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Learn how to Invest in Real Estate With Little or No Money Down

Invest in Real Estate With Little or No Money Down

Acquiring Real Estate Wealth

I don’t like “get rich quick” books. I don’t believe in them any more than I do in the Tooth Fairy. Very few people I’ve known got rich quick; and of the few who did, only one hung onto her money for any length of time. Of the few cases I’ve seen, the story is typically rags to quick riches and just as quickly back to rags.

On the other hand, I’ve known a great many people who have gotten rich over time . . . and kept their wealth. They accomplished this feat by steadily working at it. They had successes and a few failures, but over the years their net worth grew and grew until it was in the millions. For some it took 10 years, others 20, still others an unusually quick 5 years and, for a few, an entire lifetime.

Most began very humbly with very little. Some were immigrants. Most were young when they started, but many were middle aged and late entries.

Those who made it came from all kinds of professions—two butchers, a produce clerk, a couple of accountants, several carpenters, quite a few white-collar workers, and even more blue-collar workers.

Some were men; many were women. Almost all had other full- time lives: raising a family, working at a career, tending to a business, traveling. All worked at it part time. There was little they had in common—except for one thing. They all invested in real estate. (This is not to say that you can’t make money elsewhere—you can. But that’s a different book.)

Of course, this is not to say that those who got wealthy in real estate avoided other investments. They didn’t. They owned the usual—stocks and bonds. Many owned more esoteric investments such as gold, silver, and even stamps and rare coins and paintings. But over time, where they made their real money, where their wealth came from, was real estate.

I remember once talking with a successful magazine publisher. He had three titles all distributed nationally on newsstands. (I’m sure you would recognize some of them if I mentioned their names, but he’s a good friend and I agreed to keep his story anonymous in exchange for using this anecdote.) We were talking about wealth, and I pointed out that he had done very well for himself. He had a small publishing empire.

“Yes,” he replied. “But the only real money I’ve ever made was in real estate.”

I was shocked, until he explained. It turned out that over the years, he had plowed his profits from the magazine company into property, industrial and commercial buildings. Some years the magazines made good money; other years they lost. Overall, they provided him with a handsome income. But the real estate he had purchased had steadily grown in value to the point where it had made him very wealthy.

I know another fellow, Larry, a produce clerk in a grocery store. I don’t believe he ever made more than $12 an hour. (He retired several years ago.) But he bought real estate on the side. (I know, because I sold him a lot of it!) He bought single-family homes, duplexes (two rental units together) and four-plexes (four units together). He seldom had much cash on hand.

He retired modestly in a small house when he was in his fifties. But his net worth (measured by how much he had in equity in properties) was in the many millions. And he could realize it (get at the money) when he wanted to by refinancing or selling one of his properties.

A woman I know, Sylvia, ran a beauty parlor in Las Vegas. She saved all her tips in a jar and used them to buy a small house. Then another. Then another. And soon she had over a dozen rental homes, and her rental income after expenses (positive cash flow) eventually far exceeded her beauty shop income.

The point of these examples is that it doesn’t make much difference who you are, what you do, where you come from, how you invest your other money, or how much cash you have. The only thing that counts is that at least part of the time you invest in real estate. Over the years, no matter what happens elsewhere, your real estate investments should lead you to wealth.

“The Only Investment That Always Goes Up . . . Not!”

Broadcasters, reporters, and investment advisers for stock and bond companies had a field day with the above quote back in 1992. It was the early 1990s, and the real estate bubble of the late 1980s had popped. Prices were no longer going up; some were falling; and some people who bought homes at the top (particularly those who bought with loans bigger than the home’s value) suddenly discovered that they owed more than their homes were worth. They were “upside-down” and were sometimes heard to remark, “But, I always thought real estate only went up in value!”

TRAP: When you’re “upside-down” you owe more than your home is worth.

The reporters said that the great real estate recession of the 1990s proved beyond a shadow of a doubt that property prices went down as well as up. It proved that real estate was just as volatile an invest- ment as stocks, bonds, or anything else.

But was it?

Some areas of the country such as Riverside County in California and parts of Los Angeles, as well as parts of Massachusetts and the Northeast, saw prices drop as much as 25 to 30 percent. A home that had been worth $200,000 was suddenly worth only $150,000 . . . or less.

Worst of all, in those areas there were no buyers. Real estate in the best of markets is an illiquid investment—it’s hard to sell and cash out. When the market is really bad, it’s all but impossible.

Yet there were some out there who weren’t pulling their hair out lamenting the hard times and how real estate goes down as well as up. Instead, they were gobbling up properties, as quickly, as cheaply, and in as much quantity as they could. They weren’t concerned that prices were slowing or dropping. As soon as they saw they could break even on renting out a home, they scooped it up. They could care less about the doomsayers. All they wanted to do was to accumulate as much property as possible—to buy and hold, waiting for the big turnaround. They believed that real estate always went up, eventually.

