HOW TO INVEST IN REAL ESTATE WITH NO MONEY DOWN … and minimum risk! By: Milt Tanzer Copyright 2002 by Milt Tanzer. All rights reserved The information contained herein has been compiled from sources believed to be reliable but is not warranted. Every effort has been made to present accurate and useful information based on real world investment practices. The author hereby grants you the right to reproduce this ebook, in its entirety, and distribute it in any manner you wish, provided: It is distributed in its entirety and not altered in any way. All information contained in this ebook, author name, website addresses, etc. must remain in the distribution copy. You are free to give the ebook away or sell it and retain 100% of the profits you collect. 0 HOW TO INVEST IN REAL ESTATE WITH (little or) NO MONEY DOWN …and Minimum Risk Introduction 6 Chapter 1. The Importance of Attitude, 8 Perseverance and Flexibility Chapter 2. What to Look For 12 Single Family Homes Condos Duplex Four Unit Complex …or Larger Strip stores, office buildings, warehouses, etc Slums (example) 12 Unit (example) What to Avoid Single purpose buildings Apts. – Furnished vs unfurnished Chapter 3. How to Locate a Suitable Property 20 Legwork, Time and Attitude Motivated Sellers Owner transferred Death Foreclosure Retiring Health Divorce Partnership disputes Talk to Banks and other Lenders Chapter 4. How to Analyze the Area 23 Drive around Check out condition of properties in area Check the area in general Chapter 5. How Analyze the Market 26 Chapter 6. How to Find a Motivated Seller 29 Get to know the seller Get the seller to know you What does seller intend to do with proceeds Deed in lieu of foreclosure 1 Chapter 7. How Analyze the Property 33 Gathering Information Analysis Program (IPP) Chapter 8. Ways to Finance the Property 39 Understanding how a mortgage works Seller financing (#1 choice) No closing costs on mortgage More flexible on terms and rates More motivated to negotiate Talk to Banks and other Lender Understanding how lenders work Be prepared for rejection Have your presentation ready Property Details Your Financial Statement Property Financial statement Intended improvements and costs Market details Photos of property Your track record (if you have one) Bank discounting their mortgage Interest moratorium Payment moratorium Extend term of mortgage to reduce monthly pmts Financing Alternatives Normal Amortized loan Interest only mortgage Adjustable rate mortgage Graduated payment mortgage Balloon mortgages Wraparound mortgage or (all inclusive deed of trust) Land leases Combine financing approaches with multiple mortgages Sale/Leaseback Assume seller obligations Cautions on Financing Term of loan and balloons Graduated interest rate Pre-payment penalties Non-assumable loans Loans assumable at a revised interest rate or terms No pre-payment allowed Verifying present mortgage balance and terms 2 Chapter 9. The Importance of Using Leverage 51 How much leverage is advisable When should you pay off a mortgage Multiple mortgages Chapter 10. Where to Locate Cash 58 Family and Friends Banks Private Lenders Mortgage Brokers Mortgage Bankers Credit Cards Sell off part of the property Refinance another property Borrow against life insurance Borrow against stocks Personal Loans from bank Home equity loan (use caution) Add closing costs into mortgage Give something in lieu of cash (car, boat, stock) Escrow, advance rents, etc. as part of down payment (caution) Trade equity in another property you own for down payment Trade for anything you have that they want Sell a mortgage at a discount Chapter 11. How to walk away from the closing 62 with nothing down and cash in your pocket Buying a below market value and finance big (negotiate with lender or seller) Chapter 12. Understanding the Various 64 Types of Ownership Lease/Option Joint Ventures Partnerships Corporate ownership Chapter 13. How to Negotiate with the Seller 67 Start renovation before closing Pay more for the property for concessions you need Lower interest rate Extend term of mortgage Seller Refinance Sell mortgage to a third person 3 Chapter 14. How to Create a “win-win” situation with a Seller 71 Chapter 15. How to Negotiate with a Lender 72 List and cost of intended renovation Photos Chapter 16. Understanding Closing Costs and 74 Closing Statements Chapter 17. What to Expect at the Closing 78 Chapter 18. How to meet expenses on your new property 80 Generating income Should you have leases Flipping the property Chapter 19. When and Why You Need to Sell the Property 82 Equity too great Problems with property Chapter 20. The Importance of Record Keeping 86 Income received Expenditures for renovation Carrying costs on property Normal property expenses Value of your “sweat equity” Chapter 21. How to Avoid Taxes on the Sale 88 Exchanging Refinancing for cash Chapter 22. What to do if You Make a Mistake 92 and the Investment Flops Deed in lieu of foreclosure Chapter 23. The Secret to Pyramiding 95 (not the ones in Egypt) 4 Appendix: Thirteen Steps to a Successful 98 No Money Down Investment