A no money down (NMD) purchase is a way of owning a property without making any financial contribution to its acquisition.
It is about owning a property with zero cost to you at the end of the day.
If it is a strategy you can use regularly, you can use it to build up a property portfolio fast – unrestricted by the challenge of needing to have deposits of at least 20% of the purchase price plus the costs of purchase every time you buy.
With a NMD purchase, a property is acquired by using your own money or a third party’s money.
However, at the point when ownership is finally vested in you, none of your money or the third party’s money is left in the property…you have achieved a NMD deal...effectively a FREE property.
A NMD deal is about owning a property for zero cost on final reckoning.
If you use your own money to facilitate a NMD purchase you should be able to get it back in full when ownership finally rests with you.
If you use other people’s money to facilitate the purchase, there must be enough meat on the bone of the deal to reimburse the amount borrowed or used – together with any interest, charges or fees.
Here are some simple and common ways to achieve a NMD purchase….
1. Use a bridging loan
A bridging loan is a short term secured loan, typically with a high rate of interest, enabling a borrower to cover or “bridge” funding between two events.
Here is how you can use a bridging loan to achieve a NMD purchase:
- You buy a property below market value where you can add significant value by carrying out building works and/or taking steps such as obtaining planning permission, splitting the title or extending a lease
- you pay for everything – purchase price plus costs of any works and/or steps – with a bridging loan
- Once the works and/or steps are completed, you secure a regular long term 75-80% loan to value (LTV) mortgage based on the increased valuation and pay off the bridging loan – including the interest and charges
If everything goes to plan, you will be left with a property not costing you a bean, plus you will have “equity” in it – the difference between the value of the property and your mortgage.
You can also achieve a NMD purchase by operating a delayed completion strategy using a bridging loan.
These are typically the key steps:
- Using part of your bridging funds you exchange contracts on a bargain property with potential for huge value uplift after completion of works
- Legal completion of the purchase is delayed for as many months as necessary to enable your workmen to carry out the necessary value-adding works.
- You use the balance of your bridging funds to pay your workmen and legally complete your purchase when works are completed
- If all goes according to plan, you then refinance the property on a regular long term 75-80% LTV mortgage, clear the bridging loan and pay all interest, charges and fees – without any cost to you.
Another way you can achieve a NMD purchase is by way of an option to purchase.
Briefly, this is how the strategy would work:
- You obtain an option to purchase a property which can grow substantially in value as a result of building works and/or other value- adding steps – such as obtaining planning permission to construct a building or an extension
- Use your own money, funds from a private loan or bridging funds (or a combination of all three) to: (a) pay the option fee (to be applied towards your deposit when you buy), (b) carry out the building works and/or value-adding steps and (c) complete the purchase (exercise the option)
- Later you refinance to realise your gains.
If all goes according to plan, your gains will be sufficient to enable you to repay all sums due upon taking out a long term 75-80% LTV mortgage.
You will be left owning a property with equity for zero cost.
2. Tap into family, friends or acquaintances with money
Getting funds from family, friends or acquaintances is an easier and lower risk alternative to using a bridging loan to achieve a NMD purchase. Bridging loans can be high-risk and can present a range of dangers.
If your plans go wrong and you can’t pay back your bridging loan at all or on time, you could lose the shirt on your back on account of the penal interest and charges which are likely to apply.
Borrowing from family, friends or acquaintances could be embarrassing and possibly uncomfortable but, knock on wood, the financial consequences of default are unlikely to be as severe as with a bridging loan.
SOME AWESOME PROPERTY STRATEGIES
Buy refurbish & refinance (the strategy rooted in adding value to a property)
Flipping property (no I am not swearing, I am talking about doing up and selling)
Property sourcing (finding a property for a buyer in return for a fee)
3. Use your own money
If you are fortunate enough to have the money sitting in your bank account earning the peanuts the banks are offering these days, you can reduce the risk factors even further by backing yourself rather than relying on family, friends, acquaintances or a bridging loan.
And please don’t think you need to be seriously rich to do something like this.
Not all UK property comes with a central London price tag.
In several parts of the country, especially the North East and North West, you can still pick up a run down property with value adding potential for less than £50,000.
Buying for cash doesn’t necessarily mean you need to be a millionaire or “high net worth individual”.
4. Team up with somebody
A further variation is to provide the funds on a joint venture basis. This is great on at least two counts:
- You only have to put in half the money, so the deal is more affordable
- You are spreading the risk; if it goes pear-shaped, you’re not the only one losing your shirt.
If your joint venture partner is a top grade builder, so much the better if you are looking to add value through building works.
5. Higher risk NMD purchases
Although bridging loans are convenient and flexible, they are also costly and high risk.
If you breach a bridging loan agreement – for instance by failing to pay instalments or to repay the capital sum borrowed on time – you could face severe financial consequences including additional, punitive interest and charges, seizure and sale of any secured property or bankruptcy proceedings.
Therefore it makes sense to see bridging loans as “funds of last resort” when looking to do a NMD deal.
If you can use your own funds or the funds of family, friends or acquaintances on a low risk basis, you can look at higher risk NMD strategies such as buying a discount property off-plan.
Here is how an off-plan NMD purchase could work:
- Using your no or low interest funds, you exchange contracts on an off-plan property ensuring that you achieve a large genuine discount when you buy
- In theory, the longer the build period the better – the longer the period for your property to increase in value as it is being built
- When the building is finished, you complete with your own funds and later remortgage on a long term loan with a regular mortgage company.
If you got a 15% discount when you exchanged contracts and say 18 months of healthy growth totalling 15% at the point of remortgage, your 30% equity could be enough to pay all your purchase and remortgage costs – effectively giving you a property for zero cost.
These examples confirm that you can own a perfectly good refurbished property, ideally suited to rent out and attract a good rent, for absolutely nothing by way of financial contribution.
Yes all NMD purchase strategies carry a certain degree of risk; yes you will need to be very knowledgeable, careful and skilful to avoid setbacks, mishaps or outright failure.
However, all the strategies are tried and tested; countless investors have made them work successfully.
If you too want to be successful, it’s about maxing your knowledge, self-belief and action. It’s about you talking to and working with others who have succeeded with these strategies.
So what are you waiting for?
Have you ever tried any of these strategies? If so, how did it go? Please leave your comments below.
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Rebel Property Coach
My website is: www.rebelpropertycoach.com