How to buy property when you don’t have money

Buying a $400,000 property with just $5,000 money down. It sounds like an instantly dismissible headline on a flyer, but it is achievable if you know what you’re doing.

If you’re a prospective investor, or even a seasoned property buyer, and the concept elicits skepticism, you’re not alone. Most people never consider ‘no-money-down’ or ‘little-money-down’ deals because they believe they are impossible.

There could be any number of reasons you could be interested in buying property with limited funds. You could be a low-income earner or buried in day-to-day expenses. You could be earning a decent salary but struggle to save up enough capital to get your investment ventures off the ground. You could even have a poor appetite for risk and simply want to use as little cash as possible. Regardless of what situation you’re in, these deals can work – provided they have two ingredients.

“First, you have to have knowledge. Then you have to have focus,” says property developer Nhan Nguyen.

Nguyen has been investing in property for over 10 years and has built up a successful property development business from the ground up by specializing in no-money-down deals. His knack for getting projects off the ground without using any of his own cash has earned him the moniker “the no-money-down man” and he believes that without knowledge and focus, investing with limited funds is as impossible as many say it is.

“The key to making a lot of the projects I’ve worked on a success is having the willingness to pitch in hard work. You don’t take no for answer. Some people think that you need to be a professional developer or only be working part-time to use a no-money-down strategy, but that’s not true. What you really need is focus – the commitment to making the project work and the balls to take it on.

“Of course, even before that, you need knowledge. Some of the strategies you can use may seem simple, but you have to understand how they work in real life. You can’t just know about the strategy, you have to learn how to apply it.”

For the uninitiated, what Nguyen suggests may seem easier said than done. It’s one thing to know that you need practical knowledge, but how do you actually acquire it?

According to Nguyen, the trick is thinking big, but starting small. “A lot of people want to do big projects and get into big things quickly. It’s better to start out small.”

Learning about OPM

When trying to wrap your head around the concept of a no-money-down deal, it is important to realise that no-money-down does not mean that no money gets put down at all. It means none of your money. What you’re aiming to do is use other people’s money (OPM) to organise you deals or to net you a buy and hold investment.

This requires some creative thinking. “How can you get other people’s money to pay for your investment? That’s basically the trick to investing with a small amount of funds,” says Victoria property developer Ross Hunter.

Hunter says that you can work other people’s money into your deals in two ways: they can either give you funds directly, such as through a joint venture, or you can access it by using the market. The latter entails getting future buyers of the property to provide you with your start-up capital. Again, this could be directly (through the exchange of contracts) or it could be indirectly (through the bank). Either way, the no-money-down investor is using their ability to research a market, coupled with a nose for sniffing out opportunities, to get into a deal they would otherwise have been left out of.

There are multiple strategies to get into a property deal without putting much money down. Most depend on your appetite for risk and your personal skills. Here are briefly some of your options for accomplishing this:

Little- or no-money-down strategies

1. Buying off the plan

Strategy: Buy a property before it is built and, provided it increases in value by the time it is constructed, borrow against the new value to fund your deposit

Requires: An area where property prices are likely to surge in the future

Buying property off the plan, as in, before the property has been built, can be a clever way to purchase with little funding – although it can also be highly risky.

The benefit of buying this way is that if the value of the property increases rapidly in between the exchange of contracts and development, you can use this newly acquired equity to fund part or all of your deposit.

You have to tread carefully when using this approach. The strategy only works when an off the plan property is purchased at a good price and in a growing market. The development also needs to have a long lead time.

2. Joint Ventures

Strategy: Get a partner to sponsor the upfront costs of the purchase and split the proceeds

Requires: A partner you can trust, who, in turn, trusts you with their money

“If you want to buy into a good deal, and you don’t have the capacity to complete it, then finding a joint venture partner can provide the missing link,” says Real Wealth Australia’s Helen Collier Kogtevs.

Collier Kogtevs says that in a typical joint venture there are two types of partners: equity partners and finance partners. Equity partners usually pay the deposit and buying costs, the finance partner gets the loan from the bank.

This means that if you’re able to secure a mortgage, but lack savings, a joint venture can be a great way to purchase a property. The catch is that you’ll have to share the proceeds of the deal, but as Collier Kogtevs points out, owning part of something is better than owning part of nothing.

“[My] joint venture partnerships have been fantastic,” she says. “They’ve allowed me to accelerate the growth of my portfolio when I had little or no more equity to use as deposits to buy property.”

Property author Jennie Brown has also had great experiences with joint ventures and has used this strategy to purchase property many times over. She says the key to making these projects work is having everyone in the venture on the same page. She recommends setting out a clear budget and timeframe for how long you and your partner will hold the property.

3. Option agreements

Strategy: Get the vendor to agree to an option agreement, where you have the right, but not the obligation to buy the property. Find a way to increase the property value and onsell it for a profit

Requires: A vendor who will agree to an option agreement, usually a distressed seller

When a buyer and seller agree to an option, it means the buyer will pay the seller a specified amount – usually a couple of thousand dollars, depending on the property – to acquire the right to purchase the property at an agreed price until a certain date.

This amount, say $4,000, will usually be credited against the purchase price of the property should the buyer purchase the property. If the buyer does not exercise the option, the seller retains the payment.

During the option period, the buyer has the option and exclusive right (but not the obligation) to buy the seller’s property. Before signing the option, there will usually be a contract of sale already drawn up, which means that if the option is exercised it will be under terms already agreed to.

An investor can use these types of agreements to raise finance if they can find some way to increase the property’s value. This way they can sell the option to purchase to another buyer who is willing to buy the property at its new value and net the profit.

It’s a risky strategy and relies on the investor having two skills: the ability to add value to the property in a cost effective way (such as a cosmetic renovation), as well as the ability to negotiate a fairly low purchase price for the option.

The other issue is that few vendors will be willing to agree to an option unless they have had some trouble selling their properties.

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