Don’t Get Down About Down Payments—Part 1 of 2

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Have you ever looked at a deal and though, “that’s too much down—that wouldn’t be a good deal”?  Or perhaps you’ve thought, “I just don’t have enough cash to make that big of a down payment?”  It’s OK, we’ve all thought that before! But having that mentality can cause a huge problem:  we can too quickly and easily dismiss and disqualify opportunities just based on their down payments…and cause us to miss huge opportunities.  In this episode—the first of a two-part series—Jeff explains that “down payment is just a snapshot in time,” and shouldn’t be a deal killer.  

Episode Transcript

Have you ever been looking at a deal, looking at an opportunity and looking at the down payment that you think it’s going to require? And feeling discouraged by that down payment? Maybe you’re thinking to yourself, I don’t, I just don’t really want to put that much money down at all, even if I had it, I would want to put that much money down, or maybe I don’t have that much money that I could put down, and it sort of either kills your enthusiasm for the deal or actually just totally disqualifies it in your mind. You think I there’s no point in even looking at this? Because I can’t do that down payment or that down payment just doesn’t make sense. Well, in this episode, I want to help change your mind, because I don’t think those are good reasons to turn down your evaluation of a potential great opportunity. So Let’s cue up the theme song and I’m going to talk to you today about why I don’t want you to get down about down payments. I want to help reframe that. Let’s do it.

Welcome to Racking Up Rentals, a show about how regular people, those of us without huge war chest of capital or insider connections, can build lasting wealth acquiring a portfolio of buy and hold real estate. But we don’t just go mainstream looking at what’s on the market and asking banks for loans, nor are we posting We Buy Houses signs are just looking for “motivated sellers” to make lowball offers to. You see, we are people-oriented deal makers, we sit down directly with sellers to work out win-win deals without agents or any other obstacles, and buy properties nobody else even knows are for sale. I’m Jeff from the Thoughtful Real Estate Entrepreneur. If you’re the kind of real estate investor who wants long term wealth, not get rich quick gimmicks or pictures of yourself holding fat checks on social media, this show is for you. Join me and quietly become the wealthiest person on your block. Now let’s go rack up a rental portfolio.

Hey, thank you for joining me for another episode of racking up rentals show notes for this episode can be found at thoughtfulre.com/e173. Please do us a big favor by hitting the subscribe button or the Follow button or whatever it’s called these days in your podcast app. It really helps fellow thoughtful real estate entrepreneurs to find this show onward with today’s episode.

Well, there’s a sentiment I’ve heard many, many times out in the real estate investing community about seller financing, specifically, and a lot of people seem to feel like the only reason to do seller financing is because it comes with a low down payment or that it can come with a low down payment or similarly, they feel like oh, it’s a great seller financing opportunity, but then the seller wants too much down. And that’s means it’s not a good deal for seller finance anymore. And I want to start by just saying that that’s just not false at all. The only reason to do a seller financing is not a low down payment. Low down payment might be one of the reasons why seller financing makes good sense. But even if a low down payment is not a part of this particular seller financing deal, it could still be an excellent, excellent deal for lots of other reasons.

I always tell people Heck, you can have a seller who needs 50% down and it could still be the best seller financing deal that you ever did. So today’s episode is not about all the other ways it could be the best seller financing deal you ever did. It’s about that down payment. A lot of people also maybe you’ve had moments where you felt like this to look at a deal. And they think to themselves, a big down payment makes a deal. Bad like they’re thinking themselves. If I have to put 20% down, that disqualifies the deal itself. And what happens is when we think that way, we accidentally rule out what could be a great deal otherwise, because all we’re so focused on that down payment and so why are we so focused on the down payment? Well, usually, I’d say one of two things. I alluded to these in the intro, either we just sort of think in principle, like, I don’t like putting 20% down. The philosophy of that just doesn’t seem right to me, I don’t like it, I want to make lower down payments, because that’s just what I think is right, basically in the world. But the other reason is somebody says, I just don’t have that much money to put down or they’re saying like, well, if I put 20% down on this one deal, I could go find for other deals and put 5% down and I can buy four properties instead of one. And so we let this idea of down payment size. Now size can be measured in absolute numbers or percentages, right? I mean, a $200,000 down payment is $200,000, whether that’s 2%, or whether that’s 50%. But we also get hung up on absolute dollars and percentages, right? We just don’t like the idea of putting say 30% down doesn’t feel good. Does it feel like An investment type of a thing to do. So we have all this freaking baggage around down payments that really, really gets in the way of our decision making, and our analysis of our opportunities.

