Deals have different parts you need to put together to make them work.
Making deals is like cooking – you must mix different ingredients and follow specific steps to create the desired meal.
Miss one ingredient, and the meal is going to be a disaster.
A no-money-down deal has four elements. Each element is essential; you can’t do a deal without all the ingredients in place.
If one element is weak, the deal may fall apart.
If one element is vital, it can strengthen the other three.
So, let’s go over these four elements.
The Asset of Choice
The first element of a no money down deal is the asset.
In theory, you can do a deal using any asset – real estate, business, or paper.
But why is real estate the asset of choice in a no-money-down deal?
The reason is simple – financing.
Real estate is the most straightforward asset to finance.
All you need is the property and a person who can qualify for financing. It could be you, or it could be a partner.
Real estate is a tangible asset that banks and financing companies like to use as collateral.
Beginners can’t find financing for stocks, forex, or other paper assets. Funding for these instruments is only available for people who already have money. If you’re just starting and have no money, you can’t start with paper assets.
It’s not simple to get financing for a business, especially if you’re a beginner. First you need to prepare a business plan – which can only be done reliably by someone who already knows how to do business. If you’re a beginner, your business plan is likely flawed, and chances are low that you can get funding from an investor or institution.
So the decision is simple – only real estate can provide beginners with the vehicle to begin investing even if you have little or no resources. Furthermore, only real estate can give you the leverage you need in a no-money-down deal.
7 More Awesome Reasons To Love Real Estate
In addition, there are other compelling reasons to make deals in real estate.
The rich invest in real estate. They either invest in real estate for business, or they park their cash in real estate.
They became rich, and they became more prosperous because of real estate.
Here are seven reasons why.
Sometime in the ’90s, a middle-aged couple purchased a property in a squatter-infested area in Pasig for less than Php450,000.
They used PAG-IBIG to pay for the property.
Even though it was a squatter-infested area, they endured years of living in this environment because this was the fruit of their labor. It was their house. It was the fulfillment of their dream.
They had to walk every day through muddy streets during the rainy season or endure dusty roads during the summer. They may also hide inside the house when some neighborhood drunk is on a rampage outside.
They endured that for 20 years.
In time the neighborhood changed. The settlers were gone and were replaced by a highway.
The family also moved somewhere less polluted and rented their house to a cooperative of local factory workers.
In 2012, they decided to sell the house and asked us for help. After a few months, we sold the property for Php9,000,000 or 20x their initial investment!
Imagine that. Twenty years ago, the property was in the middle of a squatter-infested area worth less than Php500,000. But after 20 years, it was sold for Php9M.
That’s the beauty of appreciation.
Real estate is the only asset that grows in value with age and use.
I’m sure you have a lolo or lola with a story like this. They bought land for $10 per sqm and sold it for $100 per sqm, $1,000 per sqm, or even more.
It’s simple supply and demand. As more and more people are born, the collection of land remains the same, so the market will continue to drive the price up.
We will continue to have more people because of our population growth rate.
So expect the demand for real estate to continue to go up. In fact, according to the National Housing Authority, there is a considerable backlog in the number of housing units needed.
Every year, there’s always a deficit in the number of housing units built. This means there will always be good demand for real estate.
But it’s not only population growth that pushes the price up.
Inflation also pushes the price of real estate to increase. The cost of materials to build a house will increase so the price of new houses will always be increasing.
This makes existing houses more valuable. It’s a lot cheaper to renovate an existing house than to build something from scratch.
Good value houses and land are your best weapons against inflation.
If you’re holding cash, time deposits or bonds, your principal will lose value over time. But if you park your cash in real estate, you can watch it grow over time.
It gets better as you pass it on to your heirs. It’s the best legacy that you can leave your family because it becomes more valuable with the passing of time.
If you think real estate is expensive now, imagine the value of real estate that your great-great-grandchildren will inherit if you buy one today.
My wife had a client who asked her if she had any condo units that were a good deal. We asked around and we found an Ortigas Condo for sale at Php1.5M.
We knew that in the building, the selling range has been 1.8 to 2.4M so a selling price of $1.5M was very reasonable.
The rental rate in the building is $12,000 per month and the unit had a tenant at that rate.
We also knew that this client has a personal rule of buying at 100x the current rental so as expected, he negotiated to buy it $1.2M.
He’s not going to move up in price because he doesn’t need to buy.
So for us to make money, we had to get it below $1.2M. Otherwise, the deal is off.
