you spend. Then see how that compares to the money you made in the same time frame. If you spend more than you make, you need to make changes!
Oh – I hear it already – but, Dave, it’s Christmas! I have to get the Wii Fit for my wife, and the kids will hate me forever if they don’t each get an IPhone. Well, if you’ve saved up for those gifts, great! Go for it! But, if you are going to go into debt for those gifts then you are a SPENDER, not a SAVER and you’re obviously not serious enough about growing your wealth and becoming a rich real estate investor.
So, in answer to the questions about money and down payments, like these ones:
- “Should I approach other investors for partnering when I have no money for startup? I feel like I will be swallowed by sharks even though they all seem nice enough. I have seen several nice properties (4 plex on up) but I need to make the big leap to action.” –a reader from Portland, ME
- “Now that my credit is “good”, coupled with the changing real estate landscape, how much upfront capital is needed?” –a reader from Matthews, NC
- “I hear a lot about using credit card, home equity line, owner financing for down payment. What is a realistic timeline to see a positive r.o.i. to reimburse funds?” –a reader from Cleveland, OH
- “How can I do deals like Robert Allen – no money down, cash back on closing” –a reader from Hamilton, ON.
the general answer I have is for you to track your spending, and make sure you spend less than you make, each and every month. Then, use the excess to pay down your debt or save for your real estate investments.
In our real estate investing newsletter I answered each of these questions specifically, but to keep this simple let me just say that:
PLEASE PLEASE PLEASE DO NOT USE YOUR CREDIT CARD TO FINANCE YOUR REAL ESTATE INVESTMENTS!! Just the other day Julie reminded me of one of the first things we did at a “Get Rich Quick” real estate course we took in Toronto many years ago. During our break the real estate guru told us to call our credit card company and get our credit card limit raised and a percentage knocked off the interest rate!
The room was buzzing with excitement after the break. Everyone proudly told stories of getting credit of $5,000, $10,000 and even $20,000 added to the limits on their cards! And some even excitedly reported that they now would only be paying 18% interest instead of 21%.
What if something goes wrong with your investment and you end up paying that 18% interest on that $20,000 for years to come? Do you want me to do the math on that?
As for the other methods our newsletter readers asked us about…using home equity and vendor take back financing, it really depends on your goals and where you are right now in your life. If you’re 65 and getting ready to retire, I am not sure I would use the equity in your home. But if you are under 50, and have $200,000 equity in your home, I would definitely consider a $50,000 home equity loan for a down payment on a real estate investment – assuming you can cover the extra payments if something goes wrong with your investment.
On a good deal, your rental income should pay for the monthly payment increase that the additional $50,000 home equity loan will cost you, along with all of the other expenses on the rental property. In this case, I think that it’s a great source of money to use for a down payment on your first property.
As for owner financing. I love using owner financing. We’ve used it several times when we don’t quite have enough for 25% down and the bank won’t lend us any more than 75% on the property. Sellers are often happy to oblige with a loan for the difference. It’s secured against the property, it gives them a nice guaranteed rate of return each month, and it’s cash in their pocket each month. If your property will cover these extra payments and the vendor is willing to do it, then this is your best option. BUT – if I have no down payment at all, and can only get 75% financing from a bank, I wouldn’t use this method to finance the rest.
We’ve bought properties for no money down. We’ve learned the hard way that no money down does not mean it won’t cost you!
No money down real estate investing is VERY different than buying a property without using any of your own money for a down payment.
Let me explain… no money down is where you borrow 100% of the cost of the property. It’s incredibly risky because if the value decreases even by 5%, you will find yourself owing more money on the property than it’s worth. And if anything goes wrong you will find yourself pinched to pay for it. There are a lot of foreclosures happening all around North America for this very reason!!!
It’s also extremely difficult to find a property that will cashflow with 100% financing. And you still need money.Typically you can expect to need about 2-3% of your purchase price to cover the other expenses. It’s not a lot, but you have to pay a property inspector, a lawyer, property purchase tax and a few other disbursements depending on where you are buying.
No money down deals are not only MUCH riskier because you have no equity in the property, they are also pretty darn hard to find because they rarely cash flow.
If you have no money for a down payment on your real estate investment, then, in the following order, this is what I suggest:
1.Get control over your finances. Pay down your debt and start saving. You don’t need cash, but there probably aren’t many people that will partner with you if you are terrible with your money.
2.Look to your home. If you own a home, and have some years left before you were planning on retiring and a reasonable amount of equity in your home (over 25%), consider using a portion of the equity in your home to get started.
3. No money and you are currently a renter or don’t have enough equity in your home? Find a great property…one where the rent will cover the costs with as little as 10% down. Get an accepted offer and then find a partner that has the money to invest in the property with you. Be prepared to sell yourself AND the property.
We’ve bought several properties when we’ve had very little money ourselves. The no money down deals blew up in our face. Those were hard lessons learned. But, the deals we did with a partner, where we did all of the work finding and purchasing the property, and now oversee the property, have been a great success. Having money for a down payment allows us to buy better properties in better areas, gives us equity in the property from the start, and helps reduce the monthly mortgage costs so the property is more likely to cash flow from day one. The deal we typically make with partners: Our partner puts down the money for the down payment, but we jointly own the property 50-50. If we have to make major repairs, and the property can’t cover it, we split the cost evenly. When we sell, our partner will get his down payment out first, then we split the rest of the proceeds.
Published December 8th, 2008