No money down property investing in a nutshell

8 January 2020 | Investment

I want to talk a little bit about what I do in property. I’ve been sharing a lot of content over the last few weeks. I keep getting messages from people saying, so, what exactly do you do? What’s your day-to-day job in property? What is a day in Kevin’s life look like?

What I thought I’d talk to you a little bit about is, No Money Down property investing. No Money Down investing is what I do. I’ve built my portfolio on it. When I started in property way back in 2003, I made loads of mistakes. I bought property in the wrong areas, in the wrong way, and I lost a lot of money. And I took about 10 years to recover.

In 2013, when I found Progressive, I was actually in a pretty bad place, in terms of financially and also, in my mindset. And trying to get out of a debt, there was only one way I could do property, and that was using No Money Down investment techniques. Because I literally didn’t just have no money, I had debt. So, I had to get creative.

People say to me all the time, no money down property, it’s not possible. You can’t do No Money Down. Well, actually, you can. It gets to me sometimes, when people, they don’t even try to figure out how. They just decide for themselves it’s not possible, without looking at the facts. The facts, are, No Money Down property deals are possible. No Money Down, means literally, none of your own money, very little, or other people’s money.

On other people’s money, it just doesn’t mean joint-ventures, there are lots of other ways to do with other people’s money, which I’ll touch on.

Why would you want to do No Money Down investing?

No. 1, is, a lot of people get stuck in property. They get stuck, because they know what they want to do. They know the strategy they want to do. They want to do single-lets. They want to do HMOs (houses of multiple occupation). Or, they want to do serviced accommodation. Or maybe, they want to do a commercial deal, or a commercial conversion, where you convert a commercial deal into a residential. Or, a buy-to-flip so buy, refurbish and sell. They have an idea of what they want to do. But they have a common problem. And the common problem, is, knowing what you want to do, but not having the money to do it. They don’t have the funds. And this is where most people actually get stuck.

The actual reality, is that, they’re not really a successful property investors, if they haven’t more than 40, 50, 60 plus houses. They’ve not done that, exchanging time for money in a job, saving up deposits. And I see people who’re struggling in property, and what they do, is, they’re spending their time working in a job, trying to scrimp and save every few pennies they can to get together, to try and save up a deposit, the 20-25 percent that they need to buy a house.

The problem with that approach, is, it’s just too slow. By the time, you’ve saved up a deposit to buy your first house, you could have 6 months, a year, 2 years, 5 years passed by, depending on what you can save per month with your income potential. If you don’t even able to save enough of a deposit to buy one every 5 years, you’ve got to end up after 20 years with 4 properties. You are going to run out of life, before you’ve ever created enough income.

The only way to create a big scalable property business, is, looking at No Money Down investment techniques. There are lots of different, what I called, tools in your toolbox that you can use for No Money Down property deals. You can do stuff like, lease options. You can do stuff like, assisted sales, like exchange delayed completions, rent-to-rent, or rent-to-own, or vendor finance.

I thought I’d touch a little bit on some of these, and show you the benefits of how you can build your property portfolio. Just being a little bit creative around how you do a property deal.

The different tools – they’re not strategies. They are tools. You see, you can use a lease option to do a property that you then rent it out as an SA (serviced accommodation), or a lease option on the property that you rent as an HMO, or a lease option on a property that you rented as a single-let.

What is a lease option?

A lease option, is, where you would pay a small initial upfront, what’s called a consideration for a property, which allows you to secure a contract on the house, where you agree the purchase price today, but pay for it over an agreed period of time.

To really make it simple, if you can imagine a lease on a car. When you lease a car, you pay maybe, £500, £1,000 upfront, sometimes even nothing to get the keys of a car. And this could be a 40-50 grand car. You then pay a monthly payment every month, which allows you to keep the keys of the car, to drive the car. And then you’d pay a final payment, say, in 4 years’ time. And the final payment, is, the final balloon payment to allow you to purchase the car. Or, you have the choice to give the car back.

That’s basically, a lease option. We all understand that in terms of how to lease a car. We understand it in terms of how to lease a sofa or a television. But it’s the very same process, the very same principles, when you take an option on a property. The major fundamental difference, is, when you do an option on a car, you take the option to buy something that depreciates in value. When you take an option on a property, you’re taking the option to buy something that appreciates in value.

