We are back to buy even more homes with no money down. In Maximum Leverage 1, we covered how to use different types of loans to prevent paying a down payment. However, what if paying a down payment cannot be avoided? How can we leverage other’s people money (OPM) or our equity to pay zero out-of-pocket?
There are many advantages to paying as little out-of-pocket as you can. One of my favorite things is that it takes financial education to pay zero down payment out of your pocket. For a deal to make sense and cash flow, you have to have some idea of what you are doing.
If someone is coming is with a substantial down payment, it should be easy for the deal to cash flow from their own savings account. You are paying for your cash flow by using your own savings account to buy into equity.
Buy Land, Start Farm
The idea across all of these techniques is the BRRRR method. BRRRR stands for Buy, Rehab, Rent, Refinance, and Repeat. There is a book on my “To Read” list by the same title. Once I read this book, I will be able to detail how real estate investors use this technique to become rich. In the meantime, you can read the acronym and guess how it works.
When you use zero down, you will have to use a technique called forced equity. Forced equity is when you perform actions to make the house go up in value; such as a remodel, adding rooms or rental space, or adding items like a washer and dryer room. If you add anything that makes cash flow throughout your property, it is forced equity. Let’s take a look at some ways to avoid paying a down payment by using OPM or your equity.
Using Business Credit. If you have been following the advice I gave in my article “Establish Business Credit Now,” you will have access to some business credit. To summarize, you start by opening a business entity (LLC or S Corps). You then obtain a business credit card, build your credit up to a business line of credit, and finally, a business loan. The book “Zero Down” explains the process in detail.
A business loan may not work with a more expensive property, but if you are trying to purchase a house that requires a $20,000 or $30,000 down payment- you may be in luck. Also, you may be able to use private money (read “Become a Private Money Lender”) for the down payment and the business credit for the remodel.
Intro to REITs part IV: REITs vs Rentals
Once you buy the home and remodel with business credit, the idea is to refinance the house and pay off the private lender and your business credit. Then you should be able to rent the property and cash flow positive. Simple right? Maybe not, but possible. I recommend following the BiggerPockets website for more on techniques like this. They have loads of podcasts from many different real estate investors, all using variations of BRRRR.
Cash-Out Refinancing. Do you have equity in your current rental or a personal residence? Wouldn’t it be nice to leverage your equity to buy even more property? You can by utilizing a cash-out refinance.
A cash-out refinance takes advantage of lower interest rates and lots of home equity to change your loan terms and give you the difference. To perform a cash-out refinance, you will need lots of home equity.
You will need to figure out your loan-to-value amount before you get started. You can begin by getting a home appraisal or comparative market analysis from a real estate agent. Real estate agents can assist you more than you know; read the book “Sold” for more on a real estate agent’s life.
Play Monopoly in Real Life
The cash-out refinance process becomes more problematic the more homes that you own on your credit report. It may be good to incorporate it into a business if you want to use the BRRRR method.
Seller-Financing. Seller-Financing is something that most mainstream buyers have no idea exists. Investors who have been buying commercial real estate use this process a lot more. Seller-Financing can be a boon to people wanting to get into more expensive properties.
For seller financing, the property seller agrees to carry a “note” for the buyer. Buyers use the note for the amount of the down payment. The buyer would obtain 80% of the cost of the home from a bank. The buyer would carry a note for the remaining 20%, paying back the seller directly.
Why would a seller want to finance a buyer in this creative way? 1) It will allow more people to be able to buy real estate. Obtaining a 20% down payment on a $2 million property can be a headache for most investors. 2) The seller would still like to have some passive income coming in. Holding a note- the seller would be out of the landlord business but still have rental income flowing into his pockets. Not bad.
Why Real Estate is the I.D.E.A.L. Investment
How do you find deals where the seller is open to seller financing? If you are not a seasoned real estate investor, you will need assistance finding deals like this. Ensure you read books on how to make yourself more presentable to the real estate community. Again, finding a real estate agent to get you into this world can be very helpful.
1031 Exchange. If you have equity in a rental property, you may want to roll it into another rental property (tax-free, of course). A 1031 transfer can help you build your real estate portfolio into bigger and bigger properties over time.
Why would you want to exchange your property instead of buying an additional one? Sometimes it makes tax sense to exchange your property for a larger one. 1) You will take a huge tax hit if you sell the property. 2) You will have to recapture some deprecation costs 3) You don’t have the bandwidth (people, management, time) to handle more properties.
If you are a smaller investor and want to put yourself into one apartment building, this may be the way. You can use the equity build-up over time to grow into a large down payment into a commercial property.
How to Leverage Real Estate at Any Age
For many people, having a cash flow apartment is all they need to retire comfortably. Read more about 1031 Exchanges on Investopedia.
Wrapping up. As you can see, there are plenty of ways to use leverage and financial education to get into a property. Each technique is helpful in different scenarios. The idea isn’t to use the same approach in all situations: the more methods that you know, the more options at your disposal.
I have learned from buying and owning three homes concurrently that every home-buying situation is different. Nothing goes as planned, so using other techniques and templates can assist in accomplishing the mission. Having multiple tools at your disposal is the best way to get yourself into lots of properties.
These techniques are just the start; I have learned even more methods recently. So stay tuned for more from the Maximum Leverage series. I love the title because it sounds like a bad 90’s movie.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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