Are "no money down" purchases legit or just another scheme promising quick wealth?
Have you ever heard of the 'no money down' strategy? Is it a legitimate way to purchase a property or simply a get-rich-quick scam? Read this article to find out.
If you've considered purchasing a property in recent years, you may have done a bit of online searching on how to do that, what is involved and how much money you need.
In this search, you may have encountered online courses that can help you to 'Get into property' with 'No money down'. Sounds great, doesn't it? Buy a property without putting any of your money into it; it's almost too good to be true! Maybe that is because it is?
As house prices have been rising consistently over recent years, people have an appetite to get on the ladder and buy a property. Even more so, people now view property investment as a way to leave corporate working life and retire early, living off the monthly income generated by tenants' rent payments. Leave your highly pressured corporate job and have income paid into your account each month without really doing anything. Sounds like a dream, doesn't it?
This increase in online searches and the popularity of living a life of early retirement has caused many tactics to come to the fore.
One of perhaps the most alarming concepts is 'No money down' property purchases. It seems like the perfect solution, particularly if you want to buy a property but cannot save up for the deposit. An answer to your prayers. But, if you cast your mind back to the property crash in 2008, is this not just another way of buying a home with a 100% mortgage? Let's delve a little deeper.
Since the property crash of 2008, mortgage lenders have been more selective about who they lend money to, and it's no longer possible to purchase a property with a 100% mortgage. All buyers must pay a deposit, usually at least 5% of the purchase price.
A 100% mortgage would mean that you buy a property without any equity of your own, and the property is entirely owned by the lender. Of course, this differs from renting because you are paying the mortgage off over many years, but you will not have had to save up any deposit funds before buying and moving in.
The 'No Money Down' concept is where you buy a property, taking out a mortgage for most of the purchase price, but the deposit portion comes from someone else. Whether this is a family member, friend, or private investor. Of course, there is a chance that the family member could gift this money to you, but a private investor certainly won't. So, a loan agreement is established for you to repay that money with an agreed amount of interest.
You pay your investor's money to the property purchase and your mortgage funds, and you move in. Great!
But, the monthly outgoings will begin straight away. You will have an agreement to pay the loan back to the investor each month, plus interest, on top of your monthly costs of owning a property. This is, of course, not a problem if you have the income to support two monthly loan payments. But sadly, this option seems most appealing to people who are perhaps not earning quite much and can't save up for a deposit of their own quickly. It appears to be preying upon those wanting to own a property at almost any cost.
And where do you even find a private investor? How do you ensure that your loan agreement is correct and covers you both legally, protecting you from the investor calling in the whole loan at once. Or protecting the investor from arrears if you struggle to make the payments.
If the investor was interested in investing their money, surely they would invest in property themselves, not give you cash to invest for them? Why would they tie their money up with you and your property purchase when they could purchase a property of their own and benefit from the monthly revenue and the capital growth?
The answer to that question is most likely LIQUIDITY. Buying a property ties your funds up, and it can be hard to get the cash back again if needed. Investing into your property purchase would likely mean the investor would get their funds back faster with a guaranteed interest rate.
But, with the cost of living crisis and uncertain markets, are you 100% sure you can support the mortgage and private loan payments?
Perhaps you have been told to remortgage the property in 2 years for more money and use that remortgage to pay back your investor.
Which you can do as long as your property value has increased and your personal finances have not changed for the negative. But there are a lot of factors that would need to be taken into account if this is how you plan to pay back the investor, and a lot of risks.
As we move into a world with higher interest rates, the return that your investor is getting from you may not be as good as a high-interest savings account, so private investor money may be even harder to come by now than it was before.
And what if the property hasn't increased in value? What if you can't refinance to return that cash - you now have a debt to the investor to pay and a mortgage to pay. The only likely option is to find another investor to pay back the first one, use your savings, or sell the property for the same price (if you're lucky) you paid. Any losses here will be yours - the investor and the mortgage lender will both be legally able to receive the amount agreed upon.
It doesn't sound like the smartest property investment move anymore, does it?
It can work well in a rising market, but as soon as it slows down, you could find yourself in hot water. And how could you predict that the market would slow down two years ago? Especially when the trainer on the course told you it works really well!
Schemes to purchase property will always be filled with risk, and it can be easy to get swept up in the thoughts of property ownership, particularly if you are on a course in a room full of people telling you that it is a great idea. But, it is not a fix-all solution, and you must be careful.
If you are interested in purchasing property and want to understand the pitfalls of these schemes and courses, contact us before paying for any guru or course. It could just save you lots of money and lots of stress!