When I was 23, I bought an eight-unit apartment building with no money down. And I walked away with $1,000 cash at closing! Sounds pretty fancy, right? Wrong.
It was one of the dumbest real estate investing mistakes I’ve made in my young life.
I escaped without a scratch, but it was due to an over-sized dose of sweat, tears, and luck. None of it was due to savvy investing skills.
The Sound and the Fury
I was 23 years old and had just earned my real-estate license the previous year. My first couple of months were spent buying and selling a few upper-end units for individual homeowners. The commissions were decent, but as a new Realtor, my split with my company was high. To complicate the problem, I had financed my association, training, and union fees to get started. (This was before I had decided to cancel my credit cards.)
After several months, I began to work more in the booming foreclosure and short-sale markets that were plaguing central Indiana. Out-of-state lawyers, doctors, and other high-income earners (mostly from the West Coast) were swarming our local market.
They were buying up $30,000, $40,000, and $50,000 houses like they were toys — albeit over-priced, over-financed, and only half-functioning toys at best. With rents ranging from $400-$1000, they simply couldn’t resist what their spreadsheets were telling them the return would be. They bought many of the homes sight unseen and used the first real-estate company that would sell to them.
We represented a lot of the banks that had no idea about the local market prices. They also didn’t understand the current condition of their properties (even after we told them several times). Well over half the deals fell through. Either the banks were too unrealistic to negotiate, or a closing would be interrupted by the discovery of a mystery lien, a second mortgage no one knew about, or some other problem with the title that we didn’t even know was possible!
It was harder work for lower commission, but there were hundreds upon hundreds of properties, which helped even out the paychecks from month to month. And I was learning a lot about how to avoid real estate investing mistakes.
Property Management Comes Calling
After most of the out-of-town investors closed on their new rentals, they began searching for a company to manage/rent them. After several dozen requests for an affordable and trustworthy property management company (and no clear-cut option), we decided to start offering the service ourselves.
I joined forces with a broker who spent his time focusing on acquiring more leads for buying/selling. I set about figuring out how to actively manage and rent the vacant units (which almost always needed repairs first).
Since many of our clients were repeat customers already, they were ecstatic to have the option of having their properties managed by us in-house. Within just six months or so we had over 125 units under management.
I was working countless hours and answering the most bizarre phone calls you can imagine at all hours of the night. Overall, though, we were turning a profit and looking for ways to scale our system over the next couple of quarters.
A Perfect Storm
As part of our networking and lead-generation work, we regularly attended private meetings where local brokers would pitch each other their current clients wants and needs. In one particular meeting, another broker was pitching one of his own properties for sale. It was two side-by-side four-plexes (eight units total) with each unit being one bedroom. It was in a low-income part of town, but he was only asking $125,000 for both properties.
“$125,000 for eight units?”, I thought. “There has to be a catch.”
There was. Seven of the eight units had tenants, but only three had any history of paying on time. Even after kicking out any non-paying tenants, each unit would need a couple thousand dollars of work to get anything decent in rent. In addition, there were four furnaces in total all of which were probably made in the 40s or 50s.
In other words, it was a project by anyone’s terms. It would require some up-front repairs, several months of eviction filings, court visiting, and re-showing the units, but… “$125,000 for eight units!“
If Only Someone Would Loan Me the Money…
I dug deeper and deeper into the numbers. I was already managing property, coordinating repairs, negotiating prices on materials, and renting units for dozens of other clients. It made sense that if I could get a loan, I could plug a property right into this current system I was running.
There was a big glaring issue, though. Neither my partner nor I was credit-worthy in any sense of the word. The chance of me getting approved for a mortgage was zilch (let alone a non-owner occupied, low-income commercial loan). With regret, I pushed the property to the back of my mind and continued about the process of building the management business.
At our next networking meeting, though, we caught wind of some additional news on the properties. The broker who owned them was in serious trouble on about a dozen different pieces of real estate. He owed $76,000 on both the buildings, which were financed through a popular investor/hard-money lender.
The private lender was getting scared that the investor would soon default (giving the lender a property he wanted nothing to do with). The owner was only looking to get out of the property, so he could focus his energy on his salvaging his other properties.
Without much thinking, we pulled the trigger.
A Bold Offer
We called up the private lender (an individual) who was currently financing the properties. Then we pitched him the idea of us taking over the loan and purchasing the property from the current desperate owner.
We offered to both sign onto the loan, giving the investor two names opposed to the one he currently had. Then showed how we would remedy the situation, evict all the tenants, and plug it into our management system.
Neither of us had a penny to our names, so we even had the guts to require that the private lender actually invest more money into the property. In order for us to take it over he’d have to loan us an additional $15,000 to replace the furnaces and repair two of the units after evictions.
It was a bold offer. We’d give nothing but a management plan and our signatures on a $91,000 private mortgage (at 12%) for eight units and a $16,000 cash loan. The lender must have known even more about the current owner’s dire circumstances then we did because he took our offer. The current owner was happy to get out for what was owed, and within the week we sat down to close.
After the paperwork was signed on my first-ever real estate purchase I was handed a $1000 check (for prorated rents/deposits for the month). I gave nothing tangible, just my worthless signature, and walked to the bank to deposit the money.
“So this is how real estate works”, I gloated. “I could get used to this.”
