This article will discuss whether you can buy rental properties in today’s 2016 market with nothing down. Before diving in though, we need to lay the framework by discussing market efficiency. Indeed, one of the most attractive features of the real estate asset class is that it is inefficient. What do I mean by that?
Efficient Market Hypothesis
Efficient Market Hypothesis is an asset valuation theory which predicates that at any given time the price of an asset is reflective of all of the pertinent information, in which case the price represents the “fair market value”. Efficient Market Hypothesis gained popularity in the 60’es applicable to the stock-market.
Indeed, if you think about it, the tape at the top of your screen on CNBC which scrolls the prices of shares is the same thing all investors see at any given time. If you want to buy shares of Tesla, you will pay the same price as everyone else placing the order at that moment in time. There is no negotiation around it – the price is, what it is…done! (unless you do things that are illegal…)
Real Estate Market and the Efficient Market Hypothesis
While the EMH may have its’ place in the paper markets, after all, this is the basis of value investing propagated by the likes of Warren Buffett, obviously things work very differently in the real estate market.
The price-setting mechanism in the real estate, as you know, very much involves negotiation, and culminates with something called the “meeting of the mind”. One thing is for sure – the price of an real estate asset is not the same for everyone at any given time. The price is what you are able to negotiate!
Why Do I Talk About Efficient Market Hypothesis?
This article is not about price-setting in real estate. Instead, the reason I made a point to draw such a distinction between efficiency and inefficiency is to point out that real estate as a marketplace is in many ways just “anything goes” kind of a place 🙂
Indeed, how much you pay for stuff is a function of how well you negotiate. How you pay is also totally open to negotiation and creativity. When is also subject to the meeting of the minds. Literally – the real estate market as a whole is transacted on the basis of two entities agreeing on something that makes sense for both. This is in fact what separates real estate from any other market, and this is indeed what makes it so attractive.
So – Can You Buy Rentals with Nothing Down in Current Market in 2016
The simple answer is – Yes. Because of all of the things we discussed above, relative to the inefficiency of real estate, it should be evident that nothing down is as much an attribute of this marketplace as anything else. Not common, necessarily. Not easy, for sure. Requires much understanding of collateralization, and how lenders think – definitely. But, a possibility at any given time with any given asset. Such is the essence of the real estate market.
Blended Debt Financing
The thing you must understand is that you are unlikely to walk into a deal whereby the seller will finance 100% of your debt. In fact, it’s very difficult to imagine 100% financing with only one source of debt.
In fact, 100% financing is usually achieved with a blend of debt/equity. The bottom line to it all is this – if you are buying an investment property, and not writing a check out of your account, then you’ve achieved 100% financing. Other people or institutions may have had to write a check, but as long as it’s not you…
Case Study of Blended Finance
Below is a little screenshot video walking you through a case-study. This conversation took place on my Mastery Circle Facebook page. Mastery Circle is a platform I created to support the endeavors of the most serious investors. MC is by invitation only, and only for the Cash Flow Freedom University students.
Take a look at the video – I think you’ll learn something…
What are you thoughts and questions?