Case Studies: How to Put it all Together The “slums” - turning a bad property 101 into a good investment The 12 unit apartment complex –motivated 104 seller but a good property Forms, Checklists, Sales Contract 107 FSBO Website Links 122 About the Author 127 5 HOW TO INVEST IN REAL ESTATE WITH NO MONEY DOWN Introduction You’ve no doubt seen the "infomercials" or attended a seminar or bought a book or course on "How To Get Rich In Real Estate With No Money Down". Unfortunately, most of the "no money down" promoters have gotten rich by selling books, courses and tapes on how to do it. A few years ago, a "get rich quick" guru boldly stated, "Put me in a strange city with only $100 and I’ll own a million dollars worth of real estate in one week or less".... and he probably was able to do it. Unfortunately we didn’t see what happened to his investments after he owned them for a few months or year. You CAN find investment properties that can be bought with no money down. There are lots of them out there, if you know where and how to look for them and how to negotiate the deal. The real question is not "Can you buy property with no money down" but, "Can you afford to buy a property with no money down"? That’s something many of the "no money down" promoters fail to tell you. It is, however, something you will learn here, and must learn before you try it. I spent several years on the real estate investment seminar circuit. When the market became flooded with no money down seminars, they all dropped out. (By then, many of them had made a killing selling books, seminars and tapes). I also had a thirty-minute infomercial running on TV stations nationwide. I’ve been part of that program and I know how they operate. Now a new batch of investment gurus have enter the market, doing the same thing. My approach was different, however. I devoted my efforts and experience in showing investors how to become wealthy in real estate with the least amount of risk possible. The others have come and gone, but Real Estate Investments And How To Make Them has been highly successful since 1982, with several fully revised editions. Don’t get me wrong, there were some No Money Down promoters who did a fair job of getting you on the right track...but others were just in it for the money. You can make a lot of money by investing in real estate with limited cash. I say "limited" because, no matter what others say, you still need some money, even in a no money down purchase. I’ve learned the right way and about a quarter of a million readers of my book and investment course participants have either made a lot of money or at least know the right way to do it once they get started. You can even make a bundle by investing in real estate with no money down. But you have to 6 know how to avoid getting into financial trouble. That’s what this book is all about. Our Real Estate Investments and How to Make Them course and software program (www.investmentre.com) offers a complete beginning to end program that even professional real estate investors use as a guide. This No Money Down ebook contains full details on the subject that is not covered in the main book. One final point: Buying a property with "no money down" generally is not easy. It takes work, perseverance and a thorough knowledge of what you are doing… and that is where we are going to start. This course furnishes you with the knowledge to get it right…the rest is up to you. The rewards make it all worthwhile. As you wade through this material you will no doubt be somewhat confused or overwhelmed with the information. Don’t let that bother you. By the time you finish reading, the pieces will all fit together and you will understand how important each section is to your financial success in real estate investing. Once you discover the wealth of information here and how important it is, you will be able to use this book as a reference manual to get ideas you may need for a specific problem you run into when trying to purchase a property. What is important is that you stick with it from beginning to end so you are at least aware of the various factors and situations that result in a successful and profitable real estate investment portfolio. So, if you are ready, turn the page and take a trip through the world of real estate investing when you have little or no money to invest. 