I had no idea what was in store…
To be continued…
J.D.’s note: This is a glimpse into a world I’ve always wondered about. Though Kris keeps trying to dissuade me, I have a fascination with rental properties. I look forward to reading part two of this story. And although GRS is not about to become a real-estate blog, this Sunday’s reader story is actually about how one of you folks decided to take the plunge by buying a rental property, so we’re going to have a mini-theme here for a week or so…
Many people want to buy investment properties because of the fantastic returns they can provide. However, many people do not have the 20 percent down payment (or more) that most banks require. There are ways to buy an investment property with little money down. The easiest way to buy an investment property with less than 20 percent down is to buy as an owner-occupant and later rent out the house, but there are many other options for investors as well. Using a line of credit, refinancing your home, house hacking, the BRRRR method, or even credit cards can provide ways to buy investment properties for less money. Seller financing is a great way to put less money down on a rental property if you can find sellers who are willing. A more advanced technique is to use hard-money financing that you can refinance into a conventional loan. Whatever way you choose to buy a rental property, research the method to make sure that it is legal in your state, your lender approves it, and that you are not stretching your finances too thin.
How much money down do most banks require?
An investor will have to put down at least 20 percent to buy a property from a typical bank. If you own more than four properties, that figure can increase to 25 percent down, providing that they are even willing to finance more than four properties. On top of the down payment, an investor will have to pay closing costs, which can range from two to four percent of the loan amount. It is very expensive to buy an investment property using financing from a typical bank. I have found a great portfolio lender who will finance as many properties as I want with 20 percent down, but they are not easy to find. Once you factor in repairs, carrying costs, down payment, and closing costs it can cost as much as $30,000 to buy a $100,000 rental property.
The video below goes over ways to buy with little money down as well:
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How to buy as an owner-occupant
The easiest way to buy an investment property with little money down is to buy as an owner-occupant, satisfy your loan requirements, rent out the property, and keep it as an investment. Most owner-occupant loans require the buyer to occupy the home for at least a year. Once that year is up, you can rent out the house and turn it into an investment property. There are many owner-occupied loans available, with down payments ranging from 0 to 5 percent down. You can put as much money down as you want if you want to put 20 percent down or even 50 percent down. USDA and VA have great no-money-down programs and little to no mortgage insurance, which will save an investor a lot of money each month. You will have more costs with little money down loans because mortgage insurance is required. Mortgage insurance can add hundreds of dollars to your house payment and eat away at your cash flow. The process of buying as an owner-occupant and then turning the house into an investment property is as follows:
1. Buy a house as an owner occupant, which will cash flow when you rent it out.
2. Move into the house and live there for at least a year.
After the year is up, find another house that will cash flow and purchase that home as an owner-occupant.
4. Move out of the first house and keep it as a rental. Move into the new house and repeat the process every year!
Eventually, you will be building up equity and extra cash flow, which will enable you to buy properties with a 20 percent down payment. Repeating this process 10 times would be an excellent way to get started, but no one wants to move ten times in ten years. It can also be tough to convince your family to live in a home that would be a great rental.
Low down payment owner occupant loans
If you are going the owner-occupant route there are many loans available that have from very little to nothing down required.
FHA loan
FHA loans are government-insured loans that can be obtained with as little as 3.5 percent down. You can only have one FHA loan at a time unless you have extenuating circumstances like a job relocation. You do have to pay mortgage insurance on FHA loans, which I will discuss later in this article. There are limits to the amount an FHA mortgage can be, which varies by state and even city.
USDA loan
USDA is a loan that can be used in rural areas and small towns. The loan can’t be used in medium-sized towns or large towns/metro areas. The loan is a fantastic loan for those that qualify and want to buy a home in the designated areas. USDA loans can be had with no money down, but do have mortgage insurance as well.
VA loans
VA loans are run through the United States Veterans Administration. You have to be a veteran to qualify for the loan, but they also can be had with no money down and no mortgage insurance! VA is a great option for those that qualify because the costs are so much less without mortgage insurance.
Down payment assistance programs
Many states have down payment assistance programs. In Colorado, we have a program called CHFA. The program helps buyers get into owner-occupied homes with very little money down. CHFA actually uses an FHA loan but allows for less than a 3.5 percent down payment. Check with lenders on your state to see if you have any programs that help with down payment assistance.
Conventional mortgages
Even conventional mortgages have low down payment loans available for owner-occupants. For owner-occupants, conventional loans have down payments as low as 3 percent. You will most certainly have to pay mortgage insurance with any conventional loan that has less than 20 percent down. Unlike some of the other loan options available, you can have as many conventional mortgages in your name as you want as an owner occupant.
FHA 203K Rehab loan
An FHA 203K rehab loan allows the borrower to finance the house they are buying and repairs they would like to complete after closing. This is a great loan for homes that need work, but the buyer has limited funds to repair a home. There are more costs associated with this loan upfront because two appraisals are needed and lenders have higher fees for 203K loans.
NACA Loans
NACA is a non-profit program with:
No down payment
No closing costs
No points or fees
No credit score consideration
Below market 30-year and 15-year fixed-rate loans
This sounds like it is too good to be true, and it is a great program. However, you do not simply apply for the loan and hope the lender approves you. You must take classes, and even host classes when in the loan program.
