Buy To Let Blog
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Blog: Can someone please explain to me how no money down deals work.
Blog Reply: Before I start, please note, this is all based upon my own experience - I am sure there are many other ways to do these types of deals!
A no money down deal is where I have acquired a property having used none of my own money. These aren't that difficult to do if you are regularly coming across properties with plenty of equity built into them (in other words you buy a property for at least 20% below market value).
To buy properties below market value, you should focus your efforts on finding motivated sellers, or property needing work (here you will look to add value to the property by adding to it or giving it some much needed TLC).
By focusing on properties that are purchased well below market value, you can use a bit of financial trickery to pull off a no money down deal because the built in equity gives you a cushion to play with.
The banks will normally lend you a maximum of 85% of the purchase price, which leaves you with 15% deposit (+ stamp duty, valuation fees, legal fees, mortgage broker fees, insurance, refurb costs, etc) to find. This can be covered in a number of ways,
1. Unsecured funds (credit cards, granny, etc)
2. Secured funds (e.g. investors, secondary lenders)
3. Use your own money
After a few months, you remortgage the property (at 85% of the new valuation) to pay off the investors/credit cards etc, as well as the initial mortgage to leave yourself with one mortgage on the property.
If you are lucky, the new mortgage (as well as any rental income you have generated) should cover initial mortgage + initial mortgage interest payments + investors interest payments + investors initial money + all other costs = no money from you.
In the last paragraph, I used the word 'lucky' because most properties will not value up to allow you to remortgage and cover every single cost. Of course, some will, but most will not in my experience.
TIP: Try to get the investors to agree to you paying the investor money + interest payments as one lump sum when you refinance. This will save you having to pay interest payments to the investors out of your rental income, thus improving your cash flow in case something unforeseen crops up.
After a bit of wheeling and dealing, you will have built up a cash reserve to allow you to use your own money instead of having to use investors/credit cards etc.
In my opinion, your own money is always better than expensive borrowed money because:
1. You have far more flexibility in what you can do with the deal.
2. When (NOT if) a deal doesn’t work out as anticipated, you only have the initial lender to worry about.
3. Your own money doesn't cost you anything to use.
As before, you remortgage a few months down the line to pay off the initial mortgage + initial mortgage interest payments + your initial investment + costs. Usually the rental income covers the initial mortgage payments + a few costs in-between purchase and refinance, and investor interest payments are paid as a lump sum upon refinance.
This isn't exactly no money down, but in my opinion, using my own money has always been preferable to expensive investors or credit cards.
People who buy property no money down without a sensible cushion are asking for trouble in my opinion. A great income, or a decent supply of cash to cover voids or unexpected costs will certainly help.
So the important bits you need to remember:
1. Buy cheap property from motivated sellers to leave you with lots of equity.
2. Do not be afraid to use YOUR OWN money.
3. Refinance to release the money and repeat.
If you have none of your own money, buy and sell a few properties to generate sufficient funds.
Above all else, do not overstretch yourself, and don’t listen to people who suggest that no money down deals are easy – they are talking out of their you know what!
Hope this helps
The following paragraph:
As before, you remortgage a few months down the line to pay off the initial mortgage + initial mortgage interest payments + your initial investment + costs. Usually the rental income covers the initial mortgage payments + a few costs in-between purchase and refinance, and investor interest payments are paid as a lump sum upon refinance.
Should read
As before, you remortgage a few months down the line to pay off the initial mortgage + initial mortgage interest payments + your initial investment + costs. Usually the rental income covers the initial mortgage payments + a few costs in-between purchase and refinance.
Regards
Blog: I am still learning - but how do I find a motivated seller? I have put adds in the Loot for property. I find estate agents are a waste of time, although I did learn at Inside Track's seminar today that it is illegal for an EA not to tell vendor of an offer regardless of how low. Are there any other ways?
Blog Reply: That’s a question for another day!!
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