Have you ever imagined buying a house for $0? You must be thinking, it’s impossible.
Sorry for breaking your bubble. But, buying a property for $0 is as true as the fact that the sun rises from the east.
To buy an income-generating property that costs you $0, let’s say in a place in Los Angeles.
Might be too much for you to even fathom.
However, there are some twists involved as we’re not talking about buying a property with no money down or doing 100% financing, or taking advantage of a real estate loophole known as the ‘adverse possession’ where you take ownership of unclaimed property.
So, let’s understand how you can make this work without taking any penny out of your pocket.
STEP 1 – FINDING the PROPERTY
First, you would require to look for an income property, let’s say around the mid-city area of Los Angeles.
As the area is close to nearby transit and it is surrounded by several magnificent developments.
It’s also a 15-minute drive away from the beach and most
importantly it’s one of the few areas in Los Angeles where property prices are still selling for under $1 MILLION.
So, when you begin your search you need to keep in mind that the property shouldn’t be too new because you would have to pay a premium for it.
But it shouldn’t be too old either because then it would take too much time to have decent square footage without being overbuilt for the area.
And most importantly it had to be priced below what it was worth. So, you need to cut out your work.
After, you have spent reasonable time searching, writing offers, or getting outbid.
You find the perfect place, which is elegant and just requires minor fixes and all it costs you is let’s assume somewhere around $585,000.
You then decide to give that place a visit and even call the real estate agent concerning it and after seeing the property you instantly realize it is undervalued.
As you are the first one to see it with the advantage of getting your offer accepted before anyone else can stomp over it.
Furthermore, you constantly self-validate concerning how good of a deal it is.
But, we have a quick real-estate lesson for everyone in this field.
You may witness a probable scenario in which the seller prices a home at a competitive price and gets multiple offers.
Then, the seller has all the power and with that can get an even higher price knowing that several people want it and expecting each of them to just outbid each other.
However, if the seller has no one else interested in his/her listed property.
Then, the table gets turned and the buyer has all the power to dictate terms and the price knowing that if they walk the seller has nothing.
So if you know you don’t have any other competition at the moment, you can go for the second scenario or strategy.
STEP 2 – MAKE a TIMELY DECISION
Let’s consider the second scenario in which neither the agent nor the seller has any idea what the home is worth.
The lack of information on the part of real estate agents and sellers concerning the price would eventually let them settle for an arbitrary price.
So, you must pounce on this opportunity and make an immediate and guaranteed offer of paying the full price.
But, you must place this one condition concerning the offer, it should be accepted within a few hours.
This condition wouldn’t give the seller any time to re-analyze himself/herself and prompt him/her to accept with immediate effect.
This action would initiate a chain reaction in the world of real estate and would attract other people with higher bids or offers.
It may happen, for the same property, other buyers would be willing to pay, again let’s assume $650,000 ALL CASH!
$65,000 more than your offer.
But, in real estate, all that matters ‘is time’. For this instance, your timing was way better than the others.
So, after a 30-day escrow, the property will be officially yours.
And, you may put $150,000 hundred and fifty thousand as a downpayment and get a loan for the remaining amount to cover the rest.
We know, you must be having the pertinent question of ‘how this property cost us $0’.
STEP 3 – FIXING THE PROPERTY
We will come to that part, but earlier as we mentioned the minor fixes that may be required on the property.
Let’s consider the minor fixes that cost you roughly $80,000 and consumed your 2 months’ worth of time.
Now, your total investment on that property has gone up to $230,000 which we claimed would be $0.
It’s now time for the ‘magic of real estate’.
As you no longer have a rundown dilapidated property in need of a through-life cost.
Most importantly, what we are trying to tell you is after so much of your investment, now the property is worth more than what you had originally paid for.
STEP 4 – GETTING A REFINANCE!
Moving on to your next step, you should visit the bank and ask them for a ‘refinance’.
It is when the bank will give you a new loan based on the current value of the property, not the price that you paid for it.
If the market value is in your favor you would receive an appraiser for your property.
So, the property that you purchased for $585,000 added to the fixing cost of $80,000, a total of $665,000 is now worth $780,000.
Now, when you subtract the purchasing price from the market value price you will get a great profit of $115,000.
So, given this new higher value the bank will be able to give you a mortgage of up to $585,000.
But, this comes with a catch as the current mortgage is $438,000 and the bank’s new loan is $585,000.
So, the new loan pays off the old loan and that will leave you with $145,000 after paying some transaction fees.