So here is a key point that I want to make to you in today’s episode. By the way, this is the first part of two parts because as I started writing this episode, I realized, you know what, these are kind of two different points and I want to make them separately. So here is let me give you the punch line today for today’s episode, and then I’m gonna explain it tell you a story about how this apply to my own life. down payment is just a snapshot in time. A down payment is just a snapshot in time. Okay, so what does this mean? A down payment is the amount of cash that you need to come up with, in order to close the purchase. Right? Can we agree that a down payment is the amount of cash you need to come up with to close the purchase? Well, closing the purchase is a moment in time itself, right? You’re gonna close on February 22? At 5pm, so February 22, at 5pm is a snapshot in time you have to have the cash needed to close that deal in that moment, up to that moment, you don’t necessarily need to have the cash after that moment. You don’t necessarily need to have a cash but you need to have the cash on that day in that moment in order to get the deal closed. All right. down payment is not the equity, that you’re going to have trapped in a property forever. A lot of people look at a down payment and they say, the down payment is I don’t want to make that big of a down payment, because that’s money, that’s less money that I have to work with. For other things, right? Gosh, I have to put 30% down on this, then that’s up the opportunity cost of that big down payment is now I can’t do any other deals, or I can’t rehab other properties or whatever I might want to do.

But a down payment is not equity, trapped forever, think of down payment as the cash, you need to get the deal closed, because let me ask you a simple question. Could you refinance that property to take out equity the next day? So February 22, at 5pm, you close on February 23. Could you restructure the financing to take out equity? Yes, the answer is absolutely. Yes. Could you place a second loan on the property, let’s say the next day to recoup some of your down payment. Yeah, absolutely. You can. Now you might be thinking to yourself, Well, Jeff, haven’t you ever heard of, you know, seasoning and this and that, okay, so here are a couple keys. In order to be able to recapture some of your down payment immediately, you have to be very skilled conversant experienced knowledgeable in the topic of tapping into your equity. If your plan is to call a bank or credit union the next day and say, Hey, I bought a rental property yesterday, can I get a home equity loan today, then you need to be prepared to be laughed off the phone, because that’s not going to happen, because that’s not the right lender. For that particular situation, for lots of reasons, right? Seasoning being one of those non owner occupied property being probably another major reason that is not going to go well.

So we need to be skilled in how we’re going to tap our equity. And we have to have the right types of lenders lined up and understand how to work with those lenders. Who would be that so if you’re going to buy a property on February 22, on February 23, you want to place a second loan on that property, which will effectively recoup a lot of your down payment, you’re going to need probably a regular person, you’re going to need a regular person as a private lender, or you’re going to need another seller financing lender who is going to be willing to make that loan and placed that loan in second position on a property you bought the day before. Now, I use this example of refinancing and placing a second loan the next day just because it’s kind of an extreme example. It wouldn’t literally have to be the next day. I mean, could you do this a month later, two months later? Yeah, absolutely. You could but my point to you is this your down payment is the amount of cash that you have to come up with in order to get the deal closed, but as soon as the deal is closed, you can As long as you have the skills and the toolset, start restructuring that financing, placing additional debt on there, in order to get some of your cash back and to effectively lower your down payment a lot. Let me give you an example. Because the point, the punch line here I want to give you is that you need to put together the money you need to put together to close the deal. But that might just be kind of a momentary solution.

So let me tell you a real life story. One time, I wanted to buy a four Plex. And if I recall, the purchase price of the four Plex was like 750,000. And we were going to get a loan from a credit union as the primary financing for this property. So we went down to the credit union and talked it all through and it was going to take, you know, let’s say a couple $100,000 of cash Well, for a down payment to satisfy the credit union, right. So we had about $100,000 available to us, but we didn’t have 200,000. So we could look at this and say, Oh, the down payment is too big and just disqualify the deal. But this deal had lots of upside. It was a gorgeous property and a gorgeous area. Sky still owned it today, I didn’t want to pass up the opportunity. I didn’t want the down payment, that 20%, or 25%, in this case, to get in the way of us closing a deal that actually made a whole lot of sense. Now meanwhile, meanwhile, we were buying a property another property at the same time, with seller financing, virtually zero down small, little crappy teardown house, and we were buying it with almost 100% seller financing where maybe we’re putting like two or $3,000 down, but it’s virtually zero down. And we’re buying it for a low price. So let’s say $150,000, because it was a teardown. So we’re going to walk out of this with let’s just say a loan, a seller financing loan for $147,000. Okay, $147,000.

