How to Buy a House for $0

"How Can I Buy a House for $0??"

I get asked this question frequently - and yet - I don't get asked this question nearly enough. Most people assume that to be a real estate investor, you have to start with lots of money. The good news:  

You don't have to be wealthy to invest in real estate.

You can invest in real estate even if weren't born with a silver spoon in your mouth. How, you ask? Here are the 6 steps to buying a house with $0.

Normally you'd need 20% down to buy an investment property. But at some point that model doesn't scale. Even if you're in a market with properties at a median price of $100,000 you would still have to come to closing with $20,000 + Closing Costs. It's far too much to build a portfolio that allows you to reach financial independence. Where do you start?

Step 1: Buy a Cheap House

Buy a distressed property that needs some work. You don't want a property that's pretty, you want a property with potential. These properties tend to have good bones, are in a reasonable part of town, but need some paint, an update here and there, and a little bit of TLC. 

Step 2: Rehab

Don't know how to repair windows, hang drywall, or run electrical? No problem! The goal with real estate is passive income, not creating a new job for yourself as a contractor. Hire a high-value contractor to repair the house up to rental grade. You're not looking for a Chip and Joanna Gaines house, you just want something that will rent well and hold its value. So forget the quartz countertops. You're not building a Cadillac, you're building a Camry. 

Step 3: Borrow the Money

Here's the best part: you don't have to front the $70,000 up front - you can get a loan for it. Lots of lenders will lend short term loans that act as cash for your initial purchase and rehab. You can get this loan from a private lender, hard money lender, or even a bank (if you have enough time available to close on the property). The loan would incur an interest rate, so you're only paying to 'rent' their money since you'll be giving it back when you refinance. If you had a loan at 12% interest (1% monthly interest) and you held this loan for 4 months, the cost of the money would only be $2,800. We'll talk about how you'll pay for this without your own money in Step 5. 

Step 4: Appreciation

Once you've repaired the house, its value returns to the proper value of a house in good order in that area. If comparable houses in that area appraise or have recently sold for $100k, you've just created $30,000 in equity. Equity is value in the house that you, alone, own. That $30,000 is your money outright. 

Step 5: Refinance

Now that you've created equity in the property, it's time to put it to good use. You have a $100,000 property but owe a $70,000 note. You take that property to the bank and tell them you'd like to refinance your current note. You can find local banks to finance 80% of the value or the property (also known as Loan to Value or LTV). If the bank finances 80% LTV, that's $80,000 you have at your disposal. You use this money to pay off the $70,000 loan and establish a mortgage with the new lender, which will spread that $70,000 principal over 20, 25, or even 30 years. By doing this, you've greatly decreased your monthly payment (increasing your cashflow). You'll use the leftover $10,000 to pay for those $2,800 of holding costs we talked about in Step 3. That leaves you with $7,200 left to finance closing costs, additional rehab expenses, mistakes, or other costs. If you don't use it all - you can cash it out when you refinance! Getting paid $7,200 for a cash-flowing property isn't a bad deal!

Step 6: Rent and Repeat!

Once you've refinanced your mortgage payment will be lower. Once you pay your mortgage, taxes and insurance, property manager, and even saved for future expenses like vacancy, maintenance, and capital expenses (like a roof, HVAC, or foundation repair), you still have ~$400/mo after expenses in your pocket to use however you want. This is what's called Cashflow!

The Impact

$400/mo might not seem like much. But consider this: if you knew this process and could get one property every three months, that's 4 properties a year. In your first year you'd be making $1,600/mo of passive income. Do this for 3 years and you're looking at $4,800/mo - the equivalent of a $75k/year income since the income is tax free! 

Now only one question remains:

What would you do if you had $75,000/yr in passive income?