20 wayst ob uya n inmvtsenet property with $2,000 orl …€¦ · ground rules not every idea and...

20 Ways to Buy an Investment Property with $2,000 or Less

By Ben Leybovich

© Copyright 2013 Ben Leybovich and Just Ask Ben Why. All Rights Reserved.

Introduction

The general consensus among real estate investors is that the biggest hurdle to overcome in this business is MONEY – there is never enough of it! Whether you are a newbie with nothing on you balance sheet, or an experienced operator with an extensive portfolio of assets, we can all do more and go faster with more capital.

The practical implication of this reality is reflected in the following question:

Question: How many deals could YOU do if you had to write a check for $25k each and every time you bought a property for $100k?

I bet many of you answered “0” – did you? But, even if you are someone with a stable and high-paying job, a 401k, a big home, 2 beamers in the garage, a brokerage account, and savings in the bank, writing $25,000 checks gets old after a while. Well – the reality of conventional lending is that financing of rental property would necessarily require you to make 25% down-payments, which, on an $100,000 acquisition means writing a check for $25,000.

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© Copyright 2013 Ben Leybovich and Just Ask Ben Why LLC. All Rights Reserved

It’s certainly better than paying the entire $100,000 cash outright, but it might as well be that for most of you...

This is it – no more excuses!

I am going to teach you 20 ways to buy your first investment property with $2,000 or less. Regardless of how much money you make or don’t make, whether you own a home or rent, whether you have money in the bank or not, whether you have a 401k or not – I promise you’ll find something in this eBook that will work for you!

Ground Rules

Not every idea and technique in this eBook is going to work equally well or even be equally accessible to everyone reading. Naturally, those who are farther along in their financial lives will discover that they have more options and find that more techniques discussed in this eBook are accessible for them. However, while those of you without any assets to back you up are certainly going to need to work harder, you will find that you still have a lot of options if you are willing to educate yourself.

There is risk in everything – period. Investing is not about avoiding risk – it is about managing it, and I am all game for taking calculated risks.

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However, there are two kind of risks that I am not comfortable discussing here because even though both techniques can and do work, they require a higher level of sophistication which I am afraid a lot of you don’t yet possess.

One of these is broadly defined as The Credit Card. Indeed, there are lots of gurus running around telling people to use credit cards to finance down-payments – Don’t Do It, at least not until you know a lot more than you do now! I will not be discussing any techniques in this eBook involving credit cards.

The other is Hard Money Lenders. I have never used this type of lending source in the 8 years of playing this game, and even though in saying this to you I may make some of my friends mad, I have to tell you to be very, very careful around this aspect of borrowing. Frankly, there are better ways to come up with capital in my opinion…

The title of this eBook may lead you to believe that I advocate buying the type of property which can be bought for $2,000 Purchase Price. It can be done, but I do not recommend it for many reasons! Therefore, I will not be discussing houses that you can buy for $2,000 using your credit card – only houses that are worthwhile to own; only houses that you would want to live in yourself, if need be. The basic premise to not is this:

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Just because it’s cheap – doesn’t make it good!

Also, I will not be discussing such techniques as bird dogging, wholesaling, or fix and flipping. In this eBook I am presuming a long-term investment with at least a 5-year horizon which serves the purpose of generating Cash Flow.

Lastly, I will not be discussing techniques such as Taking the Deed Subject to Underlying Financing (Sub2) or Wrap Mortgages. Most conventional mortgages include the Due on Sale and Acceleration clauses which come with a possibility, be it a slight one, that the underlying lender will accelerate the pay-off. I do not feel comfortable advocating these techniques for this reason.

Book Layout

All of the techniques that are covered here can be done with $2,000 or less – this is a given. However, some techniques do require good credit and finance ability with an institutional lender, while others do not. With this in mind, I’ve organized this eBook in 2 Parts:

Part 1: If you CANNOT get a traditional loan

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Part 2: If you CAN get a traditional loan

Those of you who know that you can’t get financed by an institutional lender right now may be tempted to stop reading after you get through Part 1 – I wouldn’t. Indeed, go ahead and read about the kind of options that are going to be available to you once you get your financial house in order.

