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2011-09-14 16:17:33

The Danger of Zero Down Deals

Over a decade ago, I ordered a real estate course that was being advertised on late night TV.  The premise of the course was to teach techniques of acquiring real estate in local markets without putting little, if any, money into the purchase of the property.  I remember thinking to myself how awesome this could be since I had often thought of investing in real estate, but at the time, had very little money to do so.  I ordered the course and found it helpful and applied some of the principles to the purchase of my first home.  This wasn’t an investment home rather it was my own personal home that I planned to live in.  Later on, I would again use a similar technique to purchase my own personal residence with very little money out of my pocket.

Okay, so you’re probably wondering what the “danger” is by aiming for a zero down deal, right? 

 

I’ve read literally tens of dozens of books about real estate investing.  And nearly all of them try to pitch the zero down deal as the best opportunity for people to acquire investment property without paying the upfront costs of acquiring these properties.  If you could do a zero down payment, zero closing cost deal on every property, that would be ideal right?  The answer is almost always Wrong!  And let me explain why:

 

1)     Let’s say you make $60,000 per year.  You own your own home and you have a small family.  How far does your $60,000 per year go?  If you’re smart, you and your significant other are on a tight budget so you can pay your bills, save for retirement, spend a little on entertainment, save for your child’s educational future and save just enough for emergencies (which will inevitably happen from time to time).  So having said all that, you go to the local book store and buy a book on real investing.  You’ve always wanted to own a rental property but never thought you had enough money.  You see this book touting how to buy millions of dollars of real estate with no money out of pocket.  You read the book and are able to negotiate (after multiple wasted offers) your first deal netting you your first rental home!  Congratulations!  You notice you aren’t making much cash flow but you own it now!  It’s yours!  Further analysis shows your cash flow is far lower because you didn’t put any money down ( please read my other article concerning evaluating the financials of deal ).  But that’s OK!  Let’s say you are netting $25 per month from the rental (at least you’re not breaking even right?).  So far so good…… until……. vacancy, pipe bursts, eviction, vandalism, repainting, re-carpeting and so on.  I recently paid $4750 for repairs to a  rental home that I just purchased two months prior because a major leak was detected under the foundation!  Trust me, it happens!  This is what drives me crazy about promoting zero down deals!  The people who try to negotiate these deals are 9 out of 10 times doing so due to necessity because they have no money and don’t understand the importance of bringing in financially sound partners on good deals when they need them.  Don’t find yourself stuck in a situation where your rental property needs a significant repair and you don’t have any money to make the repairs.  If you are barely paying your own bills each month, then save your money up before you buy a rental property.  There’s nothing wrong by doing a zero down deal, just make sure you have enough saved for a rainy day when something unexpected happens to your investment property.  Owning rental property is a great way to earn more money per month and to build a very high net worth over the long run.  But expect to have to make repairs, perform an eviction, have an extended vacancy and so on. 

So the takeaways are:

1)     Don’t bite off more than you can safely chew.  Save enough money for a down payment and closing costs so your cash flow is stronger.  That way, you have the funds to pay for the unexpected.  Or, shoot for the zero down deals but keep enough cash on hand to cover the costs of owning rental property.

2)    Research bringing in financial partners who may be willing to give you a percentage of ownership for free, provided you do all the work.  This is my favorite technique.

 

 

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