Now, these two deals were kind of happening simultaneously. So I was looking at this saying, all right, the seller financing loan, I’m going to get from this little tear down house is going to have what we call the supercharged seller financing provisions, it’s going to have the ability for me to provide a different piece of collateral for that loan, right, so I’m going to buy this property, and the crappy little tear down house is going to be the collateral for this loan, but I have the right to provide a different piece of collateral. So this loan is about $147,000. And I’m thinking to myself, Wow, a second position loan on this four Plex. A second position slot would be a great place to put that $147,000. But unfortunately, I don’t own the four Plex yet. And I have to have $200,000, in order to close the four Plex. But if I could close the four Plex, if I could scrape together the money I needed to close the four Plex loan, close a four Plex deal, then I could immediately move the debt over from this crappy little teardown house from that house to the four Plex. And I could just sell the crappy little house to a developer who’s going to build a new home there. And that would give me $147,000 of cash in my pocket, right.

So if you haven’t seen me draw this out in a coaching environment before, just think you own this crappy little teardown house, and you’ve moved the debt off of that house onto a different property. So now your crappy little teardown house is owned free and clear. So when you sell the teardown house, there’s no debt to pay off. So all of the proceeds come straight to you. So here’s what we did. We looked at this and we said, Okay, we need like $100,000 to close this four Plex. After we close the four Plex, then we’ll sell the crappy little tear down house and we’ll move the debt from there into second position on the four Plex. And it will give us a lot of our down payment back, it’ll give us $147,000 of our down payment back.

So remember, we had about $100,000 to work with, but we needed 200 to close on the four Plex. So we were scrambling to come up with the funds needed for that snapshot in time. Only for that snapshot in time. We just had to get it closed. So we went to a private lender. And we made a proposal and said hey, private lender, we need from you actually an unsecured loan of $100,000. And we only need this money for about two or three weeks, here’s the interest rate will we pay you in our proposal, here’s the timeline is less than a month, you will make a great return on your $100,000. And we are going to, here’s exactly what we’re gonna do, we’re gonna take your $100,000, we’re going to close on this four Plex. And we’re going to sell, we’re going to close on the sale of this crappy little house over here, we’re going to move the debt from the crappy little house to the four Plex, which is going to give us $147,000 of cash, which we’ll use 100 of that 147,000 to pay you back. And that is exactly what we did.

So it was a very sort of elaborate way of creating an amazing second position loan that we placed on the four Plex, like very shortly within a couple of weeks after buying the four Plex in the first place. So what is the moral of the story? Well, the moral of the story is, we could have looked at this great four Plex that we really wanted and said, we can make this work, it’s going to take 25% down, that’s no good $200,000 No, we don’t we don’t have that. But that’s not a good investment thinking, you know, but 25% Down $200,000, we could have walked away. But that would have been a mistake, because it’s a great, great property that’s worth at least $1.1 million now. And it’s one of the best properties in our portfolio.

So again, what is the headline I want you to walk away with here today? Down payment is just a snapshot in time. You need to look at the down payment and you need to care what it is you need to know what it is. But you don’t need to feel like you’re marrying a down payment for the rest of your life. You’re committing to a down payment that you’re going to need for a snapshot in time and then afterwards, you can restructure the financing on this new property. You own this new piece of collateral for another lender that will help you recapitalize your own down payment by placing additional debt on that property. In the next episode, we’re going to talk about part two of this topic of not getting down about down payments. And we’re going to tackle the topic of borrowing the down payment because people always ask, Well, can I borrow a down payment? The answer is yes. But there’s different ways that you can do that. And I want to open up your mind to some different creative ways.

That is it for today’s episode of Racking Up Rentals. So again, show notes can be found at thoughtfulre.com/e173 Please do us a big favor by hitting the subscribe or follow button in your podcast app. And even more important would be if you could take a second to rate and review the show on the platform you listen on. Oh my gosh, I would be so grateful. I see all of those. I read all of them. And I’m super, super appreciative of those. Thank you so much for doing that.

Did you know to do we have a Facebook group for us thoughtful real estate entrepreneurs. It’s true. It’s called Rental Portfolio Wealth Builders and we’d love to have you join us over there. Just go to group.thoughtfulre.com and the magic of the internet will redirect you right to that page on Facebook and you can join us. If you liked this episode, please take a screenshot of it, post that screenshot to Instagram and tag us; we’re @thoughtfulrealestate. Alright, I will see you in the next episode. Until then, this is Jeff from the Thoughtful Real Estate Entrepreneur signing off.

Thanks for listening to Racking Up Rentals where we build long term wealth by being win-win dealmakers. Remember: solve the person to unlock the deal and solve the financing to unlock the profits.

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