About the Author

I have been buying property since 2006. Even though I purchased a number of Single Family Residences (SFR) early in my career, I have since developed a preference for small to mid-size multi-unit properties.

As of this writing I own a portfolio of 28 residential units. My area of expertise is Creative Finance. On the average I only complete 1 to 2 deals per year, since I focus only on those rare opportunities which lend themselves to creative financing packages. For example, my acquisition of a 10-plex which closed in February 2013 at a purchase price of $373,500 required me to bring $5,300 of my own money to the closing – this is Creative Finance my friends!

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In 2012 I created the Cash Flow Freedom University – an educational program for serious real estate entrepreneurs with a focus on all facets of Creative Finance as they relate to acquisition of income-producing investment real estate.

Thank you for joining the JustAskBenWhy.com email list. Please enjoy this eBook. I hope you find it educational. For more on the subject please consider joining the Cash Flow Freedom University.

And with this, let’s begin…

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Part I.

If You CANNOT Get a Conventional Loan

1. Owner-financing

The best game in town has always been and will always be owner-financing, and this is for several good reasons. First of all, it would not be wrong to say that when dealing with an owner - in lieu of an institutional or even a private lender - everything is negotiable, including the price, down-payment, interest rate, amortization, monthly payment amount, and everything else. This opens powerful doors of opportunity for a skilled negotiator.

Also, all of the qualifying standards put forth by Fannie Mae, Freddie Mac, and the primary mortgage loan originators are not in play with owner-financing. This means that while the owner will want to know your credit score and may want to see your financials, he will likely be a lot more understanding of the blemishes and insufficiencies that may be there. And as to down-payment, you need to understand the following:

Owners sell on contract by and large because they’ve tried but could not sell for cash. Specifically with single family residences, it is not

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wrong to say that the owner will usually choose to participate in financing only as a last resort, having tried everything else. This means that you, the buyer, have more negotiating power than you’d think…

Thus, owner-financing the house with $2,000 is possible and even probable if you find the right deal, and by that I mean the right owner.

Don’t believe me?

Here is something I found in my email Inbox not too long ago:

Hey Ben,

I wanted to thank you so much for the information you've provided. I used your techniques and secured my first deal within 3 weeks! I found a private seller desperate to relocate and she agreed to seller finance the ENTIRE purchase price.

And get this: at 0% INTEREST! I will pay $300 per month for 5 years for a total purchase price of $18,000. NO BANKS INVOLVED. I have the property rented out for $600

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per month and I am looking for my next deal. Your stuff works Ben!

Thank you, thank you, thank you…

Tom

WOW!!! OWNER-FINANCING

2. Private Money

If owner-financing 100% of the purchase, as she did for Tom, is out of the question for one reason or another, and in the absence of a line of credit which I will discuss in Part 2, the next best thing is to finance the acquisition fully with private money.

The question is this – if someone has significant capital sitting in the bank drawing 0.2%, why wouldn’t they chose to lend it to you at 6, 7, 8 or even 10 percent?

Well, there are many reasons why they would NOT, and you’ll begin finding out what all of them are as soon as you start asking. But, you should know that the main reason why they are not going to give you

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the money is because you don’t deserve it…you don’t know what you’re doing… you think real estate game is sexy and fast like your last girlfriend. Private lenders flat out don’t trust you...would you? Education attracts money in this and any other game, so get educated!

3. Private Money & Owner

OK – let’s say you are in fact able to find someone who’ll give you the money, but because you are such wildcard, they do not want to give you any more than 60% of the purchase price. In this case, you could structure the deal whereby the private lender gets a note and mortgage (deed of trust) in first position, while the owner takes back a note in second position.

This technique will allow you to close many more opportunities than vanilla 100% owner-financing. You must know that the owner can only finance that which she owns, which means she can only owner-finance whatever her equity. Therefore, 100% owner-financing requires you to only look for completely free and clear properties, which can be difficult to locate.

However, bringing the private money into the deal allows you to cash out an existing mortgage, while the owner financing whatever equity she

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owns. This is not necessarily easy to put together, but it certainly can work with under $2,000 out of pocket.