More details are on the NACA site.
What loan costs does a buyer need to consider besides the down payment?
On almost any loan you will have more costs than just the down payment. The lender will charge an origination fee, appraisal fee, prepaid interest, prepaid insurance and possibly prepaid mortgage insurance. Plus you may have more costs the title company charges like a closing fee, recording fees, and possibly title insurance. In most cases, the seller pays for title insurance, but with HUD and VA foreclosures the buyer has to pay for title insurance. These costs can add up to another 3.5 percent of the mortgage amount or sometimes more. When you talk to a lender they can give you an estimate of exactly how much these costs will be before you get your loan.
Can you ask the seller to pay closing costs?
Even though the lenders and title company will charge you more fees than just the down payment, that does not mean you have to pay that upfront. You can ask the seller to pay closing costs for you. If you can get the seller to pay your closing costs for you, loans like VA and USDA may be obtained with no out-of-pocket cash. You may still have to put down an earnest money deposit, but that can be refunded at closing in some cases. When you ask the seller to pay closing costs, it reduces the amount of money they are getting from the sale so you might actually be paying more for the home than if you didn’t ask for closing costs. But in my mind paying a little more for the house and financing those costs to save cash is better than paying more money out-of-pocket for a little cheaper home.
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House Hacking
House hacking is when you buy as an owner-occupant but you buy a multifamily property instead of a house. By purchasing a multifamily property you can live in one unit while you rent out the other units. This strategy allows you to rent the property faster, which may mean the bank will be more willing to give you a new loan as soon as you are ready to move out. You will also have help from the other tenants to pay your mortgage. In some cases, you may be able to live for free while you own the house because the other rent covers your costs.
Virtual real estate
Yes, you can now buy virtual real estate! This is land in the metaverse that only exists digitally. Some pieces of virtual real estate have sold for millions of dollars and others can be bought for almost nothing. Here is some more information on getting started!
BRRRR Method
BRRRR stands for buy, repair, rent, refinance, and repeat. It is a great way to get into rentals with less money down. You will need to get an awesome deal to make this strategy work, but you may be able to get all of your money back. You buy a house that is an amazing deal, fix it up, rent the property, and then refinance it. Once the refinance is done you repeat over and over! The key to making this strategy work is getting an awesome deal with plenty of equity. You also need to be prepared if things do not go perfectly. Appraisals can come in low, the banks may not want to finance you, you may not get the property rented or repaired as fast as hoped, etc.
Hard money loans
Using hard money can save you a ton of cash in the short-term, but it is more expensive in the end. Fannie Mae lending guidelines, allow you to refinance a home with no seasoning period, which means you do not have to wait six months or a year after you purchase a home, to refinance at a higher value than what you bought it for. Fannie Mae guidelines base the refinance amount on a new appraisal, and they will allow a 75 percent loan-to-value ratio. Fannie Mae guidelines do not allow a cash-out refinance, but they do allow the refinance to pay off any existing loans. Many hard money lenders will allow a buyer to borrow up to 100 percent of the purchase price and to finance repairs as well.
Since Fannie Mae guidelines allow a 75 percent loan-to-value refinance, theoretically an investor could buy a home for $100,000 and get a loan with a hard money lender for $100,000 plus $30,000 in repairs for a total loan amount of $130,000. The investor could refinance the home for as much as 75 percent of a new appraisal. If the appraisal came in at $180,000, then 75 percent loan-to-value would allow a refinance of $135,000. Fannie will not allow a cash-out refinance, but the investor could refinance the full $130,000 loan amount. This strategy can be costly due to hard money fees, but it allows the investor to refinance the entire purchase price and repairs!
This strategy can also be very risky because you are depending on a high appraisal to get your money out. Most hard money loans are only one year and you must pay off the loan after that year. Refinance appraisals are not always as high as we would like them to be. Make sure you have an exit strategy if the appraisal comes in lower than you expect.
Private money loans
One legitimate way to buy real estate with no money down is to use private money. Private money is from a private investor, friend, or family member. The private investor will give you money at a certain interest rate to buy a flip or rental property. Private money rates can vary from very cheap to very expensive depending on the relationship, investment, and terms of the loan. I use private money from my sister for my fix and flips. She charges me six percent interest. It is a great way to reduce the amount of cash I have into the properties.
I have used private money to buy commercial rentals and then refinance into a long-term loan with a local bank.
Can being a real estate agent help?
There are many advantages to having your real estate license, but the biggest benefit is you can keep your commission on almost every house you buy. On a $100,000 house, your commission could be $3,000 dollars or more. Here is an article that details why it is an advantage to become a real estate agent if you are an investor. Being a real estate agent also gives me an advantage in finding and purchasing great deals. I detail how hard it is to get your real estate license here. I saved more than $270,000 a year on commissions by being a real estate agent. That does not include the money I made on deals that I got because I was an agent.
Turnkey rentals
A new trend in the US is buying turnkey rental properties that are purchased, repaired, rented, and managed by a turnkey provider. Turnkey properties are a great opportunity for investors to buy rental properties out-of-state when homes are too expensive in their area. There are turnkey providers who offer as little as 5 percent down for investors, but they tend to have very high-interest rates. Here is a great article about turnkey providers or send me a request here for turnkey providers I know of. I bought a turnkey rental in Cleveland a few years ago.