You lock in your purchase price today. It might be that you agree a price of let’s say, 200 grand, and you’re going to buy the property any time in the next 7 years. If that property goes up in value over the next 7 years, everything all of the equity growth over 200 grand, is your money.

But more importantly, is, you can add value to the properties. If you refurbish it, add a little bit of an extension on, put a conservatory on, or put some new windows, a new kitchen, a new bathroom, or whatever it may be into that property, where you force the appreciation of the property. All that forced appreciation added value, is, your money also, because you’ve still agreed the purchase price of 200 grand.

You’ve got a massive opportunity to control the property and add value over time. But more importantly is the income that you can create during that period of time. You pay a small upfront consideration to get the keys of the house rather than the car. That could be as little as £1. Why £1? A symbolic proof of exchange. Something needs to exchange hands to make a contract legally binding. You then pay a monthly payment every month. That allows you to keep the keys of the house. That monthly payment is typically the outstanding mortgage balance. What the home owner owes on the mortgage to the bank.

You make your money by putting a tenant into the property. You put a tenant in the property who pays the market rent. And that market rent is more than the mortgage payment, meaning, you lock in a profit from day one. You then have the option to buy the property later in an agreed period of time for the agreed upfront price. The tenant looks after the property. The tenant pays you a profit every month. And you purchase the property in the future, once it has gone up in value. A really, really powerful strategy to build the portfolio, where you’re using property to create the cash, and you can use that cash then as your deposit to buy the house later.

That’s just one of the No Money Down tools. But there are many different No Money Down tools. Another one, for example, is, vendor finance. I meet a lot of people who are looking to get into property. I meet people at networking events. And typically, what happens at a networking event, is that, a lot of people are there for the same reason. They go to the networking event, looking for other people who will lend them money. But the problem, is, everybody at the event is looking for the same thing. They’re all looking for somebody to lend them money.

What typically happened, is, somebody goes out, they look for a property. Maybe, they do their marketing. They go, and they find a property deal. They know it’s a deal that works. They have a house. They need some money to fund that property. So, they try and get the joint-venture partner to fund the deal. And they totally miss possibly, the most likely, and the easiest person to joint-venture with, the homeowner, the vendor.

And vendor finance is about getting the vendor, the owner of the house to finance the purchase of the property for you. So, how can’t that work? Well, really simply. The money is in the bricks and mortar of the house. The money is in the property. When somebody has got a property, let’s say, again, it’s a 200-grand house. Maybe, they have a 180-grand mortgage. They sell the house for 200 grand. They are not making 200 grand. They’re making the 200 grand less their 180 that they owe their bank.

Why do you need to go and take out a 25 percent deposit so pay down £50,000 for that house, and take out your own 150-grand mortgage, when you could just take over there, a current 180k mortgage. You let the homeowner be your bank, and service their debt rather than you taking out your own debt, which means that, if you’ve got bad credit, you don’t have to worry about trying to get a mortgage approval from a bank. You can just take on and take over somebody’s current debt, and just service that debt over a period of time. That’s one way to do vendor finance. There are lots of other ways too though.

Another example of vendor finance might be somebody with no debt whatsoever on a property. Again, let’s say, it’s a 200-grand house. They have no debt, whatsoever. And they’re looking to sell the property today. You go to make an offer for the property. You know you’re going to need to come up with £50,000 deposit, 25 percent deposit, £50,000 on a 200-grand house. You’re looking to buy this property below market value. People talk about below market value a lot, because they’re trying to build in equity, build in profit on day one. Well, that’s because they need to go to a bank to take out a mortgage. What if you were to go to the homeowner and say, I want to give you your 200-grand asking price. I don’t want to buy below market value. I want to give you your 200-grand asking price. But what I’d like to do, is, I’d like to give it to you over a period of time.

If I went to the bank, Mr. Homeowner, and I took out a mortgage. I take out a 150-grand mortgage, and it might be at 4 percent. I would rather pay you 4 percent on your 200 grand. So, if you leave your 200 grand in the house, I’ll pay the 200 grand in 5, 6, 7 years’ time. Agree a date. But in the meantime. I’ll pay you 4 percent per year interest on the money. So, let’s say, it was a 5-year period. 4 percent interest on a 200-grand house, would be, £8,000 a year. Over 5 years, that’s £40,000. So, the homeowner will get 200 plus an additional 40 grand. 240 grand for the house.

