Cash Flow Forever! by Johnson Jeff K

Author:Johnson, Jeff K [Johnson, Jeff K]
Language: eng
Format: mobi
Publisher: View Point Publishing LLC
Published: 2013-05-01T04:00:00+00:00

Buying real estate is not only the best way, the quickest way, the safest way, but the only way to become wealthy.

Marshall Field

~20~

The Reality of Nothing Down

Why would a real estate book written in 2013 have a chapter about buying properties with nothing down? It is hard enough to get a loan for any real estate investment today, let alone try and get highly leveraged financing.

The overall mentality of our nation has changed with the recent recession. Many people, including myself, do not want to get caught in a situation like this again and will be more conservative with our borrowing in the future. Personally, I will be inclined to put more money down when I purchase properties.

Even though we are currently in a tight lending market that for most of us is unprecedented, things will ease up over time. And when it comes to real estate, most of us have short memories. It won’t be too long before many investors are back trying to obtain as much leverage as they can. There may even be circumstances where I will use leverage if I can safely manage the debt that will be incurred.

But let’s explore the “nothing down” program. Many books have been written that advocate buying property with little or no money down. Usually, the idea is this: Accumulate all this property with little or no cash, and when it appreciates in value, you sell it and make a substantial profit.

On the surface, it sounds too good to be true. Well, guess what? It usually is! This technique might work in a rising market during times of great inflation, but we haven’t been in such an economy for some time. Nothing-down deals give an investor a larger monthly payment—and big headaches—if everything doesn’t go exactly as planned.

For example, let’s say you are able to buy a $1 million building with $100,000 down, which would be considered a highly leveraged transaction. A 20-year loan at a 7% interest rate would give you a monthly payment of about $7,000. Depending on the type of property and other factors, it might be hard to generate enough income from a $1 million property to cover such a steep monthly payment.

For the sake of argument, though, let’s say it does cover your monthly payment and expenses. If it’s an apartment building, what happens when a major employer in your community lays off a large number of workers and you lose 25% of your tenants? You now have the dubious privilege of coming up with about $2,000 per month to feed your investment until you can fill the units back up. What if it’s a single-tenant commercial building and your one-and-only tenant declares bankruptcy? You now have to come up with $7,000 every month to stay current on your payments. That’s not quite the sweet deal you thought it would be.

A number of years ago, an investor in my community bought a large, vacant warehouse building for $1.25 million, which was a great price for the property at that time.

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