“No Money Down…”  A phrase widely used in infomercials and by many proponents of real estate investing.  Does it exist; certainly.  Is it a good idea; sometimes.  Will it work for you; almost certainly not. 

After 2007, many zero down financing programs dried up, making the possibility of purchasing an investment property with no money down challenging.  Traditionally, no money down financing was reserved for investors who planned significant renovations to their property.  For example, if an investor wanted to buy a $50,000 home, and then perform $20,000 of renovations, it would be possible to get a loan for $55,000 or more.  The interest rate on these loans was usually significantly higher than a traditional investment loan, but it provided many buyers the advantage of securing property with no upfront equity.

Hard money lenders also filled the cash void for many investors before 2007.  If an investor identified a good investment opportunity, they could secure a traditional investment loan (80% Loan to Value) and then get a hard money lender to supply the 20% down payment.  Hard money lender traditionally charge rates above 10%, but again, they provide a way for an investor to secure an investment property for little or no cash equity.

While this strategy is high risk, it has significant advantages.  First, none of these loans are recourse.  This means that the only recourse the banks and the hard money lender have is the underlying property.  This will certainly do a number on an investor’s credit rating, but their home, other investment properties and personal possessions will remain secure.  As a quick aside, every investor should read every page of every document they sign.  Never sign up for recourse debt, ever.  Second, this strategy allows an investor to expand quickly.  Depending on the investment strategy, this can be a great means of securing multiple properties fast.

Numerous risks exist with this financing strategy as well.  Investors traditionally have to hit a homerun with a property to make this financing worthwhile.  At a 12-15% interest rate and a short term maturity with stiff penalties, any hiccups in the project could totally derail the investment.  In a rising market, this risk might be very manageable, but in a falling or even a steady market, this risk can overwhelm even the most experienced investor very quickly.

Like all financing, a No Money Down financing strategy is a tool.  This tool is very dangerous, even in the most capable hands.  Before an investor jumps into the No Money Down market with both feet, he/she should be well aware of the risks and expect to hit a homerun on their project.