If you offer somebody today 240 grand for their 200-grand house, there’s a likely chance they might just snap your arm off. And you’re not losing, by the way. Because if you bought it today, it’s going to cost you 50 grand upfront, and you’ll still have to pay the 8 grand a year, but it’s to a bank. Why not pay it to the homeowner instead? You save, not needing a 50-grand deposit. You have the owner as your bank, instead of an actual High Street institution. And the owner gets their asking price, plus interest on their money. You can go in, add value and improve the property, make a profit from the property, and it’s a win-win scenario.

Vendor finance is a massive opportunity to do No Money Down property deals. But you need to learn how to structure those deals, and make sure it’s an ethical win-win solution for both people. But it’s a really, really powerful strategy. I love the strategy. I use it a lot in my business, because it can really help people.

Trying to buy houses at 25 percent below market value, that doesn’t help people. You win, they lose. I see the amateur investors all the time. You see them post on Facebook saying, I’m looking to get into property. I’m looking for deals in my area. They have to be 25 percent below market value. As soon as I hear that, I know that I’m dealing with an amateur investor, because they’re what I called a one-trick pony. They’re looking to do property deals in only one way. They’re not being creative. They’re not thinking outside the box. And they’re not thinking about helping the homeowner solve their problem.

And to be a professional investor, that’s what you need to be doing. I’ve been doing this for a number of years now. I’ve built a big portfolio on the back of it. And now, I teach people. At Progressive, I teach the No Money Down investing. I teach people in detail how to do all of these strategies. It’s really, really powerful. I’m really passionate about it, because these are the things that can really help you scale your business quickly, but help other people at the same time. The only person losing in a creative deal like vendor finance, is, the banks and the Government. You and the homeowner both get to make more money, because you’re working together on that property deal.

Another great strategy that No Money Down thinking, is, assisted sale. If you’re listening in, and you’re thinking about buy, refurbish, sell, buy-to-flip, then my question to you, is, why do you want to buy-to-flip? Why would you buy a house that you know that you’re going to sell on 6, 7, 9 months later? Why buy it? Why not do a don’t buy-to-flip? And I literally mean, don’t buy the house, refurbish the house, and then sell the house.

You see the problem with buy-to-flip, is, you buy the property. As an investor, you have an additional 3 percent stamp duty. So, you have to pay it 3 percent more than a homeowner. You have solicitor’s cost to purchase the house. You have to pay mortgage. You take out a mortgage. You have a mortgage to service, while you’re doing the refurb. You have all the holding costs, the gas, the electric, the Council tax, all of the holding costs. Then when you sell the house, you have the estate agent’s cost, the agent’s fee to sell it, plus more legals. And you’ve going to have a capital gains tax build on your profit.

So, my question, is, why did you buy the house?

Because actually you spend more money on stamp duty, legals, estate agents, capital gains tax than you spend on the refurbishment. Why don’t you joint-venture with the homeowner, and do an assisted sale? It’s different to vendor finance. It’s an assisted sale, where you assist the homeowner in selling their property, that you agreed with them that they will wait a few months for you to come in and refurbish the property, and sell it at a higher price, where you and them then split the profits. You get your money back from the refurb, and you split the profit on that property. You’re making a massive, massive uplift in the value. You will add huge value by doing an assisted sale. And you can give the homeowner their asking price, instead of trying to buy it below market value.

Most people who do buy-to-flip, they have to haggle and negotiate the owner down on their price, 10, 15, 20 percent below value to try and make their number stack. But that’s because in their numbers they’re including stamp duty, capital gains tax, estate agent’s cost, holding cost. But if you do an assisted sale, you remove all those costs on the process. You and the homeowner get to share the profit from the deal, which is, a bigger chunk of profit. Assisted sales is just one other No Money Down investment techniques.

I wrote an entire book on this stuff, called, No Money Down Property Investing. It’s an Amazon bestselling book. It’s on Audible. It’s on Amazon. Go, check it out. Have a read. Leave me a review, if you like the book. But there are some powerful, powerful strategies in that book, that teach you all about No Money Down property investing. It gives you an insight into the different strategies. I’ve touched on 3 of them now.

But there are some others as well. I’d like to quickly touch onto. Another great strategy that’s No Money Down, is, planning game. I see developers, and people are looking to become developers. Maybe, not the big developers, but investors who see themselves as a developer, whether they do one or 2 property deals a year, where they buy a piece a land, or take a garden plot for a house. They’ll apply for planning permission, once they’ve purchased it. If they get the planning, they’ll then build on the back garden or build a couple of houses on a plotted ground.