Well, of course that turnaround came. Did it ever! In recent years prices for real estate in most areas have almost doubled. In some areas they’ve actually tripled!

But what about those who bottom-fished during the recession of the early 1990s? They made out like bandits; they had huge profits. How did they know the market was eventually going to go up?

Were they clairvoyant? Did they have special knowledge?

I doubt they were psychic enough to see the future, but I suspect they probably did have special knowledge. And that special knowledge probably came from the Department of Housing and Urban Development (HUD) and was available to anyone who cared to look.

It showed that the average prices (add all the prices and divide by the number of homes) for single-family homes across the United States as well as the median price (as many are priced above as below) for homes across the United States going back about 40 years never went down.

The prices, both median and average, across the United States only went up! (It might not always have been up by much, in some bad years only a few hundred dollars, but the trend was always upward.)

Don’t take my word for it. Check it out for yourself. Go to the Department of Housing and Urban Development’s Web site and look into the information on their periodical charts. (As of this writing, the Web site is

Yes, prices in different areas of the country did drop, sometimes precipitously, particularly in the Northeast and some other areas. But overall across the country, prices continued to rise, enough to even those drops out. And this was during the worst real estate recession in modern times.

The point here is not that real estate prices don’t go down. They certainly do and may do so in your area. But overall and over time, certainly over the past 40 years and actually going back as far the founding of this country, real estate prices have always trended upward. The reason, as Will Rogers used to quip, is simple, “They aren’t making any more of it!”

TIP: There’s a moral here. Real estate is a great investment to be in. And when times turn bleak and everyone else is selling, it’s an even better time to be in!

Of course, I’m assuming that as you read this, the market hasn’t collapsed. (If it has, stop reading, get out there, and buy!) For you, the market’s either strong or at least stable. If I’ve made my case, even in strong markets you should by now be eager to get out there and make some real estate profits. But how exactly do you do it, particularly if you have little to no cash?


How Money Is Really Made in Real Estate

The operative word is leverage. While most people have heard that real estate offers enormous financial leverage, few really understand how it works. You’re going to be one of the knowledgeable few.

Leverage basically means that you buy property with other people’s money. You put in little of your own. Indeed, a basic tenet of real estate investing is that the less of your money you can put into the deal, the greater your chances for profit (and, as we’ll shortly see, for loss as well).

Perhaps you’ve seen this sort of thing in operation with stocks. You want to buy a hot stock that you think will soon go up in price. It costs $20 a share and you have $2000 to invest. That means that you can buy 100 shares. It’s quite easy to see that if you buy 100 shares at $20 and the stock goes to $40 a share, you’ve doubled your money to $4000.

However, what if you could buy twice as many shares for the same $2000?

You may very well be able to do just that by buying on margin. Here you might put down only 50 percent of the price of the stock and, for a fee, a brokerage company might put up the other 50 per- cent. In other words, you’ve leveraged half the value of the stock. You only put up $10 for each $20 share of stock you bought. With your $2000 you now control 200 shares instead of 100 shares.

Now if the stock goes up to $40 a share, you’ve quadrupled your money. Because you have twice as many shares, your original $2000 jumps to $8000. Further, to double your money, the stock no longer has to double. With only a 50 percent increase in share price, you can double your investment; it only has to go up by half. You get much more bang for the buck because you control twice as many shares with the same investment cash. That’s called leveraging your investment, and savvy stock investors do it all the time.

Of course, stocks are far more volatile than real estate. And there is always the chance that your stock might go down as well as go up. With a 50 percent leverage position, when the stock goes down you’d lose money twice as fast as you would by buying the stock out-right at 100 percent a share. If the stock fell to $10 a share, all of your money would be lost. That’s the risk with stocks.

Real estate leveraging works in a similar way, only a whole lot better. One of the big differences between the stock market and real estate is volatility. Stocks are highly volatile. Real estate is relatively low in volatility.

While stock and bond prices bounce up and down on a daily basis, real estate prices move glacially. If real estate prices go up by 10 percent in a single year, it’s considered an enormous increase. (Of course, in recent years we’ve seen some spectacular increases in value on the order of 25 percent per year, but that’s hardly sustainable.) Most investors in real estate are very happy if prices just go up by 5 percent a year on average.

Further, as we’ve already seen during the crash of the early 1990s, while the entire stock market can drop in value by 50 percent or more in just two or three years, real estate overall tends not to go down in value, overall. Yes, some regional markets may drop, but at the same time other regional markets may be going up.

In real estate overall what tends to happen is that the rate of increase slows but only rarely turns negative.
This has important ramifications for investors. One of the biggest is that because real estate is so stable an investment over time, individuals and institutions are willing to offer very high loan-to-value (LTV) financing.