So we made the outlandish offer of 900K cash.
Our offer was rejected but the sellers went down to $1.2M. That’s already a 20% discount from their original asking price of $1,500,000.
But it’s still not good enough because we won’t make money at $1.2M.
We said we were willing to go up to $1,000,000 cash.
They had to think it over but it didn’t take long for them to go down to $1,100,000.
So we took it.
Negotiation is tough but it’s one of the advantages of investing in real estate.
You can make a good deal better with negotiation. Just by using the right words, you create money for yourself by negotiating.
Compare that to stocks, mutual funds or time deposits. You can’t negotiate the value of stocks, mutual funds, or time deposits. You have to buy at the market price.
Why would anyone pay the full price?
#3. Leverage – Using Other People’s Money
When I was starting out, I had debt and no savings.
My salary was not high enough to qualify for a big housing loan from a bank.
Fortunately, real estate still allowed me to leverage and use other people’s money.
In this case, I gathered investors and pooled their money to buy a 6-door townhouse for Php3.5M.
The investors provided the money for the down payment and repairs while the seller-provided in-house financing for the balance.
I was able to raise money because the property was in good condition and we could sell it for Php5.4M.
That proved to me that money follows good deals.
If you have a good deal, you can raise capital even from strangers.
You can also confidently use the bank’s money if you have good credit.
I simply couldn’t do that with other assets.
Leverage is a powerful accelerator for creating wealth.
Let’s say, for example, you had Php1 million to invest. You buy a house in cash for $1M. After a year the property value increases by 5% and you are able to resell it for $1.05M or a 5% return.
Now suppose, you only used $100,000 to make a down payment for the same property and loaned the 90% or $900,000. After a year, you get the same appreciation and now resell the property for $1.05M.
This time your money makes a 50% return instead of 5%.
You get 50% because you invested only 10% or $100,000. When the value went up by 5%, you got an extra $50,000. $50,000 / $100,000 x 100% is 50%.
That’s the amazing power of leverage.
Use it to your advantage.
#4. Tax Advantages
When we sold a commercial unit in Ortigas 3 years ago, the owner, who was not a tax-registered person, got slapped with a one-time tax burden of around $800,000.
That shocked us because it was our first encounter with taxes in real estate.
The next time we sold another property for her we made sure to push the taxes to the buyer. Also, she was now a taxable entity and was able to retain a portion of the taxes that the buyer paid. She made an additional $500,000 from the retained tax payment.
I’ll be the first to admit that I’m not a tax expert so consult a tax specialist before investing in real estate for tax reasons.
But here’s what I know:
You can depreciate the value of the structure on your property and deduct it from your taxable income. This lowers your tax and increases your cash flow.
In the same manner, you can deduct a portion of the interest payments of your mortgage from your taxable income again to lower your tax and increase your cash flow.
If you are a taxable entity, you can deduct the taxes that you paid (also called input tax) from the taxes that you pay to the government. Meaning, you make money from taxes and increase your cash flow!
You can also get chunks of tax-free cash without ever selling your property. You do this by refinancing your mortgage or getting an equity loan. Since this cash is not income, you don’t have to pay taxes on it. You keep the asset and you can use the cash to buy another property!
Twice, I lost money for reasons I can’t control.
After I made our first investment in real estate, I started to pay down my debts and finally have some savings.
I put some of my savings to a pre-need plan which was the main product of a network marketing company called TPG.
While I did not succeed as a network marketer, it should just be alright because it was a pre-need plan. I should have my money in 15 years.
But the pre-need industry collapsed and that money is now gone.
The other time that I lost money, I placed it in a forex trading company named Royal Manchester Five. As a general rule, I don’t invest in something I don’t understand nor do I invest with people I don’t know.
But I got seduced because the company had support from people in our church.
I also got envious because my officemate has been making good money for the past few months! I finally tried it against my better judgment.
Needless to say, the owner-scoundrel duped everyone and we all lost our money. It was a very heart-wrenching day in church the day we were all scammed.
Since then, I resolved to put my money in assets I can control.
I don’t want to blame anyone else for my financial future. It’s my future and it’s within my power to chart my course so why should I risk putting it on a person or company that I can’t control? I just resolved to take charge of my own money.
With other assets you can only pray that whoever is handling your money will do a good job with it.
With real estate – you own it and take charge of your future. You can rent it out as-is where-is or you can improve it and charge a higher rent.
You can also resell at a higher price.
If something bad happens, you can fix it or hire someone to fix it.
