I remember back in the 1990s, when McMansions were all the rage, a certain group of self-professed real estate investors making money by ostensibly teaching others how to buy their first investment properties with no money down. It was a myth then; it is still a myth today. But it is a myth that’s making a comeback.
Recent research into hard money led to me running across an article offering no fewer than 10 ways to purchase an investment property without putting any money down. Some of the suggestions were outright false. Others were misleading, at best. The fact of the matter is that no one is going to buy an investment property for you without requiring you to put some skin in the game. Buying an investment property with no money means paying the entire price up front – in cash.
Among the many suggestions offered in the article were different types of traditional and private loans. I’m not sure how the article’s authors determined that lenders would write loans without requiring down payments, but that is what they were suggesting. Consider hard money.
The authors claimed that if you could find a fixer upper with enough potential, a hard money lender might be willing to fund the acquisition with little or no money down on your part. Sorry, folks. That’s not going to happen.
Salt Lake City’s Actium Partners is a hard money firm I am intimately familiar with. Real estate investments are their specialty. Not only will they not lend 100% of a property’s total value, but they also usually require higher down payments than traditional lenders. I suspect this is true across the entire private money landscape. Private lenders are no more willing than traditional lenders to assume all the risk of financing a property acquisition.
Another suggestion was to take advantage of the equity in your home to purchase an investment property. It’s a fine strategy many first-time investors have leaned on. But you still don’t get to buy without making a down payment. Think about it. What is home equity?
Equity is the difference between how much you currently owe on your mortgage and the value of your home. If you convert that equity into cash by taking out an equity loan, you are ultimately accessing your own money. It is just money tied up in equity. Use that money to purchase an investment property and you are doing exactly what the gurus say you’re not doing.
Using credit cards to come up with a down payment is yet another suggestion in the previously mentioned article. This one truly blows my mind. Credit cards are unsecured loan instruments. You may be able to withdraw cash on them, but you are simply borrowing against your own future income. You are still making a down payment on that investment property by borrowing on your cards.
There were seven more suggestions I haven’t gotten to. I won’t bother because the point in each and every case is the same: buying investment property without putting any money down is a myth. It is a myth perpetrated by people who portray themselves as possessing the secrets to your real estate investment success. Don’t fall for it.
You certainly don’t have to be wealthy to invest in real estate. But you do have to have some money to put down on that first property. That’s the way it works. That is the way it has always worked.