No Money Down Investing
Your down payment and OPM
By
Feb 22, 2006, 09:54

The down payment varies. With some loans, it's 20 to 25 percent. With others, it's as low as 5 percent and, in some cases, nothing. At closing, how-ever, you'll have other expenses¡ªclosing costs, prepaid taxes and insurance, points, and other costs totaling 5 to 10 percent of the sale price. To build up your down-payment account, cut the frills and save. Keep making purchase offers until the seller accepts one.

The premise behind no-money-down books is that property values inevitably rise. Their idea is to buy the property with no money, wait for the property to appreciate, refinance, and use the money to either pay off the original debt or to invest in other highly leveraged properties. Thus, you build your pyramid. I don't deny that people have done well using creative financing and no-money-down purchases. In some parts of the country for short periods of time, this has happened. But, in my view, this strategy has no place with the average investor who lacks the resources and contacts of no-money-down experts. Investors with little equity and high negative cash flows are often forced to sell when faced with a balloon. Also, lenders are often reluctant to refinance a mortgage above its original amount. The go-go years of the 1970s are over. Deflation and depreciation are the new realities, even in the so-called recession-proof Sun Belt. In Houston's nine-month housing collapse of 1983-1984, the market value of the average house fell 15 percent. Buyers who put down only 5 or 10 percent found their properties worth less than their mort-gage debt. In recent years, the value of farmland has dropped. Overbuilding and tax reform have eroded apartment and commercial property values. Local or regional economic problems have hurt real estate. Cities and towns with just one or two employers are especially vulnerable. Beware of the fallacy of appreciation. If your chief motive in buying property is for short-term appreciation, you're gambling. There are surely many easier and more enjoyable ways to gamble than to buy income real estate.

Seminarians speak fondly of OPM¡ªother people's money. They urge you to get into the habit of using credit to extend your holdings so that you can use your cash reserves for other purposes. OPM can take the form of rent advances, multiple security deposits, credit cards, and lines of credit. A variation of OPM in no-money-down deals is using "paper" to the hilt. This means borrowing against the assumed value of leases, paid-down mortgages, car, boat, or land titles, or using promissory notes, including personal lOUs. If paper is accepted, it usually has a discounted market value, especially if its liquidity is in question. But need the obvious be stated? OPM remains other people's money until the debt is paid or the security returned. It's not yours :o gamble. If the carrying cost exceeds the cash-in-the-pocket return, using 3PM can be as debilitating to your estate as opium is to your body.