Line of credit
I have had many lines of credit in my career. I have had lines of credit against my personal house (the house I live in) and my investment properties. It is much easier to get a line of credit against your personal house and some banks will not even offer lines of credit on investment properties. A line of credit is basically a loan against a home, but you do not have to use the money all the time. If you do not need the money you can pay it back to the bank and not be charged interest on it. When you need the money again, you can borrow it very quickly as long as the line is open.
Off-market properties
Off-market properties are purchased through direct marketing or by word of mouth. Buying off-market usually means less expensive properties and in some cases, owners with flexible terms such as owner financing. Many investors wholesale off-market properties, which you can purchase with no down payment. Wholesaling is a process of buying and selling properties very quickly. The properties must be very good deals and are usually found by direct marketing for properties. Many investors make a great living by only wholesaling properties to other investors.
Seller financing
Some sellers may be willing to finance the house they are selling or finance a second loan on a home that allows a buyer to put less than 20 percent down. If your bank is willing to offer 80 percent loan-to-value, the seller may offer to loan the other 20 percent, which would amount to no money down for the buyer. The seller may also offer a number of other loan-to-value percentages to help a buyer get into a home for less than 20 percent down.
Finding seller-financed properties is the tricky part. Most sellers are not looking to finance a loan when they sell. To find seller financed listings, look for homes that have no loans against them or an MLS listing description that say seller financing is available. The seller’s terms can vary greatly depending on how desperate they are to sell and what exactly they are looking to get out of the deal. Do not expect to pay four percent interest on a seller-financed loan; they will want a premium on any money they lend. It is also harder to find great deals with seller financing, which is key to my strategy.
There are many new restrictions on financing thanks to the recent Dodd-Frank Act.
Refinance
In most areas of the country, home values are rising and interest rates are at record lows. You may be able to refinance your home and get enough money to buy an investment property. Once you are able to buy an investment property, you can refinance it in one year (sometimes less with the right bank). With rates as low as they are, if you bought the home below market value, you should be able to take out as much as you put into the house and still cash flow. I use this refinance technique all the time. Getting lenders to do a refinance is tricky when you own multiple investment properties. I use a portfolio lender who has allowed me to use a cash-out refinance on as many properties as I want.
Below is a property I refinanced:
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Move in ready Houses
A move-in ready property means all the repairs are completed and it is ready to rent as soon as you buy the home. There can be many advantages to buying a nice home. The biggest advantage is you do not have to pay for repairs. You also do not have to spend time waiting for repairs to be done, which saves money on mortgage payments, utilities, and other carrying costs. The downside of a move-in ready property is that it is usually more expensive and provides less cash flow than a home that needs work.
Credit cards
A few other ways to get quick cash can be very expensive and are usually reserved for people looking to do a quick flip. If you have a killer deal you cannot pass up, you may want to consider these options, but I do not recommend using them unless it is necessary. The easiest way to get quick cash is with credit cards. You can get a cash advance or pay for repairs using your credit card. If you use a credit card to finance your down payment or repairs and cannot pay it off right away, do not pay the 17 percent interest rate. Do your best to get another card that will allow a balance transfer. Many times, you can transfer all of your balance and pay little to no interest for up to a year. That may give you enough time to pay off the card and not to be stuck with a high-interest rate eating all of your profits. I also suggest using a rewards card for repairs on your investment properties. If you pay the balance off every month, this is a great way to make a little extra money.
Self-directed IRA
If you have money invested in an IRA, you are not limited to investing in stocks or mutual funds. There are special self-directed IRAs that you can use to purchase an investment property. You can use your IRA for down payments and repairs and then collect rent in the IRA.
401K
Some 401ks allow an investor to take out a loan against them. You usually have to pay back the loan relatively quickly and pay interest on the loan. You have to be very careful when borrowing from a 401k because the money you borrow is no longer earning interest or growing in your retirement fund. If you lose your job, you also may be required to pay back the loan within 60 days or pay a 10 percent penalty and income tax on the loan.
Subject to loans
With a subject to loan, you buy a house without paying off the previous owner’s mortgage. This is another tricky situation; investors must be very careful with it. Most bank mortgages are not assumable; when the homeowner sells the house, they have to pay the loan in full. The bank most likely will have a due-on-sale clause that says the loans must be paid in full, once the property transfers ownership. With subject to loans the new investor buys a house subject to an old mortgage and does not pay off the loan. There is a chance that the bank will require the loan to be paid off if they find out that the home has been sold.
Investors buy homes subject to a mortgage so that they do not have to get a new loan. It may be hard for the investor to qualify for a mortgage or they may be maxed out on being able to get new loans. If you buy a home for $80,000 that has a $75,000 mortgage in place, the investor would only need $5,000 to buy the house instead of the normal 20 percent or more.
Fannie Mae Homepath program
The Fannie Mae Homepath program on their REO properties allows investors to put only 10 percent down and allows up to 20 financed loans in one person’s name, which is also a huge bonus. It is very difficult for many investors to get loans on more than four properties.
This program has been discontinued.
Conclusion
Rental properties can be expensive, but there are ways to purchase them with less than 20 percent down. If you are short on cash, buying properties with little money down can accelerate the purchasing schedule and increase your returns. However, you will most likely make less money on each property, because borrowing that last 20 percent can be much more expensive than the first 80 percent.
