Buying Property with "No-Money Down"

Probably the most commonly asked question is: Can I buy a property with no-money down? The straight answer to this is Yes, technically. However, there are some caveats.

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.

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How Did I Get Started (My Story in Brief)

This would be as good a place to start as any, I suppose. How did I started in this business of buying rental properties and why?

Well, I have always been interested in creating passive income, and not so much in the properties themselves. I a little bit weird in that sense, but I have learned from Robert Kiyosaki and all the Gurus on passive income, that it is the cash flow that matters and not so much what the asset is, or how it looks like. Who cares what it looks like if it can create the cash flow that you want? My only criterion really is that it must be legal. And, that is why I have focussed on what you call "bread & Butter properties" which are properties that appeal to the masses. I will define this market as I go along.

Rental properties lend themselves perfectly to creating passive income if you do it correctly. But, how do you buy rental properties correctly so that you can have that positive cash flow coming in, month after month? And, that's what we are going to be talking about in this blog.

How did I start in this?

I started really by accident, when Raymond, a friend of my brother's attended my dad's wake in 2008. We got chatting and after the usual pleasantries, he mentioned that he was busy buying rental properties. I was intrigued and so I inquired a bit more: where was he buying, what was he buying, why was he buying such properties? - all the usual questions.

One thing he said that caught my attention was the word "passive income".

He said he was getting positive cash flow every month from buying flats or what we call apartments. These are what he defined as "bread & butter properties".

The other thing that interest me then was he mentioned that I could also do it.

And, that he could even show me how I could buy with no money down. Wow! that really got my attention. And, so we arranged to meet up after that to talk further about this.

So, that's how it all started. From that one little conversation with a friend and the willingness to learn and to research it further.

Since then, I have acquired more than 20 rental units, one-by-one over a 1.5 year period, and have been collecting positive cash flow every month, after deducting all the instalments and expenses ever since.

The wonderful thing is not so much the number of units which I have bought but the fact is that on aggregate, I have been able to buy them with no money down!

Yes, with no money down. That was the only way I could buy them as I didn't have much money to begin with. My wife and I both have descent jobs but not much savings. But, we have been able to do this by "boot strapping" our cash every month from our salary and also through short term borrowings. Not to mention the fact that Banks are ever willing to loan us money especially if it's for property investing. And, we took advantage of that, and as a result have been able to build up assets worth 6 figures, giving us few thousand extra Ringgit a month (after deducting instalments, etc). One of the prerequisite to buy able to do what we have done is the ability to borrow (or leverage). Even if you don't at this stage, I will show you how to overcome that hurdle.

A few thousand Ringgit a month may not sound like a lot to some people, but hey, it sure goes a long way especially in these tough economic times. Not forgetting the compounded effect when you can invest it into other investments like stocks, or unit trusts. Or, just by leaving it to grow in your fixed deposit account.

What I am going to show you is not about getting rich quick through property investing. That is not the focus here. There will not be any hot tips to point you to the latest property launches where you can make a killing by flipping them. You can call this getting rich slowly as Sumney and Dawson call it in their book "The Weekend Millionaire's Secrets to Investing in Real Estate". It's for people who want to generate, positive cash flow that comes in month after month, while the tenants help to pay off their loans and increase their equity in the property. And in the meantime while you are collecting rental income, those properties are also increasing in value.

Finally, why am I doing all this? Well, I have had many friends who are interested in making passive income and I have showed some of them how to do this one-on-one. It's about time I put this down so that more people can benefit from this.

I hope you will find this blog useful, and that you will support it. And I would love to hear your comments, suggestions and also your successes as you embark on your exciting journey of property investing.

I wish you all the best.

Chris