If it doesn’t perform as well as you’d hoped, you can rent it for a lower price and wait until the rental rates go up or the value appreciates.
And if it exceeded your expectations, you reap all the benefits.
Real estate allows you to take charge of your financial future instead of putting it in the hands of people who will put their interests first not yours.
#6. Passive Income
You can get true financial freedom with real estate because it gives passive income.
Passive income is income that you don’t have to work for.
You get this by renting out your property. Once a tenant has been secured, all you need to do is deposit their rental checks every month.
No added work is required. Much of the work has been done in the beginning.
To this day, we continue to get the checks from our 5 remaining tenant-buyers. The work was completely done 10 years ago. All that’s left for us to do is deposit their checks.
I know someone who gets checks from 400 units. He continues to build apartments to rent and hold forever.
If you will notice, the big developers build malls and buildings and just rent it out. They don’t sell prime properties that give passive income.
The ability to give passive income is why many rich investors put real estate as the backbone of their investment portfolio. Real estate will give income forever as long as you own it.
That’s why the rich get richer.
By themselves, these 6 elements are all powerful reasons to invest in real estate.
When combined, they make real estate the best investment vehicle for any investor. By combining these advantages, you get an asset that you can easily afford, automatically builds wealth, and gives passive income for a very long time. Take this simple example.
You found a condo unit being sold for 3.5M while other similar units are being sold for 4M. You negotiate the price down to 3M. You get a 25% discount from market value and $1,000,000 in free equity.
You make a downpayment of $500,000 while your bank gives you a loan for $2.5M payable over 10 years at 8% interest.
You rent it out for $30,000 per month. You get a deposit of $60,000 and post-dated checks of $30,000 for 1 year. You use the rent and add about $300+ per month to pay the monthly amortization.
Your tenant renews and as a sign of goodwill, you don’t increase the rent. But you get an additional 12 checks of $30,000.
On the 3rd year, you increase the rent by $1,500 (5% increase). The rent now covers the whole monthly amortization and you get $1,100+ passive income per month.
On the 10th year, once the property is free and clear of any loans, you’re faced with many options. You can sell for $5M and make 10x your initial investment of $500,000? You can continue to collect the rent which is now about $36,000 per month. You can get an equity loan for $2.5M which you can use to buy another property, a car, or pay for your kid’s college tuition and still keep the asset for your retirement.
No other asset can combine appreciation, negotiation, passive income, leverage, tax advantages, and control to multiply your initial investment 10x or give you passive income for a long time.
That’s just with 1 property. If you keep adding investment properties, you create a machine that automatically makes you and your family wealthier every year.
Two To Tango
Deal-making is a dance and you need a dance partner.
Not just any dance partner but a willing dance partner.
It’s nearly impossible to pull off a no-money-down deal if the seller is not motivated to sell.
If a seller is not motivated, he will ask for a high price, cash payment upfront, and closing in 7 days.
An unmotivated seller will think you are a thief trying to pull a trick on him. He will not reduce his price to give you more money.
He doesn’t need to sell so he doesn’t need you.
When you find an unmotivated seller, stop talking. Keep tabs on him, and monitor his properties but you don’t need to waste your time negotiating because you won’t get anywhere.
Wait for the opportune time when he becomes motivated to sell.
In the meantime, you need to find a willing dance partner because the second essential element of a no-money down deal is a motivated seller – someone who needs to sell at any price.
Motivated sellers are flexible on the price and/or terms.
They’re willing to lower their price because they might lose the property to foreclosure so it’s better to get something than nothing.
Or they may need to sell because they are migrating next month and they have no intention to come back.
Or they may need the money for an operation.
Whatever it is, you just need to keep your eyes open for a motivated seller, listen carefully to their motivation and help them get what they want.
Fuel to the Fire
An engine will not run without gasoline.
In the same way, a deal will not run without money.
I’m definitely not talking about your money because if you’re reading this you probably don’t have enough. The third essential element of a no-money down deal is financing or Other People’s Money.
If you don’t have the capital to make a deal work, you need to find the capital from another source.
There are 3 ways to finance no-money-down deals.
#1. Seller Financing
In Seller Financing, the seller makes the deal work for you by accepting payment through installment. The seller may or may not ask for a down payment and the rest of the payments will be made in monthly installments.
In effect, the seller is extending a loan to the buyer to buy the property. This loan may vary in length and terms. Usually, the title will not get transferred until the property is fully paid.
