Real Zero-Down Real Estate

“I have found no greater satisfaction than achieving success through honest dealing and strict adherence to the view that, for you to gain, those you deal with should gain as well.”

Alan Greenspan

Can you really make a fortune in real estate without using cash?

In a word, yes.

My longtime friend Peter is doing it right now. Here’s how he does it.

Every morning, he spends a few minutes scanning the Internet and newspapers for homes for sale. When he sees something interesting, he does a drive by. If it looks good from the outside, he checks it out more thoroughly.

When he locates something at the right price that doesn’t need lots of fixing up, he brings it to me along with a simple, one-page profit-and-loss projection.

If I agree with his assessment (and I always do, because he knows our local rental market better than most brokers) and I like the P&L, I give him the go-ahead. He puts in a bid — and if we get it, he’s instantly richer.

Here’s why.

We organized our business as a 50/50 partnership. We are each 50% owners of the properties we buy.

The deal is simple. We each kick in 50% of the down payment, and we each receive 50% of the net cash flow and the appreciation.

Typically, we each put up 11% of the closing costs. That’s 22% altogether — 20% for the down payment and 2% for banking and legal fees.

The catch is this: He doesn’t have to go out-of-pocket for his 11%. He gets 5% for his finder’s fee and 3% as the buyer’s broker. (He is a licensed broker.) That’s 8% overall.

He gets the other 3% from me as a loan. I charge him interest on that loan.

I am happy to lend him the money for two reasons:

• I get 5% on my money, which is five times what I’m getting from the bank.
• I get Peter as a partner — and he’s the best partner I could hope for.

With the 22% in cash, we close on the house.

Because Peter is so good at what he does, he almost always has the house ready to rent and a tenant ready to move in by the day we close. (You can do this if you have a good local reputation and know how to sell rental space, which Peter does.)

Now comes the best part: positive income.

Because of how depressed property values are, we can get very respectable cash flow from our properties from month one.

Let me give you a specific example of a deal we concluded today.

Peter came to me with a 3-bedroom, 2-bath, 1,200-square-foot house in a very rentable part of town. The house was bought in 2002 for $148,000 and sold three years later for $295,000. We bought it from the bank for $76,500. (It was not a short sale. Banks are aggressively moving these kinds of houses now in South Florida.)

We will close at the end of October. He already has a tenant who is happy to pay us $1,350 a month in rent.

After all expenses, we will be netting $375 a month. $375 times 12 months is $4,500, which gives us a 27% return on our cash.

I like that. I don’t know too many ways to make an extremely low risk 27% on my money.

But it’s better than that for Peter. Since he manages the property, he gets 10% of the $16,200 rent. So his yearly net is $2,250 plus $1,620 or $3,850 a year.

Of course, he owes me $2,950 for his net share of the down payment and closing costs, which means he doesn’t get any positive cash until month eight. So the first year he nets about $700. But after that, he’ll be making $3,850 a year on this transaction.

And that’s to say nothing of the appreciation.

I don’t bank on the appreciation, but it is very likely that, in several years, we will be able to sell this property for what it went for in 2002. When that day comes, Peter will have a bonus of about $35,000.

If it takes five years for it to happen, his total profit will be $57,750. If it takes 10 years, his profit will be $73,250.

That’s not bad.

Now consider this: I have every intention of buying at least 20 homes with Peter in the next two years.

You might say that this is not a realistic situation because I am paying Peter a full management and finder’s fee for his work. And, yes, I do know people in my position who are giving their operating partners less.

But those guys will always have to be managing their partners — especially after they start making money on their own. At some point, they will think, “Hey, I don’t need his money anymore. I’ll do the financing myself.”

By being generous with Peter now, I earn his loyalty. And that loyalty will result in his working with me this way even after he doesn’t have to.

I don’t have the time or inclination to search out and manage properties. It requires an attention to detail and a scheduling flexibility that I don’t have. But for Peter, the arrangement is perfect. He’s retired and enjoys his work because he does it well. (And he gets to play golf nearly every day — which means I will never beat him!)

I intend to continue to work full-time for another 10 years. Peter can do what he does very happily for 10 years too. If, at that time, we want to kick back and do nothing, then we’ll sell out and put our money in CDs or bonds or something else. But until 2020, we are golden.

So this is not an unrealistic situation. It is a fair deal for both of us, and that’s what makes it work.

And it is something that anyone can do.

If you are in my position, you need to find someone like Peter to be your partner. If you find the right guy, make the deal I made. Don’t be cheap. It will bite you in the ass later on.

If you are in Peter’s position, look for someone with money. You may have a relative or friend you can partner with. If not, put the word out in your local community.

You might think it will be difficult to find a partner with money. But there are thousands of people out there with millions of dollars sitting in bank accounts who’d love to do what I’m doing — if they could just find a Peter.

You could be their Peter.

PS: If you are the guy with the money, you can make additional income by being the bank. That’s what I’m doing now with Peter. Rather than borrow money from a bank (which is tough to do these days), our partnership takes the mortgage from me. Since I’m assuming an extra risk — the risk of real estate values and rental income going down even further (a modest risk, in my estimation) — I charge a premium over what a bank might charge. I get an extra 6% or more on the money that would otherwise be sitting in a bank account and making me less than one-half of 1%. This is what I call “glicken.”

[Ed. Note: This is just one example of the type of strategies we highlight every month in the Liberty Street League, ETR’s premium wealth-building newsletter. In the October issue, Steve Sjuggerud explained how to take advantage of the depressed housing market to buy waterfront property in Florida at drastically reduced prices. And just a few months ago, real estate maverick Frank McKinney presented a beginner’s guide to real estate. (If you’re hesitant to get in this market, we suggest you check it out.)

Of course, the Liberty Street League is about much more than real estate.

[Ed. Note: Mark Morgan Ford was the creator of Early To Rise. In 2011, Mark retired from ETR and now writes the Palm Beach Letter. His advice, in our opinion, continues to get better and better with every essay, particularly in the controversial ones we have shared today. We encourage you to read everything you can that has been written by Mark.]