No-money-down deals do exist and are totally legitimate. It does not mean that the seller does not get any money, but it simply means that you don’t have to invest any of your own capital, instead you leverage on time and other people’s money.
There are various ways how you can achieve that. If you leverage on time, you can deploy strategies like seller financing, delayed completion, or Lease Options. If you leverage on other people’s money such as mortgages, bridge financing, or private finance with co-investors, you can also achieve not having to put your own money into the deal, or if you did, you can pull it again via an equity release. As easy and simple as that.
The Power Of Leverage
The ability to leverage time and money to your advantage is one of the key benefits a property investor enjoys. I want to show you just how powerful leverage is.
Imagine you have $100,000 cash that you want to invest on a long-term basis and will always re-invest your earnings back into the investment at the same interest rate. Let’s have a look at how a 1%, 6% unleveraged and 6% leveraged at 75% investment compare to each other over a 20-year time horizon.
First, you could put the $100,000 into a bank that pays you 1% interest and let it accumulate for 20 years. How much would you get back at the end? A mere $122,000 (rounded), which due to inflation is probably worth less than the $100,000 you had invested two decades before. Not advisable.
Second, you could invest your $100,000 into either a financial product or into a cash flow property that you pay full in cash and that gives you a net yield of 6% and let it accumulate for 20 years. You would receive $320,000 (rounded) back. Not too bad. But hardly sufficient to retire or take care of your family.
Third, by leveraging your money (75% gearing ratio) and investing into four properties instead of one you will get significantly higher returns. The net yield is still 6% as in the previous case and you make down payments of $25,000 for each of the four properties and finance $75,000 each at an assumed mortgage interest rate of 3%. Now, 20 years later you will have amassed a net worth (already excluding your liabilities on the mortgage) of a whopping $1.6 million! Even if you only make half of that, it is still stunning, isn’t it?
You have probably heard the saying: “Too much of a good thing is not a good thing.” This holds true for leverage too. While leveraging enhances your return, you need to be careful not to over-leverage yourself. Doing that has proven to be a costly mistake for many investors. That’s also why I recommended not to use 100% LTV.
There is no single correct number how much you should leverage. It will depend on your personal financial situation and risk-taking ability. What I have often seen happen is that younger people as well as new investors will choose a higher leverage, but as their portfolios and/or their ages increases, the leverage will decrease.
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