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What Is A “No Money Down Financing” Deal?

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The term “no money down financing” is used in the UK property market when a buyer arranges to purchase a property using none of their own money or avoids leaving any of their investment capital in the asset.

This doesn’t mean they get the property for free. In many cases, a “no money down financing” (NMD) deal costs a significant amount. The difference is that the buyer uses special techniques to remove all the money they initially invested so that it can be re-used elsewhere – often to buy other properties.

NMD is not new. It’s been around in the UK for quite a while, with the techniques used being the only real change. Readers may be more familiar with this strategy under one of its many other names: for example instant remortgaging, 100% mortgage and even government schemes designed to help first-time buyers into their dream home.

In a boom period, no money down deals are far more common. The major lenders are more generous, the criteria to obtain loans are generally more flexible and, with property prices on the rise, rich investors looking for profitable deals are much easier to find. Surveyors are also less cautious in their estimations of property value when the economy is on the rise.

However, once the boom ends and the decline begins – or worse, a recession – no money down financing techniques become far more controversial and much more difficult to use. The lenders clamp down on borrowers, introduce stricter criteria for their lending and are less willing to take the risks that NMD involves. Property valuations become gloomy, private investors tighten their purse-strings and the outlook becomes much less favourable.

However, once the boom ends and the decline begins – or worse, a recession – no money down financing techniques become far more controversial and much more difficult to use. The lenders clamp down on borrowers, introduce stricter criteria for their lending and are less willing to take the risks that NMD involves. Property valuations become gloomy, private investors tighten their purse-strings and the outlook becomes much less favourable.

There are two important negative factors that any investor considering NMD deals must take into account: the high risk involved and the controversy surrounding the techniques.

On the up-side, no money down financing deals offer significantly increased rewards and the potential to build a large property portfolio extremely quickly.

How “No Money Down Financing” Works

With so many entrepreneurs interested in “no money down financing” (NMD) techniques for building their property portfolio in the UK, the single biggest question is how it works. How is it possible to acquire assets at zero effective cost?

The precise tactics and techniques can change quickly with the economic cycle, so there is little point in covering them in detail, but the general rules remain constant. Understanding them is essential to building any precise strategy for NMD deals.

Firstly, it is essential to buy properties below their market value. Exactly how this is achieved depends on an individual’s deal sources: some people frequent auctions while others employ property finders; some have their own network of contacts in the business and yet others buy deals from sourcing companies.

The method of acquisition is less important than the discount. It is vital to obtain as much discount as possible to cover the other costs involved.

Secondly, it is important to mortgage the property for as much of the value as possible, thus reducing the deposit needed for the initial purchase. Again, different people use different methods for this, such as looking to commercial investors or using specialist investor mortgages from the main lenders.

Thirdly, once the purchase is complete, the buyer needs to keep the property occupied with a tenant or tenants who pay a rent higher than the mortgage amount and other regular or incidental costs. This ensures positive cash flow. Obviously, refurbishment time or rental voids affect cash flow negatively.

Finally, the buyer remortgages the property on an appropriate timeline, varying from the very high-risk and controversial instant remortgage through a more acceptable six-month period to the long-term of a year or more. This removes all the initial investment, covers the purchase costs and reduces the effective outlay to zero.

With positive cash flow and no investment left in the property, the deal can be considered to have had no cost and thus be no money down financing.


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