The Art Of Investing With No Money
So you want to become an Investor?
Well it really is straight forward is it not?
All you need is some cash or some equity and away you go, you head off find a deal whether it is real estate or a business, evaluate it and then part with your hard earned money…
But what if it bombs?
What if something happens and the market dives?
What if you timed it badly and bought at the top and the next day it plummets, or the company loses its main client?
What if there were another way to invest, without having to uh, invest?
“What’s that?” You ask, “You can actually invest without investing?”
The short answer is yes you can invest without investing your own cash, you will however have to invest some time and most likely a lot of work. You will always have to be willing to invest one type of resource to avoid investing with another.
Let’s have a look at some the ways this can be done.
– Equity, either your own in some type of asset already in your portfolio or perhaps a family member.
People often use this approach after buying their first home, once they have paid down some of the home loan, they refinance and use some of the equity to purchase an investment property that can return some passive monthly cashflow.
This is an awesome idea as you now have another asset, which you can use to leverage and rinse and repeat the process, in order to acquire another property. Building an asset base with real estate is an extremely popular investment model with millions of people around the world for the following reasons:
– An asset that in most cases will appreciate over time
– An asset that can be leveraged in order to get more financing
– Can return positive cashflow
– Can provide some incredible tax breaks that could increase your own personal cashflow depending on where you are and how you structure it.
Yes there are some cons as always with any type of investment as well risks. Though keep in mind that without risk, there will be little reward.
– The market can slump as it did back in 2008
– Natural disasters
– Damage from unruly tenants
– Your circumstance may change and you can no longer meet your obligations
All very real scenarios that any investor could be subjected to, but there are ways to manage these risks, so you can minimise the damage or likelihood that something will go wrong.
– OPM or Other People’s Money.
Yeah you heard me, Other People’s Money. Now this is something that I find simultaneously exciting and intimidating, as what happens if you lose other people’s money?
Well, you lose other people’s money don’t you?
You see the common approach is that people start to invest in a 401K or superannuation scheme, whereby they take your money and put it somewhere that returns around 1% per annum. Which is better than nothing you might say.
In actual fact it might as well be nothing as usually the rate of inflation is around 3% per annum. So therefore your investment is going backwards and that is assuming your retirement fund which is normally invested in mutual funds is going up. But what if the market slumps here too?
Well then your investment, that you don’t really have a say in goes down the toilet, and you might be lucky to get an apology. “Sorry but it looks as though you are going to have to work right up until your last day.”
Whether it is an IRA or a 401K or superannuation scheme, there is just as much risk, if not more than with an investment that you can manage yourself. You can even find people to manage them for you, if you direct it towards something that can yield a higher return.
With that being said, people who have a self-managed retirement fund might want to consider using their funds to invest in a real estate deal that you find. This could be in the form of a single family dwelling, or multifamily complex. Whatever the method, all can be an extremely lucrative way to invest money that stands the risk of being lost to someone else.
This way you have control over these assets, you determine when to buy and when to sell and you don’t have someone charging exorbitant hidden ‘fees’.
Where this comes in handy for a no cash down deal, is to be the middle man and link the self-managed retirement investor with a seller and take a cut. Some deals could make you thousands or even tens of thousands of dollars.
You may or may not have heard of a process called wholesaling, where you find a property for sale, whether advertised or not, make an offer and get the seller under contract and then flip the deal to someone else before the contract is up for settlement and at a greater price, pocketing the difference.
Another cool little method if you have a list of buyers ready to go, though there is a chance you could run in to trouble if you don’t have your buyer ready to go before the deal settles, so you have to be both diligent and organised. This method can also yield thousands, if executed correctly. Not a bad return on investment especially since you didn’t put any money in at all, just think about that for a second…
– Seller Financing
I really like this idea, though it will take some basic psychology practises as you will need to build rapport with the seller, to prove that you are trust worthy and are not going to bail on the seller.
There are ways in which you can help to build confidence in them however, buy including a clause that states, they reclaim the property if payment is not made within an agreed time frame, obviously you will need to have a contract in place with the help of a professional.
It will help to have some numbers prepared on the property that illustrate how the deal structured this way will benefit the seller, saving on agent fees and them collecting an interest component instead of the bank.
This type of deal would suit more of a distressed seller but not desperate.
– Save For A Deposit
The most common method and by far the least exciting and creative.
