No Money Down is Not Dead

I promise.

I promise that for as long as this blog has my stamp on it to never, ever, under any circumstances to promote multifamily “no money down” deals.  Except for today.

While I say “no money down is not dead” it is on life support.  I submit that most “no cash in”  multifamily deals should not have been done in the first place, primarily for reasons of inexperience on the buyer’s part.  That said, there are a few instances where no cash deals have their place.

Multifamily “no money down” deals are hard work.  Really hard work.  Once purchased, based on the high level of leverage they are even harder work.

So why would anyone want to do a nothing down deal?  

There are two extremes where zero down can work:

  1. To get in the game.   Many people are interested in knowing how to buy apartment complexes with no cash.  It’s a big draw for a novice to buy an asset with no cash.  Some people want in the game so bad they will agree to any terms for the sake of controlling the deal.  NO!  As the saying goes, pride often goes before a fall.  Getting in the game is a worthy pursuit, but don’t shoot yourself in the foot as you leave the starting blocks with your first deal.

As I have said in another post- know your exit strategy before buying.  Consider also; what makes you so special that this deal is being offered to you?   What’s the upside potential if rents remain flat for an extended period?   What is the Debt Service Coverage (DSC) on the closing day?  Is this sustainable?

Individuals wanting to acquire and manage multifamily assets need to know there are multiple pieces to making a high leverage deal work.  Buying a one or two million dollar deal with high leverage not only requires skill on the acquisitions piece but also in operations.

Being able to buy the deal is not the same as being able to manage the deal.   And whereas management expertise can be picked up along the way on a cute little duplex, the same cannot be said for a 100 unit multifamily deal. No one opens a restaurant and then starts searching for a cook.  Management is still a key aspect- even more so with tight margins based on high leverage.

As a straight passive investor in a high leverage deal, there is even more risk.  Perhaps you’ve put up your balance sheet for a piece of ownership.  Unless you are going into the deal with a very experienced operator- run!  The experienced operator often excludes most family members, those you’ve only met online and third cousins, twice removed.   And anyone that you would not trust with the actual cash (this is the real crux of the matter).  If you wouldn’t invest cash in the deal, you probably shouldn’t be putting up your balance sheet as a passive investor.

While so much of this post may seem discouraging, the point is really to be prepared and know the risk.  Have a plan of action from day one.  Have a backup plan and an exit strategy….  All prior to closing.

The motivation for a new multifamily investor is to get in the game.   For experienced multifamily investors, you are already in the game, you know the game well, and adding an additional multifamily asset, albeit highly leveraged, doesn’t negatively impact your balance sheet or cash flow.  It can be particularly rewarding to acquire an additional asset in a city where you have existing operations.  Doing so can have  positive impact on your operations with increased economies of scale as you leverage buying power and staffing.

New and expanded economies of scale including the new acquisition may actually lower your overall costs of operations (on a per-unit basis) as management and maintenance personnel is spread over additional units.  This is where an “OK” asset can become a driver to increasing portfolio-wide Net Operating Income (NOI).   The use of over-leverage, of course, is a two-edged sword.

It’s just not funny how short-term financing is technically really short-term.  Really.  People wait in line for hours to ride a two-minute roller coaster.  That’s what short-term financing is like.  We put in the hours and suffer the wait to obtain the debt, and the ride is over in two minutes (OK- it could be a two-year loan but you get the point- it’s still short-term).

The best protection against having a quality deal implode is to secure long-term financing on as much of the debt as possible.  From that point, your financing focus can be on replacing any remaining debt with equity.  The ancillary debt can be addressed through the sale of a fractional interest in the property, from the sale of other assets and/or from cash flow from the purchased asset or other assets.

Cash flow from other apartment assets in the portfolio can be utilized to sustain the newly purchased, highly levered asset (if necessary).  But this should be transitional, not a way of life.   Cash reserves, cash flow, and impound accounts build a safety net for an owner adding a high-leverage deal into the fold.

In conclusion, while nothing down is not dead, it is a risky business.  It’s not for the faint of heart or those that cry easily or lose sleep about rent collections.  If nothing down deals were an asset class I would estimate that less than two percent of all multifamily deals fall into this category.  So while they do come along, (when they do) its best to be prepared with abilities to manage not only the property but the increased risk associated with high leverage.

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