How Do "Zero Money Down" Property Investment Deals Really Work?
There are a couple of ways that this can be achieved ranging from buying properties with built-in profits and gearing up, using other people's funds/names to truly zero money down deals that come with other risks.
Briefly for those TL;DR types, these are what real estate investment courses out there usually call zero money down deals:
1. Taking out an equity loan (aka term loan, refinancing or gearing up) on your current property to re-invest.
2. Forming a company with investors to buy a commercial or industrial property.
3. Buying an undervalued residential property that allows you to gear up after completion and withdraw all your capital put in.
4. Buying a property under a younger borrower's name using the funds of an older investor.
5. Co-investing with close friends or family members by pooling funds.
6. Buying a property at a higher than market price and getting a guaranteed rental return.
If you're the type who likes long form explanations, carry on reading....
Mechanics and Risks of Zero Money Down Property Deals
1. Taking out an equity loan on your current property to re-invest
This is a very straightforward technique.
1st, you have to have a private or commercial property.
2nd, check with the banks for the equity that you can draw out through a term loan.
3rd, using the low cost of funds, re-invest for higher yielding/alpha properties under a trust or spouse's name.
1. Equity loans are not repayable with CPF so you have to ensure sufficient reserve funds to pay off installments.
2. Over-gearing used to be a high risk in the past where there was no Total Debt Servicing Ratio (TDSR) regulations in place. Nowadays, it's alot lower but you have to factor in the risks of losing your job or being disrupted by new technologies.
2. Forming a shell company with investors to buy a commercial or industrial property
By forming an investment holding company (IHC), investors can come together and co-own shares of the company that owns the property. The directors or major shareholders must take out personal guarantees on the property loan as there is no operating income.
The investors who put down the funds may require that those who put down no money, to be the guarantor for the loan. This helps the company qualify for maximum loan quantum and lower monthly installments.
Sometimes, a finder's share is also given out to the scout who labours over finding good deals, without needing to put money down.
In the event of default in loan payments, i.e. the property cannot be rented out, or if the market value were to drop drastically resulting in a margin call, the guarantor of the loan will have to shoulder the liability of payment or in a worst case scenario, have his personal assets seized by the bank and foreclosed.
3. Buying an undervalued / fire sale property that allows you to gear up after completion and withdraw your entire downpayment
The key to making this work is in finding properties that are selling at genuine fire sale prices.
Step 1: Buy property at a significant discount from valuation
Step 2: Take a no lock-in SIBOR loan so that you can refinance within 6-9 months without incurring loan redemption penalties.
Step 3: Refinance and gear up your loan and free up the "Built-in" equity and receive the capital you put in back into your pocket.
It requires alot of hard work to find such deals but if done right, this allows you zero money down in owning a property.
The usual risks of over-leveraging beyond your own financing capabilities apply and you will not be able to use CPF to repay the "geared up" amount of your loan.
4. Buying a property under a younger borrower's name using the funds of an older investor
This method has been taught in some investment clubs but i do not recommend it.
It involves using the funds of older investors, who do not qualify for much loans or already have multiple properties to their names, and the names of younger investors who conversely do not have much funds but are eligible to buy without additional buyer stamp duties, or take out longer loan tenures.
Privately, they have a prepared and signed agreement that states the shares and profit sharing split when the investment is divested.
As this method is considered an arrangement to avoid stamp duties, it is illegal and legally void. As such, the investor who puts in his funds may lose everything as an illegal contract cannot be upheld in court.
5. Co-investing with close friends or family members by pooling funds
Happens when close friends or family members pool funds together to buy a residential property.
As some of them might already have properties, they will buy it under the one who has no properties, and in return give him or her some shares of the property.
Similar to the previous point, there will usually be some form of written agreement to stipulate how proceeds are shared when the property is finally sold.
This method is similarly considered an arrangement to avoid stamp duties and is illegal and legally void.
Hence, if they fall out with each other, there will be no recourse for those who have entrusted their funds to owner of the property.
6. Buying a property at a higher than market price and getting a guaranteed rental return
This method functions similar to how a car overtrade works where the value is inflated to the banks so that the loan disbursed covers the entire "actual" sale price and no cash is hence required from the buyer.
Usually, such properties are found overseas as Singapore's strict banking regulations prevent this from happening.
Developers provide guaranteed rental returns (GRR) usually do so when the take up rate of their projects are not as fast as they would like it to be.
In order to provide a GRR that is attractive, developers would usually have to inflate the selling price. Hence, buyers are advised to do their own assessments of market prices of comparable projects in the vicinity so that they can forecast their exit plans feasibility.
A bigger risk is the robustness and credibility of the firm making the guarantee as it is possible that the rental payments stop coming in after the 1st few months or years.
Historically, there has been many cases of terminated GRR schemes that resulted in costly lawsuits and heartache for investors so beware.
So, do zero money down property investment deals really exist in real life?
The answer is yes! But most of them except methods 1 and 3 are not worth pursuing unless its with family or friends that you can trust unreservedly.
Hope you found this article useful in becoming a more discerning investor yourself and share it with your friends who are interested in learning more about property investments!
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