The Myth of Zero-Down Real Estate Investing

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“No Money Down!” You hear this all the time from infomercials and cheesy real estate books trying to convince us that we can make millions in real estate without making a down payment. To good to be true? Of course. I recently bought my fourth single family rental home. Here are the details about the investment:

  • The home was a HUD foreclosure
  • 3 bedroom 2 1/2 bath in a good neighborhood
  • 7 years old
  • Cost: $115,000
  • Rehab Cost: $10,000
  • Financing Cost: $2,000
  • Total Cost: $127,000

I was able to borrow 100% of this cost. How? I’ve found a local bank that will lend me 80% of the appraised value of the home. The home appraised in the high 150′s, and this allowed me to borrow the full $127,000. So why do I think zero money down is a myth? For two reasons, and you must consider them if you’re thinking about investing in real estate.

First, the numbers don’t always work out as well as they did on my last home. Sometimes the appraisal comes in lower than you expect. Sometimes the rehab costs are higher than you estimated. I’ve had to sink as much as $6,000 to $8,000 down on a home because the appraisal was lower or the rehab costs were higher than I expected.

Second, and this is the case with the last home I bought, things can and do need repair. This zero money down home I bought needed a new air conditioner 3 weeks after the tenant moved in. Cost of a new air conditioner unit: $2,000. Cost of the learning experience: Priceless.

In another “zero money down” home I bought last year, the home needed a new air conditioner and a new roof within the span of six months. Cost: $7,000.

Real estate has been a great investment for me. But if you’re thinking of investing on a shoestring budget, my advice is to stick with mutual funds.

Published or Updated: April 9, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Barry Davis says:

    Zero Down is not a myth. Your advice about prudence is good advice, but it doesn’t validify zero down as a myth. Mutual funds are not zero down. But I do agree for an inexperienced investor mutual funds are less risky.

    As for qualified investors, zero down is often less risk. Your illustration of a $2,000 cooler replacement has nothing to do with the amount of down payment a buyer pays for a house. If you had paid cash it would have still needed to be replaced.

    Too many so called experts have condemned zero down practices and blaimed zero down as the cause of so many foreclosures. There is no truth to these aligations. I agree that the owners could not afford to pay for the debt they agreed to pay for. But down payment had little to do with it. For those that bought homes for $400,000 with no down payment and can not afford the payment. There are those that bought homes for $500,000 with $100,000 down and cannot afford their payments.

    When the Financial industry withdrew negative arm loans the value of real estate dropped in most markets. If the mortgage rates increase to 17% real estate values will drop. If unemployment increases real estate values will drop. And I might add all of these problems increase foreclosures. It is the law of economics and supply and demand.

    Some people should never be home owners. The odds of failure in any venture have been calculated. Real estate is no different. historically the forclosure rates nationwide has been less than 1 in 1,000. But the foreclosure rates amoung certain ethnic neighborhoods are much higher. Black homeowners in neighborhoods that are 90% Hispanic face foreclosure over 25% of the time. This is the highest foreclosure rate identified by HUD. I am not predjudiced by race or color. I empathize with anyone that loses their home. But this is a real statistic.

    If you are a well healed investor and understand contracts you will understand that there are ways to eliminate recourse. In which case zero down might be zero risk.

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