It does however have it’s merits and should always be considered. If you are able to save for a deposit in Melbourne or Sydney, Australia or Auckland, New Zealand or New York, NY then it’s a fairly solid indication that you are both disciplined and well paid.
Having a steady stream of income with regular amounts of money being put aside, looks really good and gives the bank confidence that they are lending money to the right person or people.
Acquiring A Business
Now this can be a very exciting procedure.
Believe it or not, there are ways in which one is able to acquire an existing business without needing to invest one’s own personal cash.
Like with real estate there are various ways in which one can achieve this, whether it is only a small one person operation or a larger more complex business, it can be done if you know what you are doing, and how to execute the deal.
There are quite a few variables that must be considered when trying to cut a deal such as this, but it can be hugely rewarding if it done right for everyone involved.
When doing deals with businesses that generate $10M or more annually, the seller will be more motivated by price in most cases.
Whereas doing deals with businesses that generate less than $10M annually, the seller will be more motivated to sell to sell to someone they feel will nurture the business moving forward, taking care of valued employees and preserving the culture and everything the owner has built over the years.
Using this to your advantage as a no cash down buyer, can help to cement your position as the safe pair of hands.
In most cases they want to know that they will continue to see their legacy even in their departure.
A type of deal like this will work if you apply ratio of about 10% numbers and 90% psychology.
The simple process is to find a deal, whether it is in your immediate network, or to approach potential businesses in your area of expertise and ask if they had considered an exit at any point soon. Baby boomers are a good age group to approach as they will be looking to retire soon.
Shutting down a business may in fact be more costly in the long run, if things haven’t quite gone as well as they might have hoped. It might not be a easy to exit the business as they had hoped.
When a company winds up operation, all creditors and outstanding debts will need to be paid, which could lower the amount of cash taken out of the business at close. It could even see the seller in the red.
Not a great way to commence retirement.
Finding a deal like this could be gold as you could use this to your advantage, by offering yourself as their way out.
Selling it to you could see you enter the business and relieve them of any stresses or concerns they might have.
So as you might be wondering how exactly would you finance a deal without putting any cash down?
Well like with real estate there are a number of ways in which you can achieve this.
– Asset Based Lending
This one is really cool.
This is the method of using a finance company to loan you the deposit whatever the agreed percentage is.
You pledge the assets of the target business as collateral against the loan in the event of liquidation. This way the seller gets some cash at close, then you might be able to seller negotiate seller financing as the method to finance the balance.
That is why psychology is the best weapon to have in your arsenal as a no cash buyer.
You will need to display your prowess in either operating a business in the same sector, or the ability to implement the right team members in order to run the business.
In my opinion you do not want to be running the day to day operations of the business anyway, as you should really be looking to make further acquisitions that could complement your new asset.
One of the best assets you can use to leverage for finance is invoice factoring, whereby you are essentially selling your unpaid invoice to a lender and they will loan often 80% or more of the invoice value plus their fees.
Usually one the easier methods to get approved for.
– 100% Seller Finance
Just as the name suggests and just like with real estate, you can negotiate 100% seller finance if the deal permits it. This will require some due diligence on your part, with the correct team of professionals in place. Accountants as well as Lawyers to make sure you are covered from any litigation that may filed against the company. You do not want to inherit any of that.
This is the type of deal where the seller really wants to get out of the business, but does not have the right way to do it.
This is also a great place to exercise some basic psychology skills.
Structuring your payments over a period of years could see you owning the business outright sooner than you may think.
If you are able to polish up the business a little more, then you may be able to flip it for a higher price and pocket the difference in a matter of 3 to 5 years.
– Venture Capital
This one will be a little harder to obtain and each VC firm will have their individual requirements. But still very well worth a shot. Especially if the target business is in the technology sector.
Still relatively new by comparison, but there are a growing number of Crowdfunding services available nowadays, so it is definitely worth a look.
You could try a combination of all some or all of these to get the deal to happen.
I think that is where I find the most excitement, in trying to make all the pieces fit to execute the deal.
It does take a lot of time to make it happen, but in the end it is so worth it.
If you can buy a $5M deal with no money out of pocket, have it pay you a dividend throughout your time at the helm, and then sell it for $5M 5 years later, even if you still only paid half back, that still an incredible return on no money down!
I have an eBook that goes in to more detail about the whole procedure, so be sure to check it out here.
Wishing you the very best of success in your journey.