7 Chapter One The Importance of Attitude, Perseverance and Flexibility Wouldn’t it be great if you could just drive down the street of a high quality neighborhood, see a for sale by owner sign on the property and decide this is the house you want to buy. You knock on the door and discuss the property with the owner. The owner says, “Yep, I need to sell so I have it priced $25,000 below fair market value. In fact, I want out so badly, I’ll even carry a mortgage with no money down”. And this was the very first house you looked at. OK, back to the real world. That will never happen…at least with the first home you look at or probably ever. Forget about what you may have heard from the promoters of “get rich quick and easily with no investment”. In this e-book, we are going to discuss how you can and no doubt will get wealthy, but forget the “quick” and “easily” part of that last sentence. In the introduction I mentioned that you CAN buy properties with no money down. The question is, “Can you afford to buy a property with no money down”? As you progress through this program, you’ll discover how the real professionals in the business do what you want to do. The difference between them and the no money down promoters, is they approach a potential acquisition knowing exactly what to expect, not just on the day of closing, but after they own it and are faced with 100 or 110 percent mortgages, operating expenses and no incoming coming in on the property. To be successful in this type of real estate investing, you need to accept three basic personal philosophies: Attitude, Perseverance and Flexibility. If you still believe you can, without much effort, locate, buy and sell a property at a profit, you will not doubt either make a huge financial mistake or get discouraged and drop the whole idea of investing in real estate. Let’s begin with Attitude. You’ll need to accept the fact that, although you can locate and buy real estate with little or now cash down, it probably will not come easy. If you do find a large selections of “bargain” priced property in a certain area, you’d better check it out carefully. Find out what those sellers know that you don’t know. More on this later. You need to have the attitude that “I spent the whole day…or week looking at properties and did not find one that meets the standards in this book”. Your response must be, “That’s alright, and I’ll find one tomorrow or the next day. I’d rather wait until the right one comes along than make a mistake that could put me in deep financial trouble”. Let me digress a little and tell you about an investor I worked with a few years ago. It was a young couple and she was expecting their first child. He has inherited a few thousand dollars and decided to venture into a real estate investment. He wanted a rental apartment building. I feel partly responsible for what happened because in my “Real Estate Investments and How to Make Them” course I talk about making the maximum use of leverage by buying the largest property you can with the cash you 8 have available. It is, however, tempered with how comfortable you are with a highly leveraged or financed property and in knowing what you are doing. (Exactly what you will learn here). He fell in love with a 32-unit apartment complex that was over ninety percent leveraged. We prepared a property analysis, and it would make financial sense, even with that large of a mortgage. I had shown him smaller properties, eight to sixteen units in size, but he wanted the big one. I even mentioned that this particular property was not in the best area of town, but that didn’t bother him either. About a month after closing, he began to have financial trouble. I was on the phone with him daily trying to help him, but he was doing it his way. He had a couple of tenants who were throwing “pot” parties at night and disturbing the rest of the tenants in the building…and still he did nothing. I suggested he would be wise to hire a management company to run the property. It would cut into his income, but at least there would be some knowledgeable management there. Unfortunately, the management company he hired was even worse. All they did was collect a monthly management fee for doing virtually nothing but collecting rents and paying bills. Oh, they also talked him into spending more money to improve the property. Unfortunately, they did nothing to solve the real problem…the undesirable tenants. It wasn’t long before the decent tenants started moving out, leaving him with a huge monthly debt and not enough income to cover it. He finally ended up losing the property. Back on our subject, this is the reason you need to accept the attitude that it is better to wait for the right property than it is to jump into one that will put you in financial difficulty. This brings up the second of the three philosophies: Perseverance: If you are not willing to wait and continue searching until the “right” property comes along, then do yourself a favor and wait until your rich uncle dies and leaves you enough money to make a reasonable down payment on an investment property. Let me inject a thought here: In this book, we are concentrating on how to buy a real estate investment with little or no money down out of your pocket. Generally, this is the position many investors are in when they want to buy that first property. Once you have that first one up and running…and appreciating in value through fixing it up or flipping it, you now have some cash to work with on the second one. Each property you purchase after that first one becomes easier and easier, because you now have some cash equity to work with. In Chapter 24, we discuss the practice of “pyramiding” and how you can use that initial property investment and build it into a lifetime estate, without ever adding any money. 9