TIP: Remember LTV (loan-to-value). It’s a key to getting little or no cash financing.

Going back 50 years, it was common for lenders to offer 80 percent LTV. That means that for every two dollars you put into the property, the lender would put in eight dollars. You could leverage 80 percent.

Currently, times are much better. If you’re an investor, some lenders will offer 90 percent LTV. For every one dollar you put into the property, lenders will offer nine dollars. You’re leveraging 90 percent.

In later chapters we’ll see how to buy property with lenders putting in 19 dollars for every dollar you put in. In some cases, they’ll put in the entire amount, which allows you to purchase with 100 percent LTV or zero-down financing—no cash down payment. You’re leveraging 100 percent!

Before you turn to those chapters, however, let’s see how this high leveraging affects your investment returns. We’ll assume that you buy a property for 5 percent down. (Remember, later on we’ll see how to purchase for less, but for now let’s take a middle-of-the-road leverage scenario.)

We’ll assume that the property costs $300,000. Your LTV is 95 percent, so you’ll need to put down 5 percent or $15,000.

Now let’s say the property goes up 5 percent in value the first year you own it. What’s your paper profit?
If you said 5 percent, you weren’t thinking of our stock example. The way savvy investors figure their real estate profits is not on the value of the property, but on the value of their cash investment. If you put in $15,000 and the property goes up by $15,000 (5 percent of the property’s full value in our example) the first year, you’ve doubled your money. It’s called cash-on-cash investing.

Still don’t see it? Think of it this way: Your original loan amount was $285,000 on a $300,000 investment. You put $15,000 down.

The property went up $15,000 to a total value of $315,000. Just subtract the amount you owe on the loan ($285,000) from the value and you get $30,000. That’s twice the cash you put in. On paper, at least, your investment has doubled.

Okay, you may be saying. You’ve just proved that real estate can be as good as the stock market. You can double your money in both.

Actually, we’ve done much more. Remember, in order to double your money in stocks, the stock has to double in price. Even buying on the margin, it has to go up by 50 percent in value.

In our real estate example, the property only has to go up 5 percent in value (assuming you only put 5 percent down) to double your money.

TIP: Real estate values for single-family homes in the United States for the past 30 years have increased in value an average of 6.5 percent per year. (Of course, there’s no guarantee this rate or trend will continue.) (Source: HUD.)

Further, in real estate the chances are that the property may continue to increase, on average, by around 5 percent or more each year. That means that some years it might go up by 7 or 8 percent and other years by only 2 or 3 percent. You might get really lucky and get a 10 percent or more year or two and really unlucky and get a 1 percent or less (even into negative numbers) year or two. But on average, over the long haul, chances are you might hope to get around 5 percent a year—or better.

This means that the original money you invested continues to multiply as long as you own the property.

 How to Invest in Real Estate With Little or No Money Down - Table 1-1

After 10 years your original $15,000 investment is now worth $188,617 on paper. By comparison, if you had stuck the same $15,000 in the bank to collect interest at 5 percent, it would be worth $24,433. Remember, in our example you’re in effect getting the benefit of 5 percent compounded on a $300,000 property, even though you’ve only invested $15,000. Your original money doubles and more every year. That’s the power of leveraging.

In addition, during those years of ownership, you are also paying down the mortgage. At the end of 10 years your equity buildup as a result of mortgage payback is $46,455. (At the end of 20 years it would $141,075.) Add that roughly $46,000 of 10-year payback to the $188,617 from the above chart and suddenly your profit on paper is $235,072. On an original $15,000 investment!

Further, unlike with stocks, you don’t have to be continually looking for new hot issues to purchase. After all, how often do you really find a stock that goes up 50 or 100 percent in value? And in order to find that really hot one, how many losers do you end up buying?

Also, unlike stocks, you’re not likely to have those long drought periods when prices drop by half or more.

TIP: When was the last time you heard of any piece of property falling in value by 50 percent or, as has happened to many, many stocks, by almost 100 percent?

And that’s how money is made in real estate. Let’s be sure we’ve got the picture. It’s a two-step process.


How Money Is Made in Real Estate

Step One: Highly leverage your investment.
Step Two: Let it sit and make you money.


A Part-Time Career

Step Two is the reason that so many real estate investors do it part-time. It’s simply not a business that requires your full-time efforts. You buy a property using leverage. You rent it out. And you let it pay for itself while boosting your profits. If you let it sit, over time you’ll find it will make you wealthy.

Before experienced investors begin tearing out pages, let me add that there will be occasions, sometimes very trying occasions, when you’ll need to focus on the property and devote all your energies to it. This can happen when a tenant doesn’t pay rent, or when there are maintenance or repair issues. However, if you buy wisely (buy a good property) and rent wisely (rent to a good tenant), these hard times should be at a minimum. (Check into Chapter 10 to see how to do this.)

