Investing in Real Estate Without Cash
There are many ways to invest in real estate. Real estate investing can be for either short-term profits or long-term rental cash flow. Many people would love to be real estate investors, but they lack the cash for down payments and think that buying and holding or buying and flipping are the only ways to make money. This isn't true.
Strategies for Investing in Real Estate Without Cash
There are strategies for real estate investing without cash. You can start for as little as the cost of a few hundred business cards. This isn't an article about "easy money." While there are ways to get started in real estate investing with just your desire and some legwork, it isn't easy, but it can turn into cash in your pocket in a short period of time.
There are gurus everywhere, on TV, in print and on the Internet who teach all of these methods. You can learn a lot from real estate investment websites, but be careful about paying for a very expensive course or mentoring. Others have learned the hard way that, no matter how much the instructor knows and teaches you, it's still up to you to go out and implement it. Some of the techniques that will allow you to make money from real estate without having any cash to start include:
- Bird Dogging
- Lease Options
- Sandwich Leases
- Back-to-Back Closings
Here is an overview of these techniques, how they work, and how some real estate investors are using them for cash income early in their investing businesses.
Before you can truly appreciate the value a bird dog can provide real estate investors, let's look at who these investors are. The first thing that comes to mind is a "flipper," buying homes, fixing them up and selling them quickly for a profit.
Then there's the long-term investor who buys homes as rental properties, realizing cash flow and appreciation over time. Either of these real estate investing strategies can be very profitable. Which strategy an investor chooses is about their goals, temperament, and risk tolerance.
There are many more of these investors out there than most people think, especially the long-term rental investors. Who are they? Only a few are the high profile type you see on TV. The vast majority are people you see every day. They may have another successful business and have cash that they want to invest in real estate.
Running their businesses requires most of their time, and they tend to rely on traditional resources like real estate agents to help them locate investment property deals. They will usually pay more than they should for these deals as the real estate agents are working out of the Multiple Listing Service (MLS) inventory. There isn't a lot of flexibility in pricing, especially with the commissions in the deal.
Many of these investors are buying multiple properties. What would their reaction be if they were contacted by someone who said that they could bring them home purchase deals for 10% to 40% less money than what they are currently buying? The answer is simple, as they're in this to make money.
The less they pay for a home, the better their return on investment (ROI) from cash flow, and the sooner they have locked-in equity. They'll want this person to bring them deals. This person is known as a bird dog. It's a bit like being a wholesaler.
Through work, research and investigation, the bird dog finds homeowners who need to sell and haven't been able to or homeowners with mortgage difficulties or foreclosures before they're listed. That's bird-dogging, and it requires no cash to get started, just some business cards and a lot of effort. However, it can make real estate investing a business for the average person with too much debt and not much cash.
They're out there looking for homes real estate agents aren't listing. In fact, some bird dogs have real estate agents feeding them leads when a distressed homeowner hasn't been able to sell. The bird dog delivers profitable investments to the investor and fees can run between $2000 and $10,000 per deal when it closes.
Another way to make money in real estate investing without using any of your own money is to use assignments. It's not a complicated process but it does require that you have your buyer lined up prior to locking yourself into a purchase contract. You're going to actually make your deal with the seller and write up a purchase contract. The contract will indicate that the Buyer is "Your Name and/or Assigns."
This allows you to assign the contract to someone else, your buyer, without any further consent of the seller. They must be a cash buyer, but that's normally the case when you're doing these kinds of deals. The seller will just be informed that your buyer is now the buyer and that the transaction will proceed as normal according to the purchase contract terms.
Another consideration when assigning deals is the earnest money deposit you give the seller. This money is deposited with the title company handling the closing, and you will not get that refunded. It will transfer to your buyer. So, you'll want to keep this amount as low as possible as there is still some risk that the deal will not close.
If you regularly work with investor buyers, you may be able to actually get your fee when you do the assignment of the contract over to them, and not have to wait until closing. However, you may be paid when the deal closes. Of course, if you're well-aligned with certain buyers, and can describe the deal to them and get a verbal commitment, you may be able to also get the earnest money up front before you lock up the home.
The basic components of a lease option strategy are a lease with monthly lease payments and an option to purchase the property at the end of the lease period. Let's run through an example to illustrate how it works. You're an investor who wants to own a home as a rental property, but you're not sitting on enough cash for a down payment. You may even have a credit score that would make borrowing too expensive.