My book Build a Rental Property Empire, goes over how to buy investment properties with little money down. It also covers how to find deals, finance rentals, manage them, and much more! It is available as a paperback and ebook on Amazon or as an audiobook on Audible.
Editor’s note: Lending Club no longer offers peer-to-peer lending on it’s platform.
LendingRobot is a service that fully automates peer-to-peer (P2P) lending platform investments. The service is available for individual investors, and is both cost-effective and easy to use. LendingRobot attempts to bring superior returns at low risk by combining cloud technologies with machine learning algorithms. The platform is an SEC Registered Investment Advisor, able to provide investment guidance.
The platform concept started in 2013, when Emmanuell Marot and Gilad Golan began developing a script to automate their own investments on Lending Club. Eventually, they also added support for Prosper Marketplace. The platform was publicly launched in April 2014, then added Funding Circle to the mix in 2015.
What has developed from this evolution is a platform that assists individual investors in acquiring and managing their loan investors on three of the prime P2P lending platforms on the web. In effect, LendingRobot is a robo-advisor for peer-to-peer lending investing. The service has continued to grow steadily.
How LendingRobot Works
Investors begin by linking their Lending Club, Prosper or Funding Circle accounts to a single LendingRobot account. You simply add your API credentials to LendingRobot. In this way, LendingRobot enables you to automate investing on all three platforms, if that’s what you choose to do. The platform can even create an account with each of those three P2P lenders if you don’t already have an account established with them.
You can choose the type of investment strategy that you want to use, conservative or aggressive. The platform even has a “slider” that lets you adjust the risk level in your portfolio. You can also use the “advanced mode” feature to specify multiple rules for your investments on both the primary and secondary markets. You can even use LendingRobot if you want to invest on your own, and use the service to help you manage your portfolio of notes.
LendingRobot scans new loans as they appear, and will automatically invest your idle cash. It also has the capacity to sell your notes, if that’s what you choose to do. You will receive a daily summary report that will keep you informed of the activity in your account.
LendingRobot has a wide range of benefits available for P2P investors.
Create custom investment parameters. LendingRobot enables you to create investment rules, based on their proprietary research, that will enable you to pinpoint the types of loans that you want to invest in. You can choose certain credit score ranges, loan terms, debt-to-income ratios – the choices are nearly endless.
LendingRobot secondary market. One of the fundamental limitations that P2P investment has had up until now is the lack of liquidity. That is, once you purchase loans or notes, you have to hold them for the duration of the term. There is often no secondary market for the loans and notes that you purchase on most platforms.
But LendingRobot uses unique secondary market automation that puts thousands of notes for sale, and reprices them on an ongoing basis until the target price is reached. This will be an advantage to you as an investor, both with selling loans and notes that you no longer want to hold, but also in buying existing loans and notes under more advantageous circumstances.
LendingRobot accomplishes this by adding any notes that you want to sell with Lending Club’s secondary market partner, Folio Investing. LendingRobot will gradually lower the price point on the notes for sale over a term of five days, until all notes are sold. This will enable you to liquidate an entire portfolio of notes in a matter of days.
You will also have the option to purchase notes on the secondary market through Folio, giving you an opportunity to purchase them at a discount, and for a greater profit when they finally pay off. This will become an increasingly important feature as P2P investing matures.
Investing speed. LendingRobot needs only seconds between the time a new loan comes on the market, and the service is able to invest in it. Since competition for the best notes in the P2P space is becoming increasingly intense, that kind of speed will give you the advantage of being able to get to the most desirable investments in the least amount of time. As more money pours into P2P lending investments, this will be an increasingly critical advantage for the individual investor.
Automatic reinvesting. Another limitation with P2P investment is that as notes pay off, your investment position declines. Staying fully invested is a huge task when you try to do it manually. But LendingRobot offers continuous reinvesting of loan proceeds. That will maximize the money in your portfolio that will be invested and earning interest on a continuous basis. This is another critical advantage for individual investors when it comes to P2P investing.
Transparency. LendingRobot enables you to see expected returns, cash flow forecasts, and the risk profile of a given portfolio. That will give you an opportunity to measure expected performance from various portfolio mixes. And that will help you to create the best portfolio for your investment needs.
LendingRobot is getting better. LendingRobot represents a new concept in the automation of P2P investing – which itself is only a few years old. The point is, while LendingRobot’s machine-learning algorithms are the result of years of research data science and optimization, the system is continuing to learn and grow. You can be part of that growth.
Lots of free information. The site provides a wealth of information covering an overview of the P2P lending industry, including statistics in regard to Lending Club, Prosper and Funding Circle. This enables you to see comparisons between the three platforms side-by-side, to help you decide where best to invest your money.
For example, the comparison chart indicates that you can invest with Lending Club or Prosper if you are not an accredited investor, but you can’t with Funding Circle. That’s the kind of information that you need readily available in one place.
They also provide you with performance charts, that show how each platform’s returns compare with both the marketplace average, and with US bonds. There’s even a list of the latest loans available with both Lending Club and Prosper.
