How Does One Buy An Apartment Building With No Money Down?
Truthfully how does one buy an apartment building with no money down? I mean, the idea of buying an apartment building with a multi-million dollar price tag, without putting any money down just seems preposterous! Is it real? Can it be done?
It is very real, and yes, it can be done. There are probably a few thousand apartment entrepreneurs across the country doing it right now. Let’s break it down and look at it, because once you understand apartments a little more you’ll see that buying this way is just the most effective way to put deals together.
First of all, “no money down” is misleading. There are always down payments made on apartment deals. Paying a down payment is the only way for a lender, or seller if owner financing, to minimize the risk they incur by extending purchase money financing. The more down payment the buyer puts in, the more likely they are to make the payments. End of story. So no seller or lender is going to extend 100% financing on any apartment deal, there will always be a down payment required.
However as an apartment entrepreneur, you don’t put up your personal money for a down payment. To cover the down payment, closing costs, fees, earnest money, rehab cost, and any cash requirement the deal has, the smart thing to do is use Other People’s Money.
In French, entrepreneur means ‘problem solver’. Let’s face it, an apartment entrepreneur’s entire brief is to take a property which is essentially just a giant mass of problems, and one by one, sometimes two or three at a time … solve them. And that applies at the very beginning, when you are buying the property.
Apartment deals require a lot of money to buy, and often, a lot more as well to get rehab done. The bulk of the purchase price is covered by a commercial lender. Commercial lenders have hundreds of millions of dollars they need to get out. Believe me, they want your business.
But you are worried your net worth or income is not high enough to qualify for a three million dollar mortgage. That’s OK. The lender isn’t looking at your income statement to make sure their payments will be covered, they are looking at the property’s income statement. With 20 to 30 percent down payment, a good debt coverage ratio, and a good management company in place to manage the property after you take title, commercial lenders are happy to provide you with 70 to 80 percent of the purchase price of your deal.
That leaves the not inconsequential issue of, where does the cash for a 20 to 30% down payment come from? If I’m buying 250 units for $4M, that means I have to raise a million dollars for the down payment! Geez! How … … ? Well, you are an apartment entrepreneur, remember? A problem solver. You need money to buy an income property that is going to produce a very healthy return. Who has money receiving low returns right now, say 2%, who would be thrilled if they could place their money a real estate secured investment that gave them a much higher return, say, 10%.
The answer is, millions of people all across the country. There are people with money in self directed IRA’s, many people have thousands, even millions, just sitting in CD’s while they collect the interest. There are other investors doing 1031 tax deferred exchanges with real estate sale proceeds they need to get reinvested before a certain deadline. There are other investors in your local community, there are attorney’s, accountants, doctors, dentists, the list goes on and on. All with money to invest.
You could call these people with capital seeking safe, high returns, private lenders. Or more generally, private money. Despite what you may think, your community is awash in private money seeking the safe, high returns you offer with your apartment deals. Your job is to put your deal together, package it as an investment opportunity for them, showing cashflow numbers, how you are going to increase the value of the property, how they are protected, and then make it available to as many potential private money investors as possible. What you don’t know just yet, but will be pleasantly surprised by, is when you do this, just how much private money shows up in your own network, and how quickly it materializes.
Private money doesn’t show up just for the sake of it though. You must be offering an extraordinary deal, in every respect. Two, three times the return, with absolutely no way for them to lose.
All of this is possible with a profitable apartment deal. You are taking a troubled apartment project, investing in and restoring it to it’s highest and best use, releasing a lot of cashflow and value. The tenants benefit, the local community benefits, and by clearly showing this to potential private money lenders you give them the chance to be part of the adventure and profit with you.
When you start looking at an apartment deal through the lens of an entrepreneur you start to see all of the opportunities for solving problems with win/win solutions. “No money down” was a sensational marketing device for an ’80′s era information marketer, however it is not representative of how you go about funding an apartment deal.
You are better to shed the antiquated notions of “no money down” and instead don your apartment entrepreneur’s hat. Look for deals where you can create serious upside value, make a compelling case to your private money backers, and let your great adventure begin.