Real Estate Investing

So what about the mantra we hear from so many different real estate investing gurus? “To learn how to invest in real estate today with no money down, attend my seminar … or read this book … or listen to this tape … or watch this video …” Is zero-down investing really possible, or is it merely an appealing myth that the gurus cash in on?

For the purposes of this article, we are going to assume your investment plan is long-term renting, not short-term flipping. The short answer is yes, zero-down investing is possible. Even if you have to resort to seller financing, you could eventually own property that you could rent (but probably not until the whole thing is paid off). Banks may be a little tighter these days and you would certainly need to have pristine credit, but there was a time not so long ago when lenders happily handed over full financing. We’re reaping the rewards now with the foreclosure circus, but I digress.

The more complicated answer — and the one most people don’t want to hear — is that zero-down investing is not a practical way to invest. Presumably, with 100% financing, you don’t have a lot of cash flow. You may view real estate as a way to generate cash flow. However, unless you plan on being a slumlord, you’re going to have to fix things. The HVAC unit, roof repairs, broken windows or doors, rotting floors … the list of things that could need replacing is virtually endless. Combine that with monthly obligations like insurance, the mortgage, homeowner’s association dues and the property manager’s paycheck, if applicable, and you’ve got yourself a very small profit margin (if any at all).

Is that worth the headache and responsibility of being a landlord? You are on call virtually around the clock, because emergencies can’t wait. Furthermore, with 100% financing, your interest and monthly mortgage payments are going to be sky-high. Your rental income might be enough to cover the monthly payment, but the loan will be stretched out over so many years that you will simply be treading water. It’s certainly not a profit vehicle for you. In fact, it will probably turn into a money pit and you will rue the day you bought it. The Dough Roller blog has a great post about real-world experiences with money-sucking investment properties.

Investment real estate that is paid for in full, or at least purchased with a significant down payment of around 50% or more, is so much more profitable and practical. Don’t sour yourself on the idea of investing in real estate by ruining your first experience with an impractical strategy. This can be a great money-maker, but zero-down investing is not the way to accomplish that goal. If your cash flow isn’t great, you’re better off investing in mutual funds until your cash flow improves. In most businesses, cash is king, but especially in the unpredictable real estate investment market.