And, the entire amount of $145,000, is yours to grab!
We will explain ‘HOW’.
Well since there is no more loan on the property, it just goes to you.
This means as you were originally $235,000 out of pocket to buy and remodel this property.
We know, your next question will be, but you got only $145,000 back!
You also need to understand that in this instance your out-of-pocket cost to own a property in a place like Los Angeles is a mere $85,000.
We know, it’s exactly not $0 and in the title of the blog, we promised it.
And, we will deliver as we promised, just fully read us out!
STEP 5 – INTEREST-RATE SHOPPING
As, the time spent on the purchase of property in Los Angeles exceeds a year and according to our property predictions, the new outlook with all the fixing issues resolved would attract new talent and new business into the area.
The new tax reforms that came into effect in 2018 since then have brought a spike in real estate deals, especially under $1 million, specific to your purchased area of yours.
Now in addition to this, concerning the recent economic uncertainty which has led to interest rates going down at the time.
You might have to pay 4.6% on your current mortgage of $585,000, quite a competitive rate given, that it was a cash-out refinance.
Since interest rates have gone down, and you were paying just too high so what does any good real estate investor do when this happens?
Well, they go for ‘interest rate shopping’, and you would be doing the same by going from bank to bank to get a quote on a new mortgage.
Again, being hypothetical, you started by getting a quote of 4.2% which would have saved you about $140/month on your mortgage.
It’s not bad but, you could do better by taking that quote to another bank and having them beat it and then taking that quote to another bank and having them do the same.
You will observe that it has soon become a race to the bottom to determine which bank would give you the lowest interest rate just to get your business.
STEP 6 – TURNING the ODDS in YOUR FAVOR
By following this strategy you will get a decent, or should we say lowest 3.75% fixed-rate 30-year mortgage on a cash-out refinance.
Now, from this entirely hypothetical situation, you will be confused and summarize that it has too many ifs and buts.
And, this sort of deal can happen as a fluke, not as a result of a logical decision-making process.
For it to be true it required a third-party appraiser, an increase in property value of the given area, the possibility of another cash-out refinance, and so on.
In this, you are also forgetting the part where the rise in appraiser value of the property according to the current scenario might have raised to $965,000 which is $190,000 higher than what you received in the first instance of this hypothetical situation.
Now, if you take into account another cash-out refinance, given the $965,000 of value, you can be allowed for a $675,000 mortgage leaving 30% worth of equity still in that property.
Similar to the above instance, your current mortgage is $585,000 and the bank’s new loan is $675,000.
As we discussed earlier, the new loan pays off the old one and leaves you with $85,000 in your account after paying some transaction fees.
Now, when you will re-evaluate everything you will find out that you have $290,000 worth of equity in the property.
Therefore, you have now saved an extra $200/month on your mortgage interest payment.
Thus, you have got back the entire investment amount of $235,000.
Leaving a total out-of-pocket cost to own the property in Los Angeles for an absolute $0.
SUMMING UP!
So, if you create a timeline you will find out that the first finance got you $145,000.
The second one, got you $85,000 which was everything you had invested in that property.
So now it’s a ‘FREE’ real estate property deal.
We know, we will have a split audience regarding the $0 as you may think it still had $235,000 involved in it.
We agree with you, but first of all, this isn’t exactly rocket science either and many of you can replicate it and buy a property to get all of your investment back with substantially less money than we mentioned in this hypothetical situation.
Secondly, in real estate, the only number you should care about is the ‘net return’.
It means if you invest $20 into a property for a year and you get all of your $20 back but now you still own the property that’s what’s important to focus on and not the cost of the original $20.
This is how any successful real estate investor should think and reflect the same through their decisions.
Some of you may have the wrong idea concerning the mode of repayment, but you must understand that through this strategy you were your own lender and you paid yourself back with astounding real estate property.
You also must understand the big difference between speculating on real estate appreciation on stated income, 100% financed variable interest rate, short-term loans, and then expecting the market to appreciate and value to pay for that loan.
Against, taking out a 30-year fixed-rate mortgage on an income-generating property leaving 30% equity in the deal.
In real estate, it’s always about finding a good deal, putting your money in it, and making it work for you.
By repeating this strategy and constructing a viable circuit of financing you could soon build up your real estate empire that would ultimately cost you just ‘$0’.
ALSO READ: 4 TIPS to BUY REAL ESTATE with NO MONEY and NO CREDIT