20 percent equity without 20 percent down

In recent conversations, I have had multiple people inform me that they were buying real estate investments by finding properties on the MLS. After finding a house, they are paying a 20 percent down payment and likely using a conventional loan to acquire the property. There are certain options that would allow you to put a down payment of 3-5 percent but those options typically require you to live at the property for a certain amount of time. While these might be some of the more common ways to purchase a home, most seasoned investors would rather focus more on a “Value Add Deal”. A value add deal is when an investor purchases an investment property under market value that requires rehab and improvements to add value to the home.

When buying an investment property, specifically a value add deal, you must first evaluate the property by finding comparable homes that have sold within the last 12 months, are within 200 sq. ft. and within a mile of the subject property. These properties will be crucial throughout the entire process. Once you've selected the highest selling comparable properties in the neighborhood, you can determine what the house could potentially be worth once renovations have been made. This process is how we get to the ARV (After Repair Value). Once you have the ARV you will then figure all of the renovation costs needed to help the home resemble the comparable properties previously mentioned. With this information, you can determine the new purchase price using the following formula:

(.8 X ARV) - Renovation Costs = Purchase Price

As an investor, your next step should be to contact a hard money lender for approval (Jacob and I can help with referrals if needed). When using a hard money lender on a value add deal you only need to put down 10 percent of the purchase price and they will finance the rehab. Essentially this means that you are not paying for the rehab costs out of your own pocket. Most people think you have to have the entire purchase price in cash to start investing and that is not the case.

A popular phrase with investors is, “Cash is Trash”. Say you have $100,000 of available funds to invest in real estate. With that available cash, you can contact a hard money lender and leverage those funds to purchase multiple homes at once or you can use all of the available funds on one home to purchase and rehab. The easy choice is to use a hard money lender to purchase and fund the rehab of multiple properties to increase more capital in a quicker fashion.

In short, you can put down 10 percent on a fixer upper using a hard money lender and refinance the home after all renovations.This will allow you to immediately have 20 percent equity and recoup your initial investment. This ultimately will be a better option than having to put 20 percent down on a conventional loan to purchase a listed, potentially over priced house, that would require all improvements to be paid completely out of pocket.