In recent years, I seem to notice a trend in Asia
of no or low money down property investments. In essence, these schemes sell on
the fact that anyone can become a property investor without having to put down
any capital or savings.
Out of curiosity, I attended these seminars and
sharing sessions to try to extract the “secrets” of these so-called property
gurus.
The “free” seminars usually start off with the
speaker boasting about the portfolio of 10 or more properties that they have
acquired in a fairly short time. They claim that they have started without
forking out a single cent to purchase them. Over time, using the same
technique, they acquired more and more properties that are now providing them a
secure passive income. The remainder of the seminars usually deviates far from
the property investment topic and focuses on the lavish lifestyle that these
gurus now enjoy.
Towards the end, they usually will either attempt
to market a property investment course or sell overseas investment grade
properties to the audience.
Having exchanged contacts with some of the
attendees, I soon managed to find out the real “secrets” of these gurus. The
bottom line is…Creative Financing!
1.
Borrow Money from Friends or Family
This is one of the simplest strategies is to
employ. Many supportive friends or relatives may be eager to help you kick
start your first foray into property investment and provide you with your
initial funds.
However, there are inherent risks in such investment.
Relationships between friends or family can easily turn sour over money when
there is an unexpected situation. Perhaps they may need the money back urgently
due to unforeseen circumstances or become jealous of your success.
2. Loan
the Money from the Bank
This usually comes from alternate sources of
borrowings and not from the normal property loans.
For example, one could take out a personal line
of credit or overdraft facility with the bank. Another method is to pledge
collaterals in return for credit; the collateral could be stocks & shares,
insurances policies or even another property!
Loans from banks usually come with interest cost,
and non-collateralized loans attract much higher interest than its
collateralized counterpart. Therefore, one must ensure that the property will
be able to command a certain sustainable cash flow before entering into the
investment.
3.
Co-invest With Other Investors
Like-minded investors may enter into a private
agreement with each other to share the cost of the property investment.
Investors could leverage one another’s credit ratings, age and earning power to
maximize the loans from the bank and also sharing the cost and down payments.
Just like any business agreements, co-investment
also entails business risk. Always ensure that detailed business agreements are
drafted out and signed by all parties. Agreements should cover entry and exit
strategies, decision-making authority, voting rights and spell out exceptional
events such as death or bankruptcy of a partner.
Alternatively, investors could setup a company to
purchase the property and use company shareholdings to divide up the property
ownership proportionally. This method can leverage of well-established company
laws.
4. Crowd
Funding
Crowd funding is a method of attracting a large
pool of investors to invest a small amount each via the Internet. The funds
pooled would then be used for property investments or other projects or
business as defined in the crowd funding scheme. Investors can put in very low
amounts of capital to get started.
Under most company laws here in Asia, limited
liability entities may only have up to 50 shareholders or else they will need
to be publicly listed. Therefore, there is no real legal framework to support
crowd funding here in Asia.
Therefore, crowd funding methods would require
some level of trust with the agent. It can be difficult to differentiate legitimate
crowd funding sites versus fly by night scams.
5. Other unconventional and/or questionable
methods
Some of the methods I am about to share here are
rather unconventional and entails much higher risk. Some of these methods are
also be legally or morally questionable and may carry complex implications if
the situation turns for the unexpected.
First unconventional method is a private
arrangement with the seller to extend credit. The seller themselves assist the
buyer with the down payment in which the buyer is obliged to pay interest.
Second unconventional method is to arrange to buy
the property from the seller at a much higher price. After the transaction is
completed, the seller would privately arrange for the excess funds to be
transferred back to the buyer. Thus, buyer would then effectively loan the full
purchase amount from the bank.
Third unconventional method is to sell property
transaction options. In order to show commitment, property sellers usually
require the buyers to put down a deposit (conventionally 1% of the purchase
price) to secure the option to purchase. However, instead of exercising the
option, these buyers would sell the options at a higher price to another buyer,
thus passing on the rights to purchase the property and in the process make a
profit.
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