LendingRobot Pricing and Fees
The first $5,000 of your account value is free. After that, there is a fee of 0.45% of the account balance over $5,000. That applies only to amounts invested by LendingRobot; it does not apply to loans purchased prior to starting your LendingRobot account.
There are no setup fees or termination fees.
Is LendingRobot Right For You?
P2P investing is simple in concept, but it can become complicated in the execution. Since you need to spread your investment capital across so many notes in order to achieve a reliable level of diversification, you virtually must automate the process. LendingRobot handles that for you, and has the advantage in that it can be used across three of the most popular P2P platforms on the web.
We generally think of investing in fixed rate assets as being the low maintenance part of an investment portfolio – and that’s exactly what it should be. LendingRobot let’s P2P investing be low maintenance.
There are a couple of caveats I would like to point out. The first is the potential that automation could cause you to underestimate the risk involved in P2P investing. You are, after all, investing in unsecured loans for people with varying degrees of credit, as well as a wide range of employment and income situations. That is an inherently risky investment, and automation should never cause you to underestimate that risk.
The second is the secondary marketing feature available through Folio Investing. Don’t get me wrong, it’s a great feature to have. But at the same time, you don’t want to over-rely on it either. The service is currently available only on Lending Club, not Prosper or Funding Circle, though that may change in the not-too-distant future.
Even on Lending Club there may be some limitations to secondary market transactions. Lending Club makes the following statement in that regard: “Note Trading Platform was designed to provide investors with the chance to realize some liquidity in transactions with other Lending Club members”. It’s also important to understand that notes are more likely to sell at a discount than at a premium, so it may prove to be primarily a market where you can unload unwanted notes, but do so at a loss.
It’s equally important to realize that notes cannot be sold on the secondary market if they are in default or charge-off status.
That said, the secondary market can be a major advantage to you as a buyer, for all the same reasons that is not necessarily a failsafe for you as a seller. It represents a real opportunity to buy notes for below – maybe substantially below – par value. And that will add a gain on payoff of the note to the interest you’re collecting on it. That’s a double win!
If you are an active investor on Lending Club, Prosper or Funding Circle, you need to give LendingRobot a serious look. It offers a real opportunity to take this growing and profitable asset class and set it on automatic pilot. It offers a serious chance to increase your rate of return on investment, while reducing the risk of default.
Save more, spend smarter, and make your money go further
MintLife investing columnist Matthew Amster-Burton has been answering questions from the Mint.com Facebook page and Twitter.
Angela writes: I’m getting married – and soon! What are the top investment-related things my fiancé and I should be thinking about?
Congratulations, Angela!
My favorite investing topics are how stocks and bonds work, how to pick the best funds in your 401(k), and putting it all together into a plausible financial plan.
Unfortunately, the most important investing topic for newlyweds isn’t any of those things — it’s debt. (I know, I kind of want to punch me, too.)
Debt is the opposite of investing. When you invest, you’re turning your money over to someone else in hopes they’ll do something smart with it and give you more money back later. When you take on debt, someone else is investing in you. (Try saying that in a horror movie voice.)
That doesn’t mean all debt is bad, though. It’s just that mixing debt and investing — with a couple of exceptions I’ll get to in a minute — is usually a bad move and most newlyweds bring at least some debt to the marriage.
Let’s say you or your fiancé has a student loan charging 6.8% interest, which is the going rate for an unsubsidized Federal Stafford loan. Paying down this loan is the equivalent of earning almost 6.8% on a risk-free investment (I say “almost” because the interest in tax-deductible, so the effective rate is a little lower).
What is the most you can actually earn on a risk-free investment? About 2.25% on a 5-year CD.
The same goes for credit card debt (duh) and car loans. It doesn’t make any sense to start investing in stocks and bonds when you can get a guaranteed risk-free return by paying off the debt.
Most couples find debt stressful to talk about, partly because it’s easy to see right there in black and white (and red ink). It’s also painfully obvious whose debt is bigger and that’s not a contest anyone wants to win.
You and your fiancé probably already know about each other’s debts, but if not, now’s the time to lay it all out and start talking about how you’re going to conspire to wipe it out.
Oh, and build an emergency fund, too. Sigh.
Exceptions to the rule
Now that the unpleasantness is out of the way, let’s talk about a couple of reasons why you might want to go ahead and start investing — even if you still have some debt around.
Get the 401(k) match. Do your employers offer a 401(k) match? Take it, take it, take it. Even if you have other debt, turning down a 401(k) match is like turning down a raise. Please don’t do that.
Think about your mortgage attitude. If you’re planning to buy a house, some people (like me) argue that you should concentrate on paying down the mortgage and neglect your investment accounts. Others argue just the opposite: mortgage rates have never been lower, you can refinance if they go down further, and you’re likely to earn a higher return on your investments than the interest you pay on your mortgage.
You and your fiancé should have this conversation and if you find yourselves in the “pay it down” camp, consider a 15-year fixed rate mortgage. You’ll get a lower interest rate and force yourself to pay the mortgage down fast.
Advanced moves
Maybe I’m not giving you enough credit. Maybe you’re a couple of go-getters coming to the marriage without any debt; maybe one of you already owns a house and the other is moving in. (No, I can’t believe I just said “go-getters” either.)
