Can You Buy Property with No Money Down?
I went to my usual eatery this morning. The young prawn noodle seller, Ah Boon, smiled and told me he went for a seminar that told people they can “buy property with no money down”. He laughed that half the room was brainwashed and signed up for the program.
So the question is, can you really buy property with no money down? The answer is “Yes” because I did one deal like that. But I have to warn you that not everyone can do it. In fact, it might not be wise to do so.
The “secret” to buying money with no money down is simple:
1) Leveraging on other people’s money for the initial down payment while you bear the mortgage.
2) The developer “pumps up” the valuation and gives you a “huge discount”. You get the bank loan based on the pumped up valuation and yet pay only the discount price. Hence, there is “no money down”. This is a rampant practice especially in Malaysia. Remember, Malaysia Boleh!
Hence, the title of “no money down” is misleading. The money has to come from somewhere. Either from other people, the bank or some other financier.
Two reasons why I warn doing it:
1) By leveraging on other people’s money to co-own property, you need to have a clear legal structure. Different investors have differ risk behaviors and needs. It is easy to come together thinking to make good money. Staying together is another issue. For example, what if one of your investors passes on before the property is sold?
2) By over-borrowing and over-leveraging, you are more exposed to interest rate swings and market cycle downturns, especially when you borrow at a pumped up valuation. There was once a “property guru” who taught people this “no money down” practice. He was having supper with one of my very good friends, Mr S. Mr S is a very down to earth multimillionaire who owns many fully paid prime properties in Singapore & KL.
This “property guru” boasted about “owning” 50 over properties through high leverage. Many of his properties are not tenanted or TOP’ed yet. At the end of the supper, I asked Mr S on what he thought about the “property guru”. His answer: “Floating Asset. He is living an illusion and he better prays the market doesn’t move against him.”
Thus unless you have a huge stable monthly cash flow that allows you to hold on to numerous investment properties long term. Buying a lot of properties with no money down? Think again. It might lead you to simply “no money” in the end.Earning Disclaimer
“Please note that the material here is provided to you for general information and illustrative purposes only, or as descriptive case studies on how our value-investing principles may be applied. It is not intended to be and should not be construed as any form of general or specific financial advice. For the avoidance of doubt, we do not recommend or provide opinions on how or what you should or should not be investing in, and you should always do your own research and independent assessment before making any investment decisions, taking into account your own specific circumstances. If you require any financial advice on investments or any other financial matters, please consult the relevant professional financial advisers.”