No Money Down, Think Again

During this hiatus I want to talk about a few pet peeves I have in the real estate business.  This entry is dedicated to the many real estate schemes and scams that you see on television.  Before I rant, I want to say that many of them certainly have the potential to work.  Additionally, many of these products do work, but not the way they claim.  For those of you hoping to be the next Donald Trump for three easy payments of $49.99, think again.  There are much cheaper alternatives to getting started in real estate. 

I want to first give you my credentials so you know how much experience I have and where my perspective comes from.  I am 26 years old with an undergraduate degree in business from Cornell University and am currently one semester away from having an MBA in Real Estate from Cornell as well.  I bought my first house at 21 and have owned about five houses since them turning a solid profit on all of them.  I only say this so that you know I am a reasonably intelligent person with a bit of real estate knowledge. 

I first came into contact with these get rich quick real estate “systems” through my brother.  After I had bought several houses, he mentioned that he had purchased a famous system on EBay.  I thought I might be able to gain some value from it, so I borrowed it for two weeks and read it cover to cover.  Now at this point I had bought two houses and read tons of books.  The lies from this book astounded me.  My most favorite of them is that you can start a real estate business with no money down.  They mention borrowing from relatives, creative financing, mortgaging your current home and other off the wall schemes.  Let me tell you that there are about .00001% of people in this business that started with no money.  And many of them go bankrupt very quickly. 

Let me take a minute to explain the no money down scheme.  First, you have to have impeccable credit and a great property.  Next, you have to submit to what amounts to usury from an interest rate standpoint (10-15% over normal rates).  If you manage to get past all of that you still have to make sure that you meet all the financial hurdles banks set for these kinds of loans or they will foreclose on the property.  Many people who have good credit can lose their home and send their credit scores in the tank from one misstep with no money down loans.  Additionally, if the market takes a turn you often end up with a property worthless than you bought it for with a loan you cannot get rid of. 

The only exceptions to this are the people in ultra hot real estate markets like California or New York City.  Here there will be a lot more competition, but if you can find a good property you make a fortunate regardless of the financing.  Good luck finding that homerun though; there will be at least 100 people (no exaggeration) right there with you. The people that make no money down loans work typically have experience in the real estate business.  If you have good connections and a great property you can make it work.  The rub, of course, is that you will make a much higher return using a conventional loan or even a commercial loan and by the time you get to this point you don’t need a no money down loan.   

Bottom line, steer clear of the many “systems” that you see on television.  If you want to get started in the real estate game, head to Borders or what ever local bookstore is near you and browse the real estate section.  I recommend the following books: Real Estate from A to Z, Rehabbing for Dummies, Profiting from Real Estate Rehab, [Buy it, Fit it, Sell it], and any other basic book on real estate investing.  Steer clear of books that promise you will be a millionaire in a month or that suggest starting the business with no money down.  Read at least two or three books, then start small with an easy property to rehab and rent.  After that, go at your own pace.  If you want to do it full time set goals of say 10 houses this year and 20 the next.  The most important piece of this process is to make the first investment.  Don’t read yourself out of investing.  The sooner you invest the better.  Real estate is not a hard business, but you have to be educated. 

One last thought.  When you see people on television talking about how they made millions in the real estate market, ask yourself why they are now on television selling a “system” and not out making more millions?  If I could make a million dollars a year, I certainly would not waste my time selling junk on television.