4. 50/50 Partner

I have many philosophies around real estate and life in general, but one of my favorites is this:

A Small Piece of Pie is BETTER than No Dessert!

With this in mind, to make the deal attractive to an equity partner, why not consider giving the money guy 50% of the deal? This may not be the most advantageous proposition for you because even if the money only comes in for 20%-25% of the purchase while the owner finances the rest, you may still need to give up 50% of the deal.

But, beggars can’t be choosers, and if this is the only way to entice the money guy to take a chance on a newbie like you, then this is your choice to make…

Remember as well that as a partner as opposed to a lien holder, the money will have a voice in the deal, thus remember to choose your partner carefully and remember the following:

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Money is an amplifier. It brings out and exaggerates what is already there. When dealing with a good and honorable person, money entering the equation will make them even more so. The opposite, however, is also true! Be wise as to who you choose for a partner; often enough the profit is just not worth it!

5. Private Money Conglomerate

If you don’t know anyone with substantive enough capital to fund a deal on their own, then it may be necessary to “pool” funds together. This is more complicated since the more partners, the more moving parts, the more reporting requirements – the more risk.

Now – if you don’t have the ability to refinance the acquisition within a reasonably short period of time, then all of the money has to stay in the deal for a while. Make sure that you make this clear to everyone involved.

However, you should know that ability to finance property is predicated on different factors in the Single Family and Small Multiplex markets versus the commercial space. Without going into great detail, let me just say that on the commercial side it is the asset that qualifies for the

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loan more so than you or your personal income. In very broad terms, you may actually benefit from playing on the commercial side.

I know that this goes against conventional wisdom, but it is good food for thought. Incidentally, I cover this topic in great specificity in Cash Flow Freedom University.

6. Buying More than You Need

This is a bit creative and requires you to step out of your comfort zone a bit, but this strategy can really work well at times. I received a call from a beginner investor last week, and this strategy is what I proposed to him.

Let’s say you, like the kid who called me, come across an investor who is selling an entire portfolio of investment real estate – let’s say 10 houses, and he wants $40,000 per house on the average. What if you could buy all 10 of them for $400,000, and then turn around and sell 9 for about $45,000 a piece?

If you did this, you would generate about $400,000 and in doing so you would be left with 1 house free and clear!

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OK – this is not as easy to do as it may sound. Furthermore, in lieu of contracting to buy the portfolio, you would likely be better off optioning it, which I will discuss in a bit. But, this strategy is used by investors all the time!

7. Non-Real Estate Collateral

People sell real estate for many different reasons, one of which is to fund another type of purchase such as a new car, boat, or a motorcycle. Do you have a car, boat or a motorcycle that you wouldn’t mind parting with in order to buy a rental property? If so, you can try to offer it as down-payment with the seller carrying the rest of the financing.

One of the beautiful things about Creative Finance is that there are no rules – if it works for both sides, then it works! So, open your mind…

8. Conventional Loan Secured by Non-RE Assets

I know that in this section of the eBook I am not supposed to be talking about anything that requires conventional financing, but this next idea is different. Let me explain…

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Any time you approach a bank for a loan, the banker will consider many things (I’ve outlined all of them in detail in CFFU), but the 2 main concerns will be quality of the proposed collateral and your ability to make the payments on the loan should you be approved.

Now – if you approach the bank to finance a brand new purchase, it is very different from asking them to give you a loan secured by something you already own: you are not showing up empty-handed. Well, remember that car, boat, or motorcycle from the previous example? If you own one or more of these or other items of value free and clear, you may have a strong chance receiving a loan secured by those items conditioned on your ability to make the monthly payment.

Do you have a job? Can you make a payment every month? If so, this is certainly worth consideration…

9. Lease - Option

This is not a favorite tool of mine for the purchase of real estate for many reasons, which is a subject for another time. However, if there is no possibility of owner-finance or private money, then in lieu of doing nothing at all a lease-option can get the job done.

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Let’s say that there is just no way that you can convince this owner to participate in financing with $2,000 – he wants more money down, but you simply don’t have it and have no access to it. Here’s what you can consider doing:

A lease-option involves two separate contracts: a lease, and an option. The lease contract is just like any other lease whereby you gain tenancy. The option contract, just like it sounds, gives you the option to purchase the house during a certain period of time (option window) and at specific price.

