Monday, August 30, 2010
Buying Property with "No-Money Down"
This business of no-money down was popularised by Robert G. Allen, a financial guru who wrote a seminal book on this topic (can't remember the actual title). His mentor is a chap called John W. Schaub who's been in the property line for more than 35 years, and is author of books like "Building Wealth One House at a Time" and "Building Real Estate Wealth in a Changing Market". The truth is that it can be done.
What does no-money down mean?
In the simplest sense, it means that your property is financed entirely by borrowings or loan from the bank. You don't actually put any equity in acquiring it, and allow the monthly rental collections to pay for the instalments. In practice, you would still need to put "some" money down, initially as the down payment, but at the end of the transaction, you should get your money back from the loan, which makes it, "no-money down".
What are the caveats?
An important caveat is that you do need some money to start with, as a deposit, perhaps up to 10% of the property price. But, because you can buy "below market" (see my earlier blog on this topic), and can find a bank that will loan you the full price, you don't come up with a cent (of equity).
The second is that your monthly rental income, must be more than your instalment amount. There's good leverage and there's bad leverage. If you are highly geared, but don't have the means to pay for the instalments, you are looking for trouble. I would also budget in a small "buffer" on top of just covering the instalment, just in case. You could lose the house. But if you can cover the loan instalment, then you are set as essentially your tenant will be paying for your house, adding a little equity every month until its all yours in a few years time.
The third this is. You would probably not be able to buy every single unit with "no money down" in other words, have the bank finance 100% of the property for every unit you buy. But, on aggregate this is possible. So, if you buy 10 units, you may have say 7 or 8 units which you are able to get it entirely financed by buying at below market, while others, you are paying market value, and financing it up to 90% margin, for example. So, the aim is to buy on aggregate, with as little money down as possible. This will just increase your return on cash ratio through the roof.
I will talk more about the actual mechanics of executing this transaction in the Malaysian context in my next blog. In summary, yes, this business of buying with no money down, can be done and has been done, but mind the caveats; the returns are fantastic but there are also risks involved.