In that case, you need to make sure you’re on the same page — investing-wise. This is important for two reasons:
Since you presumably expect to live off a shared pool of savings in retirement, it makes little sense for you to manage your investments with two separate philosophies. If one of you likes index funds and the other is a stock-picker, you need to hammer out a compromise.
Looking at all of your investments as a single portfolio allows you to simplify your holdings and choose the best funds in each of your accounts. For a great overview of how to do this and why it’s important, see author Mike Piper’s post from the Oblivious Investor blog: It’s All One Portfolio.
Oh, and one last piece of advice: talking about investing on your honeymoon kind of kills the mood. You might want to wait until the night you get back to pull out this column and say, “We need to talk.” That should really win him over.
Matthew Amster-Burton is a personal finance columnist at Mint.com. Find him on Twitter @Mint_Mamster.
Do you have an investing question for Matthew Amster-Burton? Head over to the Mint.com Facebook page and ask away!
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This is part two of a three-part series on how he stumbled into real estate investing at age 23. Be sure to read part one here.
When we last left off, I’d just walked away from my first real estate closing with an eight-unit apartment building and $1000 cash in my hand. I was riding high. Unfortunately, the reality of the situation hadn’t sunk in. Over the next year, my low-income, eight-unit apartment building was going to take me on the most wild roller coaster ride of my life.
Instead of providing a chronological list of events (which may be entertaining, but of little use), I want to share the mistakes I made and the biggest lessons I learned throughout the process. In this second installment, I’ll share the first two mistakes (of what could be dozens). Neither of these first took long for me to realize.
Mistake #1: I Bought a Negative Cash Flow Property Without an Emergency Fund
Yes, it was purchased at a great price. Yes, it did have an amazing amount of potential. But all the potential in the world didn’t change the facts:
7 of the 8 units had people living there.
Only 3 of them were paying tenants.
I needed at least 5.5 tenants paying to break even.
All of the units, even the vacant one, needed repairs before they could be rented.
In theory, I knew all this before I bought the property. I had a detailed plan on how I would attack these issues quickly. I would file evictions the next day on those tenants that had gone months without paying. I would immediately hire people to get the vacant unit up to minimal renting standards.
In theory, it was all going to work perfectly. But then it came time to actually execute the plan.
Coordinating quotes for repairs took longer than expected. Eviction filing took money up front and the courts were running an extra week behind (4-5 weeks instead of 3-4 weeks). Tenants became optimistic about the management change and wanted to work out repayment plans.
In the first two weeks, a storm broke a large front window, and a back door was kicked in (probably by the tenant who lived there, although I had no proof). While insurance would eventually cover the window, both had to be fixed immediately, as it was winter and both were security concerns.
Repairs and maintenance were both accounted for in my number crunching, but the emergency fund that could smooth out an early spike in the averages was nowhere to be found. I didn’t have a penny to my name and the $1000 check at closing went much faster than anticipated. The lack of the emergency fund compounded into several other problems in those first few months.
Mistake #2: I Got Emotionally Involved
Back in part one of this story, I outlined my previous success in building up a property management business. With my client’s properties, I was cool and calculated. I treated management as a business. The property owners were clients. The tenants were…just tenants.
When I signed the dotted line on my own property, the idea was to simply plug it into our property management system. It was going to be “just another set of units.” We’d coordinate repairs, screen tenants, and handle issues in the same ways as we had set-up for our clients. I was incredibly naive.
Without an emergency fund, we needed money. Sure, we had plenty of clients who had also needed money at one time or another. It was my job to set expectations and to advise them on the best course of action. I sought to remove emotions from the equation and ensure that they didn’t make a rushed decision.
I was good at this part of my job and we made nearly no exceptions. If a client had a monetary circumstance where they had to make what we thought was a bad decision, they’d usually cease to be our client. It was that simple.
It’s amazing how quickly exceptions are made when you are the one that needs money.
It happened slowly at first. One tenant, whom seemed genuine, wanted to set up a payment plan to get back on track. It was a weekly payment plan, something we would have never agreed to with our normal clients (too much time commitment). We had two choices in our situation. First, we could head through evictions (2-5 weeks), coordinate repairs (1 week minimum), and re-rent (1-4 weeks minimum). Or alternatively, we could try to squeeze money out of the existing tenants.
The former was the smart, long-term, and business-oriented option. It was the only one we would have offered to our clients. I could have listed at least two dozen reasons why it was the best option. Of course, we chose the latter.
This ushered in a four-month period of various weekly payment plans with not just the one tenant, but with 3-4 other tenants as well. It did help bring in the immediate cash we needed, but we paid a hefty price. Juggling these weekly re-payment plans with tenants who had already proven they weren’t reliable:
Took additional time.
Added large amounts of stress.
Caused problems with repairs (easier to fix up a vacant unit).
Fostered a “but you made an exception with him” mentality among all of the tenants.
Lowered the value of the property (a fresh, consistent tenant would have increased value).
It was a horrible pattern, one that I knew far better than to fall into. I assumed there would be no emotional difference on how I would handle the property…and I was wrong.
These first two major mistakes arose in the first few weeks and months. We haven’t even touched on the issues that came up when we replaced three furnaces and four water heaters. Nor have we revisited the most bizarre moment of the entire year, which involved a split-personality tenant, no less than three fire trucks, and fraudulent accusations of animal cruelty.
