The other day one of my mentorship group students asked me point blank: "Exactly how does no-cash-no-credit real estate work?"
There are actually a handful of "versions" on how this works:
1) Getting a property with a lease-option: Essentially you are taking over the payments and ownership (preferably with a land trust or land contract) and offering a "short term" lease option deal where you'll take over the property, get a mortgage on it within 18 - 24 months, then "cash" them out. This is idea for underperforming properties that desperately need tenants and the seller/owner knows he/she cannot sell the property to anyone seeking out a mortgage unless the occupancy is over 85% (which is what most lenders/banks require for a conventional mortgage). If you have credit problems or no money down (or both), this would be the time to start getting it together because you'll have 18 - 24 months the moment you take over the property. In the very least, you'll have to raise 10% in cash and fix any personal credit issues which, even in the worst credit cases
2) Raising capital with private investors: This is much easier to do than most of my students realize. If taking an underperforming property, one that needs rehab, is a bank-owned REO, or something else with huge upside potential, many times you can "sell" the plan of how you plan on putting the property back together from scratch and, most importantly, what the numbers will look like (in cash flow) once you're done. Most investors will put all cash into the deal, especially if you're getting it dirt cheap. If it's a property that's performing on a minimal scale and needs some or no rehab, they'll fork over the 20% cash down payment for it. The "draw" for them is that they'll be able to participate in a cash flowing investment without doing anything and since real estate is usually the strongest and highest yielding type of investment (even over stocks since it's less risky), they love the prospect of getting the full benefit from this type of asset without doing the work.
3) Raising business capital for real estate: This is also pretty easy to do. Of course, it starts with having some decent personal credit or a FICO of anywhere from 680 to 700 (on the low side). Once you have this bare-minimum FICO score, you can start building some business credit pretty quickly. Will you get $500,000+ in cash a few months after starting to build good business credit. In most cases, no. It takes a year or longer to build this type of credit because it hinges on 2 factors: (1) personal credit needs to be hovering around that 800 FICO mark, and (2) you need to have a "seasoned" business that is active and has decent gross-revenue tax returns filed for the past 2 years. However, the part where most students miss the boat is by thinking they actually need $500,000+ for a real estate deal and you really don't. I've changed my personal real estate investing strategies over the past few years and have been focusing on smaller buildings between 4 and 24 units, mostly because they are much cheaper to operate which puts more bottom-line cash in your pocket. The other reason is that putting $100,000 to $200,000 down on one of these deals can take you a very long way and getting that type of cash with built business credit is a lot easier than you think and can happen relatively quickly.
4) Flipping properties using "deferred" transactional funding: This is a highly effective method for taking an SFR (single-family home), fixing it up within a couple of weeks, reselling it a couple of weeks after that, and taking your profits/proceeds out of the middle. "Deferred" transactional funders get their transaction fees at closing and not up front. This means that you can buy a home with 100% cash and essentially "flip" it within a short period of time, getting the profits out of the middle. There is a certain way that this has to be done in order for this to work properly otherwise, if you don't do it right, you'll lose the house you're trying to flip or you won't be able to get it in the first place. This is a great way for new investors to raise capital for larger buy-and-hold investment property deals. The good news about this strategy is that the "deferred" transactional funder doesn't check your credit and doesn't verify income, making this a true no-cash-no-credit real estate deal. You can also flip a small apartment building including a "quad" (4-plex). However, keep in mind that you have a limited time to get in and do rehab so this isn't realistic for deals that require 6 months or longer in construction/rehab work.
All of these strategies work and they work extremely well when implemented correctly. But which one does a completely newbie real estate investor use? What can allow someone to get into the real estate business as quickly as possible and to start seeing money coming in right away?
The answer lies in option #4 above. It's because it's the most easily accessible and doable for new real estate investors and you can literally get started as fast as you learn what to do.
And learning what to do can be in as fast as a weekend!
for more details about what I'm talking about...and how many of my student property flippers are scoring between $25,000 and $50,000 per flip deal!
See you at the top!