By guest contributor Gerald Tay
Some “property experts” claim that anyone, including ordinary investors, can own properties easily either with “No Money Down” or “Little Money Down”, and make people pay ridiculous amounts of fees in property seminars just to learn from them.
In this article, I am going to share some of these strategies with you for FREE! But beware – even though some of these strategies may be applicable to an educated investor, they do come with many risks ordinary investors may not fully comprehend.
Between early 2000 and 2005 in Singapore, to help support the local property market, the Loan-To-Value (LTV) was raised from 80% to 90%. The minimum cash requirement was also reduced from 10% to just 5%. In other words, anyone who bought properties during this low period would qualify as buying property with very little money down.
However, government policies always change according to market conditions, and today, if one were to have an outstanding mortgage on an existing property, the Loan-To-Value is now just 60% for the second or greater loan, requiring a hefty 40% down payment. A $1 million property would require you to cough out $400,000.
That’s one of the many reasons why, today, one would see many advertisements touting how anyone can buy properties with no money or little money down, just to lure investors to invest on assumptions of a low interest rate environment.
So what are some of these “No Money Down” or “Little Money Down” deals and strategies? And are they even applicable for the ordinary investor?
1. Borrow money to pay the down-payment
This first strategy would be for an investor to borrow the down-payment from friends, relatives, bank overdrafts, credit lines and even insurance policies with substantial cash value. One can even borrow from an existing private property which has appreciated significantly in value to obtain the cash for the second property’s down-payment.
The risk is that unless the investor can ascertain for sure that the property invested is indeed a great property with very good cash flow to repay the debt leverage, the investor could get into serious debt obligations.
2. Co-Invest with other investors
The second strategy involves an investor partnering others to buy a property together. If a property cost $1 million and the required LTV IS 80%, the down-payment excluding other upfront costs is $200,000. If there are four investors in a group, each investor need only come up $50,000.
The risk is that unless one can find a group of friends or associates who share very similar investment objectives and have proper legal documentation drafted, most often than not, many of these deals end up badly. For example, one of your co-investors may need to exit earlier than expected due to an urgent need for money, or even death of a partner. Or worse, all partners face equal legal obligations should one partner go bankrupt or choose to default on the loan payments.
3. Co-Invest with other investors using Central Provident Fund (CPF)
The third strategy is similar to the second strategy above – the difference is in the use of one’s CPF funds. Assuming that one investor does not qualify for a bank loan but has cash to support the down-payment and mortgage payments, and another investor is able to get a bank loan, but does not have sufficient cash to invest, then they may come together as partners. So the investor who does not have sufficient cash to invest can tap on the investor with cash, which becomes little or no money down for him in this case.
The risks are similar to the second strategy using cash.
4. Buy overseas property with no money or little money down
There are many overseas properties that can be bought for as low as $5,000 or even with no money down through special arrangements with the seller in that country. In the USA for example, there are many cheap properties one can buy and some can even be bought with no money down through a scheme called “Seller Financing”. It enables the buyer to own a property by having the seller pay for the down-payment.
Buying a cheap overseas property has inherent risks and may not be suitable for most ordinary investors. Even experienced local investors are extremely wary of such properties – what can a foreign investor who is unfamiliar with the foreign territory expect?
Such shady properties are often located in bad crime-ridden areas, with low income tenants who cannot afford to pay rent. Or they come with hidden maintenance issues which can eat into an investor’s returns. There are crafty sellers who offload such properties to ignorant buyers and conceal many of the inherent risks of buying such properties.
Even if it’s 100% financed, a bad property is a bad property!
Quality properties in good locations rarely, if ever, have motivated sellers. Unfortunately, the “gurus” have made buying no money down more important than buying quality properties. How you finance the property isn’t as important as buying a property that will be a sound, long term investment. In other words, buy only quality properties with investment value. Even if it’s 100% financed, a bad property is a bad property!
As Warren Buffet puts it wisely, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” And this applies to property investment as well. A smart investor will invest in enough education before entering into any investments. The return of your investments is dictated by the amount of education you have. Rather than aiming to buy properties with no or little money own, first focus on educating yourself thoroughly. The rest will follow.
By guest contributor Gerald Tay, CEO and Chief Trainer at CREi Academy Group.