The No Money Down Trap

I think this is going to be a real problem for a lot of people in the USA in the near future. I’ve seen areas of the country that are being incredibly over-built. How many people, when they’re buying a new house, find out the percentage of investor-owned properties in the neighborhood? I wouldn’t want to buy a house where the investor-owned percentage is 20%, let alone the 50%+ figures I’ve seen in some areas. Why? And what does this have to do with ‘no money down’? To take a step back, I’m in favor of purchasing investments with no money down. But, I think too many people, mostly inexperienced investors, are not investing conservatively enough. Consider the carrying costs. If you’re flipping properties, you can do well right up until the moment the property values stop skyrocketing. It’s easy to make money when properties are going up 5% per month, just like it was easy to make money on the NASDAQ in 1998. Is it true that all parties come to an end?

If you’re investing in property for the long-term, it’s even more dangerous to use the no money down if you’re doing no money down because you don’t have any money to put down. How are you going to afford the property if the tennant doesn’t pay rent? How much of a cusion do you need to cover carrying costs when something goes wrong?

When is it a good idea to use no money down? When you don’t need to of course, but also when you do have some cash but don’t want to use it for a down payment because you wish to preserve that cusion. Keeping money in reserve is always a good idea, especially when the stakes are so high.

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