For novice investors, a No Money Down strategy will look very different than it will for an experienced investor.  The risks of a true No Money Down strategy are too high for investors just getting into real estate investing.  While many novice investors started with this strategy in 2003 – 2006, 2009/2010 will not be a great time to secure these mortgages.  Additionally, the high costs and high risks of this financing strategy make it a poor fit for the novice investor.

So what is a novice investor to do when they are short on capital?  Take the traditional fundraising approach: Family, Friends, Investment Clubs and well wishers.  Fundraising in this manner not only gets a novice investor much needed capital, but it forces him/her to critically analyze their investment opportunity because they have to present it in a compelling manner to their future investors.

There are critical rules to working with friends, family, investment clubs, etc.  First, an investor should prepare clear terms and spell out exactly what will be done with any funding received.  For example, if an investment property will be purchased for $100,000 and the money received will go towards the down payment that should be clearly stated. 

Next, an investor should create a simple return structure.  It’s easy for non-real estate people to understand a monthly cash flow and it’s easy for an investor to manage.  Returning to the $100,000 example, if friends or family members commit $20,000 for the down payment, an investor should promise a fair return.  Assuming a 10% return on $20,000 ($2,000/year), an investor should commit to paying $167/month and returning the full principal upon the sell of the property.

These agreements should always be in writing.  This is a best practice for any investor and should be no different with friends, family, etc.  The more structure and professionalism an investor brings to the deal, the more credibility he/she will have when pitching their investment.  Be detailed about the role of the general manager and the role of the silent investment partner.  It might be worth having a lawyer draw up a very basic boilerplate contract to use for future deals.

Investors should also try to under-promise and over-deliver.  Never promise unrealistic returns or understate the risk of an investment to secure funding.  This only serves to ruin your credibility and cut off future funding sources when the road gets rough.  Real estate investments carry inherent risk that is only compounded by limited experience in real estate investing.  Being honest and regularly providing information to financial backers helps the novice investor stay abreast of the market and their investment.

Friends, family, investment clubs, etc. offer great opportunities to connect with other real estate investors and secure additional investment funds.  This No Money Down strategy provides capital and important relationships to help grow a successful real estate investment business.