To make this happen, you have to understand what the seller really needs and persuade him to be open to the possibility of getting paid in installments.
#2. 3rd-Party Financing
The second option is to use 3rd-party financing. The 3rd party may be a bank, a government financing institution, other lending institutions or private individuals. Your 3rd party source will be providing the capital to pay for the real estate purchase and other subsequent costs.
Getting that 3rd party funding will depend on different factors.
Banks and lending institutions look at the property and the borrower. They make an appraisal of the property to determine its value and only fund a portion of its appraised value. For example, if you are buying a property valued at $2M and the bank is only willing to fund 70% of its value, then the bank will lend only a maximum of $1.4M (70% x $2,000,000) if you qualify for their 2nd requirement – your capacity to pay.
In general, if your monthly income is more than 3x the monthly amortization, you will be approved for the loan. This requirement will vary with different banks but that is generally the case. So for example, if your monthly amortization is $20,000, you will have to have a monthly income of $60,000 to be approved for that loan.
#3. Real Estate Options
The third option is my preferred way of doing no-money-down deals.
You don’t buy the property outright.
You just get an option to buy the property at an agreed price. You don’t own the property yet. You just get the exclusive right to buy it.
So if other people are interested to buy it, they must now go through you. You now have at least two options on how to dispose of the property once you have a committed buyer. The first option is to pay for the property in full and then sell it to your buyer. This will require a “double-close” and the title will be transferred twice.
The second option is to simply sell your option to your buyer. With this option, you simply assign your option to purchase to your buyer, then your buyer is the one who completes the transaction. There’s only one title transfer involved and you save on closing costs.
Show Me The Money
Many investors hope to make money in real estate.
I don’t recommend hope when it comes to making money.
Instead of hope, have a clear plan to make money. This plan is the last element of a no-money-down deal.
Profit from real estate comes in two forms – capital gain and passive income.
Capital gain is a one-time windfall of profit. This is the windfall of money that a property owner gets above his original purchase price. However, once the property is disposed of, you have to make a new deal.
On the other hand, passive income is a continuous stream of small amounts of money every month. You only get small amounts of money every month but the beauty of passive income is you only need to work once but you get paid many times over.
Choosing the correct profit strategy is critical to making the numbers work. Here are 4 different strategies that you can use with no money down deals.
In real estate, wholesaling is acquiring real estate at very low prices and reselling it quickly at below market value either to a landlord or a renovator. The wholesaler sells the property as-is, meaning without any changes.
The wholesaler uses Seller Financing and/or a Purchase-Option to control the property. In this way, you minimize closing costs because no title transfer happens.
The wholesaler doesn’t use a lot of money. This is the recommended way for a beginner to do a real estate deal because there is little risk involved. Only your earnest money or option money is at risk and in some cases, the seller may even give you the exclusive option without any earnest or option money.
To use this strategy successfully, the wholesaler must continuously expand his network of landlords and rehabbers so he or she can quickly resell properties. Also, the wholesaler will spend most of his time looking for great deals to keep his clients happy.
The wholesaler should learn how to appraise the values of properties and make estimates of repairs.
With retailing, you renovate the property and sell it at full market value to an end-buyer. The end-buyer then pays for it with cash or using 3rd-party financing.
Done properly, this strategy yields a ton of cash upfront that you can use for your next deals. The disadvantage is selling the property may take longer.
The good thing about this strategy is if you do the renovations well, you’ll get a stream of end-buyers lining up waiting for your next projects. You will have a pipeline of buyers keeping you busy and profitable over a long period of time.
In retailing, it’s usually best to purchase the property in cash with the help of financing from an equity partner.
An equity partner will not ask for monthly payments so you don’t need to worry about them. This is critical because the time it takes to sell a property to an end-buyer is usually longer.
You don’t want your profits eaten by interest.
So keep as much of it as you can and use cash from an equity partner to make the deal happen.
Rent-to-own is similar to retailing in that you fix up the property and sell it at full market value to an end-buyer. The difference is you sell it on installment terms using either a Rent-to-Own agreement or a Contract-to-Sell.
Rent-to-own is usually done to spur sales. You make property available with low-down and easy monthly payment schemes.
The good thing about rent-to-own is you get cash upfront from the downpayment and you get cash flow every month. You also increase your profit because you can charge interest on the balance.
In leasing, you hold the property long-term and make money by renting it. You hold the property forever and just get passive income every month.
If you hold enough properties, you can choose to retire because you no longer have to work for your daily needs. This becomes your ticket to financial freedom.