Sunday, 10 August 2014

How to Invest in Property with No Money Down

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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