“Find the deal . . . and you’ll find the money.” So said Eddie Popkin at the ETR Wealth Building Conference this past October. Eddie is a real estate lawyer and investor. With his partner, he has developed over $500 million worth of residential property using this approach. On my own much humbler scale, I have found Eddie’s maxim to be absolutely true.
Over the past year, I bought three properties with no money down (100% financing) and one property with “virtually” no money down (10% down, which I got back at closing). In all three cases, I was able to get these high financing ratios (and at low, fixed rates) because I found the right deal first. By “the right deal,” I mean that I bought significantly under market value, giving me “instant equity.”
Buy a property that’s worth $225,000 for $150,000, for example, and you have $75,000 in equity to start — even if you financed 100% of the $150,000 purchase price. Plus, by buying under market you’ll be reducing your risk in two ways: (1) You’ll have lower carrying costs and (2) you’ll be much more likely to sell the property at a significant profit.
Whether you’re buying with zero down, 10% down, or 20% down, “buying right” means three things:
1. You’re buying at a price that is at or below the average price for similar properties in the area.
2. Good things are happening in the area to support rising prices (e.g., neighborhood revitalization, new construction, growing popularity).
3. The income the property produces will pay for all carrying costs — and still generate a net cash flow to build up a reserve to cover maintenance and possible vacancies.
When you have a property at contract with these three characteristics, it should be no problem to find the money to do the deal. If you have good credit and steady income, you can go to banks. These tend to provide the lowest-rates and will often finance up to 90% of the purchase price on an investment property.
If the idea of going to a bank for your first investment loan seems intimidating, consider this — also from Eddie Popkin: “Banks aren’t warehouses. They don’t look for depositors so they can stick the cash in a vault and dust it off every few days. They take money in at low rates so they can lend it out at higher rates. That’s how they make their money.”
In fact, I’m at contract now on a property, and the financing is being provided by one of the largest banks in the country. Just the other day, the loan officer said to me, “Justin, my job is to lend out as much money as I can as quickly as I can to qualified buyers.” What he really meant — and this is how all banks operate — is that they want to lend as much money as they can to qualified buyers . . . on qualified properties. In other words, the property has to “appraise out.”
If they lend 80% on $100,000, they want to be confident the property is worth $100,000. So if they have to foreclose on it, they only need to sell it for $80,000 to get their loan back — perhaps $85,000 to cover their costs too. Here’s another powerful idea from Eddie Popkin: If you don’t want to work with a bank, you can put together a general partnership to buy a property, with yourself as the general partner.
In this case, you’d offer the limited partners a percentage of the appreciation, with no personal risk or management responsibility on their part. You’d find the deal and use the limited partners’ capital (and some of your own) as the down payment. You’d be responsible for getting the bank financing and managing the deal. In return, while you may have put up only 10% to 20% of the down payment, you may keep 50% to 60% of the gains. Financing techniques like these require more explanation than I can provide here. And they all entail some risk. But, in general, the greater the discount at which you’re buying the property, the more choices you’ll have in financing it.
One last thing. We’ve been assuming that you’ve got decent credit. But what if you’re not the ideal “qualified” buyer. What if you’ve changed jobs recently . . . or set up your own business . . . or even have bad credit? Can you still find the money if you find the right deal? Absolutely. And I’ll tell you exactly how to do that in my next article. (Ed. Note: Justin Ford is the editor of Main Street Millionaire, ETR’s Real Estate Investment Program.
To learn more about it, click here. Mr. Ford and Mr. Popkin spoke at ETR’s Wealth Building Conference in Delray Beach a few months ago. Professionally mastered CDs and DVDs — including their presentations as well as those of other top real-estate investors, millionaire entrepreneurs, and friends and associates of Michael Masterson — are still available. To order yours, click here.)