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Financing is an integral part of any deal, but for new investors it may also be the most difficult. If you are new to real estate investing, your start up funds may be scarce, so what are the options if you lack the money for a down payment? Do you give up hope? Do you pass on the deal? Absolutely not. To be successful in real estate you must find creative solutions to make thing happen. No matter the situation, there are creative financing options out there. As a real estate investor, the more creative you are, the more successful you will become.
Despite what you might hear from skeptics, it is possible to own a property with no money down. No money down does not mean no down payment. It still exists, but instead of using your own money for the down payment, you will be using other peoples money (OPM). It’s all part of creative financing that results in a win-win situation all around.
Option 1: Make the seller your partner
Make the seller your partner by offering equity participation. For example, if your down payment is 20%, then offer the seller a 20% equitable interest in the property. Let’s illustrate how this works.
You are purchasing a property for $100,000.
The seller agrees to 20% interest in the property.
You get a mortgage for $80,000.
If the home sells for $150,000, the seller will receive back his initial deposit of $20,000 plus another $10,000 (20% of the $50,000 profit) for his equity interest , for a total of $30,000.
You’ve made yourself a profit of $40,000 ($50,000 profit – $10,000 to equity partner = $40,000)
It’s a win-win for both parties!
This scenario is based on a rental property. If you are working with a quick flip property, the terms on how the repair costs will be factored in will need to be agreed upon in advance.
Option 2: An equity partnership
In an equity partnership you are working with someone other than the seller, yet the concept is the same. When one equity partner does not have enough to cover the down payment, then give opportunities for others to become equity partners as well. Let’s illustrate how this works.
You are required to put $24,000 down on a property. You give your family members the opportunity to become equity partners. Your dad has $12,000 to contribute, so you give him a 10% share in the house. Your sister agrees to $9,600 and receives a 8% share in the house. Your brother has $2,400 to invest so you give him a 2% share. Now you have your down payment and your family owns 20% of the house.
If you purchased the home for $120,000 and then sell it for $180,000 you will have $60,000 profit. Here is the break down of what your family will receive for their investment.
Your dad gets his initial $12,000 plus $6000 for his 10% equity partnership.
Your sister gets her initial $9,600 plus $4800 for her 8% equity partnership.
Your brother gets his initial $2400 plus $1200 for his 2% equity partnership.
You receive your profit of $48,000 ($60,000 profit – $12,000 for equity partnerships = $48,000).
This scenario is based on a rental property. If you are working with a quick flip property, the terms on how the repair costs will be factored in will need to be agreed upon in advance
It’s a win- win for all parties!
If you are ready to begin investing in real estate, but you don’t have the money for a down payment, creative financing techniques can help get you started. Ask the seller, ask family members, or ask your friends to become equity partners. You can even ask your real estate agent. They may be willing to take back a note for their commission. Investing in real estate is all about getting creative and thinking outside the box.
Source: Guide to Real Estate Investing / Rich Dad Education
Thank you for reading. I hope you find this blog posts informative. Please feel free to contact me or comment with any thoughts.
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