No money down!!!
September 13th, 2006 by Kenric
I still get a few questions a month about the so-called “No Money Down” informercials on TV. I figured I’d clear something up about no money down investing.
Almost any investment can be a no money down investment. To be clear, no money down usually means “None of your own money down”. Investments usually take money. It’s where the money comes from that is important. If you bought a house for $100k and you got a $100k loan from the bank you could consider it a no money down investment. If you got an $80k loan from the bank and your parents give you $20k you could also say that it’s a no money down investment. You could even get the seller to finance the home for $100k and it would still be no money down. My point is that none of the $100k that you needed to purchase this house came from your pocket. Your checking account balance stayed the same, thus its no money down!
So is no money down investing for you? The answer is it depends on the reason you are doing no money down.
As an investor you would like to keep as much capital as possible and the less you put down, the more leverage and greater return you have. Suppose you find a $100k property that cashflows $400/mo with 20% down and this same property cashflows $200/mo with 0% down and you have $20,000 in the bank. Would you do the 0% or 20% down? With 20% down your cash on cash return is 24%. With 0% down your cash on cash return is infinite. You are making $200/mo and you still have $20,000 in the bank waiting for the next deal.
What is disturbing to me is that most people who are doing no money down deals are doing it because they “HAVE NO MONEY”. It’s not because of leverage or better returns. It is because they have no money and saw the informercial at night on TV. Even taking the deal above, if an investor with no money chooses the 0% down path, what will happen when the furnace dies in month 2? They had no money to begin with and now there is a $2,000 repair bill. How do they get this furnace fixed?
That’s the difference between types of no money down investors. Some do it because it makes sense investment wise and some do it because they have to. I always see posts on the richdad forums asking “I have no money and bad credit, how do I get started in investing?” My answer is you should first figure out why you have no money and bad credit, save some money, build up your credit and then come back and ask again.
Posted in Real Estate | 2 Comments »
Stumble it!
Good stuff K- so much of investing has to do with control. Control over yourself, control over your money, etc. Once you have controls in place, the options are endless- it is not so much about what you can or cannot do, but whether you should or shouldnt…I think I feel a blog coming on…
By prlinkbiz on Sep 13, 2006
I think some “gurus” are trying to capitalize on folks’ emotions that the (formerly) most profitable real estate market ever is passing them by. It’s crazy, but these people feel they just need to grab on to the train as it flies by or get left in the dust. “Gurus” use this to pull customers to them and buy their systems.
You need to understand how to control money, before you can understand how to make it.
By RealOG on Sep 13, 2006