As part of the option, you will need to pay an option consideration fee, which is usually non-refundable but typically not excessive. Thus, $2,000 may be enough to get this done.

Now – an option does you no good unless you have a way of exercising it. At the end of the option window you must be able to pay off the seller, which most likely brings us back to needing traditional finance-ability.

But, if the option window is long enough, you will have time to work on your credit and to bank some money toward the down-payment. It’s not a good way in, but it is a way…

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10. Other Ways to Generate Down-Payment Money

Before I finish this section, I want to address the issue of that $2,000 down-payment a bit further. There is a reason I used this figure - $2,000. I believe that it is achievable for most people! I am going to get your mind going in the right direction by asking you a set of questions. But, I won’t provide the answers – that’s on you…

• Do you have $2,000 in the bank? NO?!?!• Are you living on a budget?• Can you put away $30/week for a year and a half?• Do you own stuff that you can sell to generate $2,000?• Do you have a family member that you can borrow from?• Do you own a boat that you can sell?• Do you own a vehicle free and clear or have significant equity in?

You don’t have to sell it…• Can you pick up a part–time job for a while?• Etc.

I never said this game does not require sacrifice – It Does!

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Part II.

If You CAN Get a Conventional Loan

OK – so in this section we are discussing some of the options available to people in better financial circumstance. Do you own a home? Do you have a retirement account? Do you own other real property? In this section I’ll discuss some of the ways to leverage your assets into purchasing an investment property for little to nothing out of pocket.

11. HELOC Down-Payment

As a general rule of thumb, I am of the opinion that equity which is locked inside an asset is a complete waste. Some of you may disagree, but I define Financial Freedom as an ability to earn enough money passively (through investments), to enable me to perpetuate my family’s life style without relying on a traditional W2 or 1099 paycheck – this is the goal! I feel that putting my financial well-being under a bosses’ control is too dangerous.

Having said this, just because your balance sheet says that you are worth 1 million dollars doesn’t mean that you’ve achieved financial

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freedom. Equity looks good on paper, but unless it impacts the income statement in a positive way, it is useless as far as I am concerned.

Thus, if you live in a big old house which is worth $465,000, but the balance on your mortgage is $120,000, then you’ve got substantive leveragable equity. You could establish an Equity Line of Credit (HELOC) and use the money to make down-payments on rental property. I used this technique extensively at one point.

12. HELOC / Conventional Refinance

In the example above, the amount of leveragable equity may be substantial enough to actually buy an investment property outright. If so, you may have the option of simply holding the property on this equity (HELOCs will usually give you 10 years or so to cash out) and using the cash flow from the newly acquired property to cash the HELOC out organically.

But, another option could be that after having seasoned this investment for 6 – 12 months you could go to the bank and apply for a cash-out. To do this, the bank will appraise the property and finance a certain amount of value out (usually no more than 70%). Thus, you can cash out the

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vast majority of the HELOC out and free up capital to do this all over again. Furthermore, if you do this right, 70% LTV may be enough to cash out your entire original investment.

13. Owner-Financing w/ HELOC Down

In lieu of utilizing a HELOC to finance a down-payment with an institutional lender financing the rest (as discussed in number 11), in this technique (having utilized our HELOC for the down-payment) we look for an owner to finance the majority of the purchase.

This technique has one significant advantage over the one in number 11. If you can find the right kind of owner, it may be easier to get the owner to finance 70% of the purchase than a bank…

14. Private Money In / Institutional Out

This is one of my favorites. I use a form of this technique on a lot of my deals. Similar to financing the entire acquisition with a HELOC and then refinancing with an institutional loan, this technique entails financing the purchase with private money on the way in, and refinancing with an institutional loan.

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Keep in mind the following – I do not recommend any transactions that are a shorter time horizon than 5 years, and even that may not be enough time!

15. Owner Down-Payment w/ Conventional Loan

This is a bit more difficult to do now days than a few years back, but it can be done. The essence of what is being done here is 100% financing of property, with the owner financing the down-payment - and banks do not like that at the moment.

