“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 home:
- 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 October 28, 2012.