Rich Dad Education Blog

In fact, it is highly recommended that new investors start investing without using their own money, even if they have extra money to invest. This concept may be surprising, but having money can be detrimental to learning to be the best real estate investor you can be. If you have money to invest, it is very easy to pay too much for a property. It is tempting to use money as a crutch to close deals that are not good deals or marginal at best. But with the right training, an open, teachable mind, and a good coach, having no money can be a substantial force to push you to be a more skilled, creative, and professional investor.

There are many ways for financially challenged investors to make money and generate real estate cash flow. In the first article in this series, the wholesale model was discussed. With wholesaling, you do not buy and sell properties; you obtain and sell contracts. Because you are not actually buying the property, you don’t need good credit and money for a down payment. The only money you might need is for the earnest money to bind the offer. You make your money by selling and assigning the contract to another investor. This is a great way to get started in real estate for investors who have little or no money to start their investing business.

In the second article in this series, an often-overlooked method for financing real estate projects, government and private grants, was discussed. The federal and state governments, along with private groups and corporations, have made billions of dollars available for grants and low-interest loans for funding real estate projects. You just need to know how to tap into these resources and be willing to follow the rules.

In this month’s article, several ways to buy properties using nothing-down techniques will be discussed. Does this mean that there is no money required for a down payment on the property? Although that may be the case on a few deals, it just means that the money used for the down payment isn’t your money. That scenario fits well if you have little or no money to invest.

You may have heard the saying, “When the student is ready, the teacher will appear.” It can also be said that, “If the deal is good, the money will appear.” To put it another way: if you have negotiated a great deal and you let people know that you are willing to share the profits from that deal, then you will be able to find the money to fund the deal. If the deal is right, the funding can easily fall into place.

There are numerous ways to buy property without using any of your own money. Here are a few of the more popular techniques for buying a property with nothing down:

1. Borrow the money. One of the easiest ways to purchase a property with no-money down (no money out of your own pocket), is to simply borrow the down payment. Here are a few places you may be able to borrow money from:

• Business partner
• Friends
• Family
• Home equity line of credit
• Credit cards
• Cash value life insurance policy
• Real estate agent (i.e., suggest they loan you their commission for a short while)
• Personal or signature loan
• If you are purchasing your own personal home, you may qualify for a down-payment assistance program
• Other investors
• Hard-money lender (if there is enough profit in the deal to support the higher cost of a hard-money loan)
• Car title loan (note: use a credit union, not a payday loan)
• Zero-down loan from a lender
• VA nothing-down loan (if you are a veteran and qualify)

2. Provide the seller something they need in lieu of a cash down payment. Ask the seller what they need the cash down payment for. At this point, you should have built some rapport with the seller and, if you tactfully ask the seller their plans for the cash proceeds from the sale, they will most likely tell you. People may take cars, motor homes, motorcycles, boats, campers, all-terrain vehicles, trailers, guns, furniture, or antiques in lieu of a down payment. It never hurts to ask.

3. Take over the seller’s debt. Sometimes a seller needs the down payment money from a property sale to pay off other debts. For example, say an investor has found a motivated seller who is willing to sell an existing rental property for $150,000. The seller is willing to carry the financing, but insists on 15 percent ($22,500) down payment. He will carry the balance, $127,500 on a six-percent note, amortized over 30 years, with a seven-year balloon. Not a bad deal, assuming the rental analysis formula has shown that there will be a positive cash flow based on the current rents. But you, the investor, don’t have $22,500 for the down payment. In talking with the seller you find out that the $22,500 is needed to pay off some past-due medical bills. Rather than coming up with the $22,500 in cash, you could negotiate to take over responsibility for the seller’s past-due medical bills. Problem solved. If you negotiated a good deal on the property, the positive cash flow might even cover the monthly medical-bill payments. However, the smart investor could then take it a step farther: go to the doctors and hospitals owed the money and offer to pay cash now if they will discount the bill. You might be surprised to see discounts up to 50 percent, especially if the bills have been past due for awhile. You would then have to come up with $11,000 or $12,000 cash to payoff the debts, but that leaves you with an extra $11,000 or $12,000 equity in the property. It all starts with asking the seller what he really needs the money for.

4. Trade your skills. Find out if the seller needs any services in their trade or business. The father of a good friend of mine was a lawyer. He once did some extensive legal work for a gentleman who owned some land up one of our local canyons. He traded his legal services for the land. My friend’s family eventually built a cabin on a small part of the property and then subdivided the property and sold cabin lots. Over the years, the land produced more than 20 times the profits, compared to the original legal fees. Mechanics, plumbers, contractors, accountants, doctors, dentists, lawyers, hair dressers, and store owners all could trade their services to a seller in lieu of a down payment. Again, find out what the seller needs and try to supply those needs. But what if you don’t have the skill that a particular seller needs? Find someone who does have that skill and see if that person may need your services. You might end up with a three- or four-way trade in order to meet everyone’s needs, but it can be done if you are a little creative.

5. Offer a higher price. A lot of sellers seem to place the most importance on price. Say you had a rental property under contract for $160,000. The seller is willing to take 10 percent down and carry the rest on a contract. The numbers show it’s a great deal (based in the existing rents), but you don’t have the required $16,000 down (or don’t want to put the $16,000 cash into the deal). You might offer the seller $170,000 if he will carry the whole contract and forgo the down payment. The seller very well may take the deal. Your payment (on a six-percent, 30-year amortized note) would only increase by about $60 per month. The benefit to you is that you don’t have to come up with the $16,000 cash and you get into the property with nothing down. If you borrowed the $16,000 from a credit union at six percent on a 60-month note, your payments would be 309.32 per month for principal and interest. I’ll take the $60/month payment over the $309 per month payment. The benefit to the seller? The seller gets $10,000 more for his property (over the length of the loan). Seems like a fair trade.

6. Negotiate the terms of the down payment. In real estate, everything is negotiable. If you don’t have the down payment in cash, perhaps you can negotiate to pay the down payment in installments. For example, say a seller wanted a minimum of $5,000 down on a property. You might be able to get the seller to take $500 per month for the next 10 months. It never hurts to ask. Or maybe you could negotiate $250 per month for the next 12 months with a balloon payment of $2,000 due at the end of 12 months. Be creative.

7. Take on a partner. You could always take on a partner who would put up the required down payment. He/she would then share in the sale proceeds of the property or in the monthly proceeds from a rental property. Start developing a list of potential money partners and find out what terms they would require in order to invest with you. Again, all terms are negotiable. Just like dealing with sellers, deals with partners need to be win-win.

8. Lease with an option to buy. You don’t need to own a property in order to make money; you only need to control a property. So, if you have no money, no partners, you can’t borrow the money, and have no skills to trade, you could try to negotiate a lease with an option to buy. As long as the rate is lower than the rate at which you can sublease the property for, you can generate a nice monthly cash flow. Also, you can usually negotiate an option fee with the seller that is less than the fee you charge the person you bring in as a rent-to-own client. Thus, you can get some up-front cash out of the deal, as well as the monthly cash flow.

These are just a few of the ways you can purchase (or control) properties without taking money out of your pocket to put into the deal. Future articles will discuss additional techniques that will help you buy properties if you don’t have money or credit. Don’t let the lack of money stop you from investing. Find motivated sellers, get to know them, and find out what their needs really are. Then be as creative as you can to fill those needs.