All of which is to say that real estate affords investors the opportunity to continue their regular careers and their normal lifestyles while they invest. That’s one reason that so many blue-collar as well as white-collar workers own property. That’s why retail clerks and accountants, welders and entrepreneurs, immigrants and seventh- generation families all invest in real estate. It’s the American road to wealth. For a vast majority of people, it’s the only road to wealth.


The Other Reality of Real Estate Investing

Thus far we’ve talked as if finding and buying investment property and watching your profits roll in were as easy as rolling off a log.

It’s not.

If it were, the country would be filled with nothing but millionaires. (As it is, millionaires are only about 1 percent of the population, which is still probably higher than any other country on earth, with the possible exception of the oil-rich lands of the Middle East.)

There are at least two difficulties that you must overcome in order to be a successful real estate investor. Both are surmountable. But, it’s here where shrewd investing (the kind you learn, in part, from a book like this) pays off.

They are negative cash flow and transaction costs. We’ll deal with them extensively in later chapters, but for now, here are the problems they present.


Negative Cash Flow

We’ve talked about buying with little or no cash down. Indeed, getting into real estate on that basis is the basic theme of this book. However, the less money you put into a property, the more difficult it becomes to break even.

Part of the reason is that in addition to a mortgage payment, as a landlord you’ll also be paying property taxes and insurance. And occasionally there will be rent-up costs as well as periodic maintenance, repairs, and vacancies.

Add up all of these on a monthly basis and you get what many in real estate like to call your “nut.” Like a squirrel, this is the amount you need to bring in each month to survive, to break even on the property.

Monthly “Nut” on a Rental Property

■ Mortgage payment
■ Taxes (1/12th)
■ Insurance (1/12th)
■ Rent-up costs (averaged over 5 years)
■ Maintenance (averaged over a year)
■ Repairs (averaged over 10 years)
■ Vacancies (averaged over a year)

Of course, the single biggest element usually remains the mortgage payment, which gets bigger the less cash you put into the property. Add the mortgage payment to the others, and it can quickly add up to a substantial sum. Altogether this is what it will cost you each month to operate the property. If you make more, you’ll be able to put cash into your pocket (a “cash cow”). If you make less, you’ll need to take cash out of your pocket (an “alligator”—it bites you each month).


You Don’t Want an Alligator

I don’t have an alligator as a pet, and I hope you don’t either. The reason is that they have nasty big tails and even nastier and bigger appetites. And they have this very nasty habit of biting whatever looks like food, meaning you and me.

Most good rentals bring in cash each month, or at the least break even. But you can have a bad rental and, if you do, it’s like an alligator. When your monthly cash expenses exceed your monthly cash income, you’re in a negative cash flow position.

That means that each month you need to take money out of your wallet to meet your expenses. You’ve got an alligator biting your behind. Too often the less cash you put in, the bigger the alligator you end up with.

TIP: Part of the negative cash flow may be met by taking depreciation on your property. This may or may not be available to you as an annual write-off against income depending on your financial situation. See Chapter 12.

The bigger the hemorrhage from your wallet, the bigger the alligator. The problem for those putting little to no cash down quickly becomes “How much negative cash flow can you handle?” How big an alligator can you have biting you each month?

For some people, putting a couple of hundred dollars a month into a property is nothing. Of course, this changes when you own a dozen properties and they’re all alligators.

For others, putting $500 or even $1000 a month into one property is doable, at least for a short while.
No matter how big or small your alligator, over time you’ll get tired of it’s nipping at you. For one thing, it can significantly reduce your profit. Each time you put money into the property after your initial investment, your rate of return goes down.

Another thing is the annoyance factor. Even if it’s only $50 a month, you’ll mentally begin to see the property as a liability instead of an asset. Remember, your profits, until you sell, are on paper. However, your losses each month are in cash.

Successful real estate investors look for cash cows and avoid alligators. The problem, of course, is finding such properties.

Today, prices have gone so high that by the time you finance the property with little or no cash and account for the other monthly costs, it’s hard (but not impossible) to find a property that will bring in enough rent to give you a breakeven. Of course, rental rates in some areas have skyrocketed, which has helped enormously in creating cash cows. But even so, the challenge is in finding properties that are priced well enough to make sense as investments when putting little or no cash down.

It’s a nitty-gritty challenge, one that every investor who wants to be wealthy must successfully face. The important thing about alligators, however, is that you can avoid them. By carefully selecting properties, you can get those that will either break even or be a cash cow (show a positive return). We’ll go into this in great detail in Chapter 6, but first let’s see the other problem of real estate investing.

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