It is possible however. The deal which is a candidate for this will need to be an above average opportunity. By and large, banks want to see a Debt Service Coverage Ratio (DSCR) of at least 1.2 – you will need to do better… at least 1.4-1.5 DSCR (I discuss this extensively in CFFU).

Fundamentally, your success in being able to facilitate this technique is a function of a strong relationship with a bank, so start working on it!

16. 401k

Some investors with higher paying jobs and 401k retirement plans, borrow against their 401k. Personally, I am not a fan of 401k retirement

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accounts. They offer very little choice, and the choice they do offer is between mutual and other balanced funds. 401k was supposed to have been designed to help you not lose money – I am not quite sure if the design worked…

But, due to the design features which are supposed to limit exposure and risk, the best you can hope for with a 401k is tracking the performance of the market at large – that’s not good enough for me, and it’s not good enough for many other investors. Is it good enough for you?

If there is a way to tap some of the value in such an account via a loan or a line, it may be worth considering…

17. Self-Directed IRA

If you chose to utilize a retirement account for your Real Estate Investing, a more effective way may be through a Self-Directed IRA (SDIRA). This still not a widely-known or used investment vehicle and there are only a few custodians licensed to service these, but a truly self-directed account can be directed by you to invest in anything at all, including real estate.

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When utilizing SDRIA, the investment can never go through you as this would be considered self-dealing by the IRS - and a host of other rules and regulations apply. Furthermore, you are unlikely to be able to convert your current employer’s 401k to an SDIRA; however, a 401k from a previous employer is a prime candidate.

I do not specialize in these. While they can be a powerful vehicle for Real Estate Investors, the paperwork must be done correctly, and the type of deals you chose to do have to be picked carefully – you don’t want to lose your retirement capital! I’ll be happy to point you in the right direction for additional research if you contact me…

18. Equity Bridging and Blanket Notes

This is another favorite of mine, but in order for this to work you must own some amount of real estate. I discuss this in great detail as part of Cash Flow Freedom University, but here is how this works in short:

Investors with larger portfolios are sometimes able to use a technique we commonly refer to as Equity Bridging, which allows us to utilize equity locked in a property, or multiple properties we own, to collateralize lending for the subject property we are purchasing.

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The tool that is used for this is the blanket note, which results in an umbrella mortgage. This type of a note cites multiple pieces of real estate as collateral for lending, which in effect pulls or “blankets” leveragable equity of multiple assets together. This technique negates the need to refinance each building to generate capital – much, much more on this in CFFU.

19. Unsecured Line of Credit

Those of you with strong financials, lots of assets, strong income, and a well-established relationship with a bank may be able to achieve an unsecured line of credit. These are hard to come by now, but it can be done. Specifically, if you are looking for a relatively small line of credit while your financial statement is very strong.

20. Long-term Private Money

Well – I saved the best for last. I started out by stating that 100% owner financing is the best game in town, and it is – there are no concerns of qualifying with the bank or needing to come up with the down-payment.

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Well, long-term private money is the next best thing. Imagine having access to private cash which could stay invested in a deal for 5, 10, 15, or 20 years – WOW!

Much as owner-financing is hard to come by, private money lives in a world of its own. How do you find it? Who can you talk to? Who should you not talk to? What do you say and not say? What do you need to know in order to have a chance of attracting this type of investment capital?

This is what Cash Flow Freedom University is about!

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Thank you!

I hope that you’ve enjoyed this eBook as much as I enjoyed writing it.

If you’d like to know more about my perspective on Real Estate and Finance, as well as learn tips and techniques that can help you profit, please check out my blog and my instructional videos by visiting www.JustAskBenWhy.com

If you wish to acquire in-depth knowledge of Real Estate Investing, please consider joining Cash Flow Freedom University.

If you have any questions about anything in this eBook or anything, please email me or connect with me on the social networks at /JustAskBen

Thank you and good luck in all of your endeavors!

Sincerely,

Ben [email protected]

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20 wayst ob uya n inmvtsenet property with $2,000 orl …€¦ · ground rules not every idea and...

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