Before we move forward, let’s establish some guidelines:

•        Any financial investment involves some level of risk and real estate investing is not for everyone.
•        Many techniques of buying real estate with no money down involve credit card cash advances, wholeselling, personal mortgages or hard money loans. Though those approaches may appeal to some, this article presents an approach using institutional business financing for the purpose of increasing net worth and generating steady extra income through real estate.
•        This particular approach assumes the following:

1. You are currently employed.
2. You have a good FICO score.
3. You are buying single family homes for resale (“flipping”) or as rental property.

Now that we’re finished with the housekeeping, lets dive in:
I.        Get organized:
a.        Form a business entity. Many investors use a Limited Liability Company (LLC) and have found this adequate for the task. Each state has different filing requirements so be sure to follow the right ones.
b.        Get an Employer Identification Number (EIN) from the IRS.
c.        Create a checking account at your local credit union in the name of your new LLC using the EIN you recently secured.

II.        Get a Commercial Unsecured Revolving Line of Credit (URLOC):
a.        We have finally arrived at the meat and potatoes and this is where having steady employment and a good FICO score is so vital. An unsecured line of credit is for want of a better term, a giant credit card that you can borrow against except with a much lower interest rate. Provided you meet the right credit criteria, financial institutions may be able to offer you an unsecured business line of credit with the major caveat being that you have to personally guarantee it, since your business is new and has no previous income. This means that you have to sign documentation making yourself liable to pay off any balance on the line of credit if it were to go into default. The maximum credit line your business is allowed will be dependent on your credit score, income and any existing debt you have. Different financial institutions have different policies surrounding business lines of credit but credit unions have been known to be more amenable to issuing credit to local residents (hence the reason for opening a business checking account with a local credit union).

III.        Find property at a discount:
a.        Now that you have the means to buy your first property nothing is more important than choosing the right one. Spend some time becoming familiar with an area in which you want to make your purchase. It cannot be stressed enough how important it is to take time understanding your area of choice. You should have a very strong idea of the price at which properties sell or rent and the time it takes to find a buyer or tenant. Your objective is to obtain a property where the combined purchase price and cost of repairs should not exceed 75% (remember this figure) of the property’s market value after any repairs are complete. Discounted properties can be found through investor friendly agents or websites such as www.houseQuery.com. Once you have decided on a property use your business line of credit to finance the purchase.

IV.        Cash Out:
a.        If your intent is to sell the property then your exit is simple. Sell the house on the open market, pay off your business line of credit and keep the difference as your profit.

b.        If you intend to rent the property then you have a few more steps. Remember the 75% we spoke about earlier? Here is where it comes in. Once the property is rented you can go back to the institution that issued the line of credit and secure a business real estate equity loan. Usually these type of mortgages require a 75-80% loan to property value (LTV) ratio which means that as long as your total costs remain below 75% you will need no money down. As a matter of fact you may actually walk away with some cash at closing. Consider the following: Let’s say you buy a foreclosure for $50,000, spend $15,000 on repairs and it is now worth $100,000. If you secure the business equity loan that requires an 80% LTV you can get $80,000 of which $65,000 will go to pay back the line of credit. Now you have an additional $15,000 that you can use towards your next property purchase. One of your most important considerations is to ensure that the rent you collect exceeds the equity loan payments and provides some positive cash flow.

Let’s recap what you have just accomplished:
•        You own a home that is worth $100,000 that you borrowed $80,000 against so your net worth has increased by $20,000.
•        You have a line of credit with a zero balance in addition to an extra $15,000 towards your next property purchase.
•        Your net income has increased by the amount that the rental income exceeds the mortgage payment thereby increasing your monthly cash flow and potentially your borrowing power.
•        You have not spent a dime of your own money.

As in all things nothing is as easy as it may appear on paper but with a disciplined and well thought out approach you can be well on your way to creating your real estate investment property portfolio.

Happy investing!