For that, you’ll have to wait until next week!
J.D.’s note: Adam doesn’t realize it (because he’s a young pup), but this post makes a New Wave geek like me think of this Culture Club song…
I almost never pay the entirety of my rent. I don’t have roommates and I’ve never been evicted. In the four years I rented a one-bedroom New York City apartment, I paid the full rent only one month. I now own a condo in Portland, Oregon, and I almost never pay my mortgage.
I’m able to keep my condo and apartment because I let strangers pay my bills for me. I’ve created a situation where my home generates income.
Letting Strangers Pay My Rent
Here’s how I did it in New York City for four years: I traveled nearly every week for my job as a management consultant. I was out of town Monday-Thursday most weeks. I reasoned that other people like me may have the opposite commute pattern, where work brings them to New York weekdays. I posted an ad on Craigslist for a “part-time roommate”, and sure enough, lots of people were interested in paying me for the privilege of staying in my cute, East Village apartment three nights a week while I was away.
With an aggressive savings plan and the money generated from my “roommates,” I was able to squirrel away enough money for a down payment on a condo in Portland, where property is much less expensive than in New York.
I purchased a reasonably-priced condo between the trendy Pearl District and Nob Hill areas. With permission from my company, I relocated to Portland for two months while working on a West Cost project. Living in Portland gave me the opportunity to decorate and fully outfit the condo. Before moving back to New York at the end of the project, I hired a local management company to handle advertising, tenant screening, and rent collection. The management company rents out my furnished condo to business people coming to Portland for 3-6 month stretches or people in town on extended vacations.
These are just a couple examples of ways people can turn their home into an income-generating asset. My circumstances are a little unusual, but the concept is nothing that can’t work for nearly everyone in some capacity. In my experience, there are four main ways nearly anyone can leverage their apartment or home to generate income:
Vacation Rental. When you know you’ll be out of town for several days, post an ad for your home in the vacation rental section of Craigslist. Other great resources are AirBnB.com and SecondPorch (a Facebook application).
Home Exchange. Consider doing a home exchange when you take vacations. If you have a home in Maine, you can potentially “swap” with a couple in Paris for a week or longer (fun fact: Europeans seem to love Maine). A great place to start is HomeExchange.com, a vacation swapping website.
Room for Rent. If you have an extra bedroom in your home, consider listing it on a site like AirBnB.com, where travelers all over the world look for inexpensive accommodations.
Part-Time Roommate. If you travel regularly for work, find someone with the opposite commute pattern who needs a place to stay in your home city. Craigslist and social media like Facebook and Twitter are great resources for this.
One Potential Scenario
To give a sense of the income potential of these arrangements, let’s take an example of a couple who lives in a 2-bedroom home in Portland, Oregon. Assume they live in a fairly desirable area and use their spare bedroom as a home office and guest room.
They rent their spare room to vacationers four nights a month, charging $50/night. Annual income: $2,400.
Once a year, they take a 10-day vacation in Europe. This year, they opt for a home exchange, saving $150/night in hotel costs. Annual cost avoidance: $1,350.
They usually go camping a couple times over the summer. They rent out their home two weekends each summer, charging $150/night. Annual income: $600.
During the holidays, they travel cross-country to visit family. They rent out their home over Thanksgiving (four nights) and Christmas/New Year’s (10 nights) at $150/night. Annual income: $2,100.
Total annual income/cost avoidance: $6,450.
This is a fairly realistic scenario, with prices typical for Portland. Let’s assume this couple earns the local median income of $56,000 for a two-person household. With minimal work and a little flexibility, this Portland couple is able to boost their income by nearly 12% annually.
To take this a little further, let’s say they continue renting out their place, earning $6,450 annually for five years. They invest their income with an 8% annual return. At the end of five years they’ll have $37,800. Then they have a baby, so they stop renting out their space. They convert the second bedroom into a nursery and stop taking long vacations. They leave the $37,800 in the investment account, which continues to earn 8%. By the time their child is 18 years old and ready for college, the account will be worth over $150,000, which should cover their child’s Harvard education (assuming the kid is smart, like his parents). Not bad, right?
Is This Realistic?
Many people think that this story doesn’t apply to them. They think either that no one would pay to stay in their home, or that it would be too weird to have strangers around their stuff.
When I first had these doubts, I had to tell myself: I like my home, don’t I? Is it that far fetched a notion that someone else might, too? As for the aversion to having someone else around my stuff, I had to think through that reaction: Was I really willing to turn down hundreds or thousands of dollars of income because I wanted to protect my things from being near strangers? I had to discipline myself not to let my Stuff take over my life, limit my opportunities and cost me money.
After conquering my doubts, I forged ahead. Looking back, I have no regrets. My belief is there’s no harm in trying — all the listing services I mentioned (except HomeExchange.com) are free. If you’re curious to give this a try, spruce up your place, take some well-lit photos, and write a snappy ad. The more positive energy you put into your home and your ad, the more success you’ll have. You’ll likely be surprised at how many people are interested in paying to stay in your home, and you may even make some friends while you’re at it!
A Final Word of Advice
Be sure to check your lease, zoning laws, or condo bylaws to ensure you’re not violating any rules. Also, check with your homeowner’s or renter’s insurance policy to ensure you’re covered for damage from renters and visitors.