Through marketing with bandit signs, newspaper and Craigslist ads or just a word-of-mouth referral, you locate a highly motivated homeowner who hasn't been able to sell their home. Let's look at a hypothetical example. Let's say that the homeowners have had the home listed, but have been unable to sell.
The home is worth $100,000 in the current market, their mortgage balance is $70,000, and their payments are $525/month with taxes and insurance. One spouse has been laid off their job, and the other has located a better job so they need to move soon. Here's what our investor does:
- Offers to lease their home for 3 years with lease payments equal to their house payments.
- Pays them $1,500 as a non-refundable lease option payment to have the right, but not the obligation, to purchase the home at the end of the lease for $80,000.
- With a verbal agreement, the investor uses marketing or other methods to locate a tenant for the home who is willing to pay $750/month to lease it. They will sign a minimum of a one year lease.
- During the 3 year lease, the taxes and insurance will remain as/is, with the escrow in the payment taking care of those items.
- Cash out: $525 x 3 for first and last month lease payments and a security deposit = $1,575 + $1,500 for the lease option payment = $3,075.
- Cash in: $750 x 3 for first, last & security deposit = $2,250.
This is the worst case cash situation, with the investor out of pocket $825. However, they could have negotiated better with the seller and postponed the security deposit, or done away with it altogether, dropping the amount they would be out of pocket to around $300.
This isn't bad to control this home and lock in a profitable purchase at the end. It's already worth more than the price to be paid, and will likely appreciate during the 3-year lease. The $250/month positive cash flow will amount to $9,000 over the 3 year period. So, even if the investor doesn't exercise their option to purchase the home, they have made a nice profit considering the tiny amount of cash they have invested.
The sandwich lease is just as the name implies: two lease options with the investor in the middle. In this situation, the investor wants to have the option to purchase the property at a discount at the end of the lease period, and they want to find a tenant who wants to purchase the home but can't due to credit problems or a lack of cash for a down payment. Most people in this situation who want to own, are happy to find the right home they can buy with a lease option, having time to improve their credit and get the down payment together.
We're going to use the previous example, but instead of a regular tenant, the investor finds someone who wants to lease-purchase or rent-to-own a home. All of the numbers are the same, except now the tenant buyer wants to own the home at the end of a 3-year matching lease period.
The tenant buyer now not only pays the first, last and security deposit upfront, but also a lease option non-refundable payment for the right to buy the home at the end of the lease. Also, the tenant buyer agrees that if they do purchase the home, the price will be $110,000. Now the cash flow for the investor looks like this:
- Same $3,075 going out to the seller for the first lease option.
- $750 x 3 = $2,250 + $1,500 lease option payment from tenant buyer coming in = $3,750.
- An investor could also have asked for a higher lease option payment but was happy with a $675 positive cash flow when both deals are signed.
- Seller makes $675 up-front, $250/month for 34 remaining months (first/last paid), and $30,000 gross profit by selling the home for $110,000 but paying only $80,000.
- Investor's gross profit is $39,175 with zero dollars of their money invested.
Another advantage of this strategy is that the tenant buyer is hoping to own the home and will take better care of it. In fact, some investors are negotiating leases that require the tenant to pay the first $100 or more for any repairs. As the insurance and taxes are being paid in the original mortgage payment, expenses are minimal.
If the investor wants to cover all of the bases, they can pay the mortgage payments directly, not letting the seller get into a position where they may default anyway. Lease options and sandwich leases are strategies used often by real estate investors to add properties to their portfolio and build monthly cash flow.
The housing and mortgage mess that began to unfold in 2007 created a lot of change in the lending and real estate transaction businesses. Title companies that used to do double closings and fund one deal with the proceeds of another are pretty much nowhere to be found now. However, there is a way to wholesale and flip properties with back-to-back closings without using your own money.
Of course, the first requirement is that you have a profitable wholesale flip deal set up. You must have the first property purchased at the right price, and a ready investor to buy it from you at a nice profit. The profit needs to be sufficient to cover a fee that will be required in order for you to use other people's money to get the first deal closed so that you can close the second sale to your investor.
Transactional funding is the process of getting a very short-term loan to fund one deal with a follow-up closing to sell the property the same day or within 24 hours usually. A transactional lender will place the funds with the title company that is needed to close the first deal.
Once that deal closes, you move on to the second deal, usually scheduled right behind it. The closing statement for that deal will reflect a payment to the transactional lender for the amount they loaned on the first deal plus their fee. This is usually a minimum of $2,500, and can also be based on a percentage of the amount loaned. You get the balance and your profits.