It’s a really great strategy. But it’s highly risky, if you’re buying in property, then applying for Planning Permission. What we do, is, I use the lease option to, I spoke about earlier, and we secure the property on an option to buy subject to Planning Permission. We then compare as little as £1 for the right to buy. We then apply for the Planning Permission to the Council, to the planning department. We apply for the planning. If we don’t get the planning, we don’t purchase the land. If we do get the planning, then we buy the land. You’re de-risking the process of doing developments by using planning game with an option to buy. So, you’re using 2 tools together to really, really massively increase the likelihood of you becoming successful, and massively reducing the risk of having a huge outlay to buy a piece of land, or a piece of ground, and then apply for planning. Or, even if it’s a property that you want to add value to, maybe get planning permission to convert it to an HMO. Instead of buying it, then applying for the planning to convert into HMO, house of multiple occupation, we would secure the property on an option to buy subject to the approval of the Planning Permission. Then apply for planning. Get the planning. Buy the property. Don’t get the planning. Don’t buy the property. Reducing your risk.

There are lots of different No Money Down tools. I want to touch on one more of them, just one more. And there are others as well. One more. It’s powerful. Probably one of the most powerful No Money Down tools, is, rent-to-own. Rent-to-own – that’s where you use tenant-buyers in your property.

The average age of a first-time buyer across the UK at the moment, the average age is 37. That’s across the entire country. In London and the southeast, the average age of a first-time buyer is mid 50s. Now, with rent-to-own, you can secure a property purchase and move a tenant-buyer into the property. A tenant-buyer instead of a tenant.

The benefit for the tenant-buyers, is, they pay an upfront amount of money to secure the purchase of the property. Then they pay a monthly rent every month plus a bit extra, a top-up. And that top-up is deducted from their future purchase price. But they agreed today. They lock in today a future purchase price for their property. So, that’s locked in. It cannot change. That property price will be higher than the price that you secure the house for, locking your profit in as well.

The tenant-buyer can then build up over a period of time the deposit, save it with your help over a period of 4-5 years so that they can rent and buy at the same time, allowing them to get the opportunity to get on their property ladder. They’re still renting, however, not in the traditional way. if you can continue to rent in a traditional way today, and you don’t buy a property, say, I can’t afford to buy a property today, the risk that you’ve got, is that, in 5 years’ time, house prices will be way, way higher than they are today. And you’re not saving money quickly enough to save up that deposit. And you’re getting further, and further, and further away from it. Everybody has to own your home.

With rent-to-own, the buyer gets to put a stick in the ground, lock their purchase price in today, and then at 4-5 years, 6 years even to save up towards in being able to buy that property. Massive benefit for them. If you’ve bought a property today, and you took out a mortgage, you would technically still not own the house. You have a mortgage.

In this scenario, we are basically their bank. They have a rental amount that they give us every month, which is, equivalent to a mortgage, and they pay an extra bit, which is, the repayment portion towards the property. But the tenant-buyer, if you currently don’t own a house, you should be looking to be the tenant-buyer. However, if you do own the house, you’re already in your own home. Then you should be looking to do this with other people, helping other people get on the property ladder.

So, there are 5 of the No Money Down strategies. In my book and on my trainings at Progressive, I cover a lot more strategies. We’re going to real detail around exactly how you can structure these deals, how you can build a property portfolio using creative No Money Down investments strategies. Yes, money is needed. But hopefully, you can see from what I’ve just discussed here, that it doesn’t have to be your money. It could be a joint-venture partner’s money, It could be the vendor’s money. It could be the tenant-buyer’s money. Other people’s money, not just joint-venture partner money in terms of another investor. Other people’s money. There’s money everywhere in the world today. Your knowledge on how to use the tools allows you to be able to expand your portfolio quickly, using creative strategies.

That is No Money Down property investing in a nutshell., You’ve been listening to the Progressive Property Podcast. Remember, the podcast is out every Tuesday. It’s on iTunes and Stitcher. Make sure you subscribe. Make sure you’re listening in every week. We’re sharing different property investment stuff every single week, to help you on your property journey. I’ve been Kevin McDonnell. You’ve been awesome. See you next week.

This post has been originally featured in Progressive Property