Benefits and Drawbacks

So far we have discussed the benefits of Low and No Money Down deals and it should be becoming apparent that the LMD approach taken most of the time by Axis, combined with BMV purchasing, offers very substantial advantages to investors including immediate equity, higher return on cash and increased return on investment.

These benefits are truly significant and worthy of the most detailed consideration by investors.

No Money Down investment offers more challenges and in many cases the increased risk and costs will not be of benefit to the investor. Any serious investor should balance the pro's and con's of NMD investing very carefully before moving ahead.

There is a spectrum of possibilities ranging from cash investment at full open market value at one end, to NMD on a BMV property at the other. The big question is where on this spectrum a specific investor making an investment should be.

The closer towards the NMD position, the closer the investor gets to:

Highest possible Return on Investment
Maximum profit from your available funds
Largest portfolio in shortest time
Stretch your resources to the max

Low and No Money Down investing often makes possible what for many investors is impossible - the ability to develop a good portfolio with limited resources.

OK, there are excellent benefits arising from these techniques but what about the drawbacks? Let's consider these carefully and analyse how we can minimise the risks they can create. As we go through this discussion, remember that how you invest is on this spectrum from a cash purchase to a NMD transaction, it's not a black or white decision.

Huge Leverage

The more you borrow, the more you are at risk if something goes wrong. It happened in the property crash. When prices are rising, leverage works in your favour. When prices are falling, leverage works against you.

To minimise the risks of the high level of borrowing there are four things you can do:

Take fixed rate finance, at least in the first few years. Fixing your outgoings brings confidence and certainty to your planning.
Buy at the bottom of the property cycle. That's why the current time is so good now; we are bumping along the bottom of the current cycle.
Never have to sell - it doesn't matter in the short term if prices go up, down or sideways. That's a theoretical valuation that has no real meaning if you keep renting the property.
Make sure you have some cash in reserve to cope with voids or unexpected costs - that way you won't be caught out and have to sell at short notice.

However, whatever level of care you take, the reality is that a NMD deal is the maximum possible leverage which is risky, unless it is a small part of your overall portfolio. For most investors, the LMD approach championed by Axis, provides a great balance of low risk, good cashflow, excellent returns and a modest capital contribution.

Higher Costs

Almost universally investors using No Money Down techniques will face considerably higher costs. This is not the same as the LMD approach which will in fact minimize costs!

These will be in two areas:

Higher fees of all kinds
Higher interest rates because you are borrowing greater percentages of the value and using different, specialist lenders

There is usually no negotiation over fees. They are what they are. It comes down to a straight commercial judgement on the part of the investor. Are you willing to trade higher fees for the advantages of the No Money Down deal?

Poorer Cashflow

The current state of the market and the much higher rental yields generally achievable, mean that investors buying the 'standard' way will almost always benefit from positive cashflow from day one. It's gratifying to know that every month you have a surplus of rental income over expenditure.

This also extends to the Axis approach with BMV property and LMD financing - in fact the cashflow will be substantially higher!

Move to No Money Down investing and the picture changes considerably. You may borrow 100% of the purchase price, plus incurring substantially higher fees. The end result is that at best you will face a neutral cash flow position, and more likely a negative cash flow position.

How should investors deal with this?

Our recommendation is to work out three years cash flow requirement. Say the property is in negative cash flow of £2,000 a year, that's £6,000 in total.

Then make sure you have enough cash to pay this as it arises. Consider it as part of the purchase cost - add it to the existing capital requirement to get into the deal. If it makes sense to you, then go ahead. If not, then walk away.

You will have to decide if trading a small monthly loss over the next few years for a zero cash investment up front is worth doing. If things go well, you are acquiring a valuable asset that can produce substantial wealth over coming years. If things go badly, you could incur further costs with no 'padding' to accommodate them.

Special Knowledge

Many of the No Money Down techniques require specialist knowledge. The transaction will often have to be structured in a specific way that requires the agreement and understanding of:

The sourcing company
The vendor
The vendor's solicitor
The investor
The investor's solicitor
The broker

It is far more difficult to structure Low and No Money Down deals when they are a 'one-off' and far easier when working with a sourcing company that can negotiate the deal to include Low and No Money Down strategies with the vendor.

At Axis we have been specialists in Low and No Money Down deals for many years, and have completed more than a thousand transactions. Investors can have confidence in us.

We strongly recommend that if you want to participate in Low and No Money Down deals you work with a sourcing company that has special knowledge of this area.

Greater Risks Of Deals Not Happening

Low Money Down deals the Axis way - offering a BMV purchase and the best possible loan finance based on the buying price - is inherently the safest way for a purchase transaction to happen.

However, despite all the care that we take, deals using No Money Down techniques can fail. There are many reasons, mostly out of our, and your, control.

So if you participate in NMD transactions you need to understand that this can happen and be OK with it. No one likes to lose a good deal, particularly if some of the work in buying it has been done. Axis works really hard to overcome any challenges and issues, but doesn't always get the result we want.

There will always be another deal. Wait a week or two and watch for the next one.

Buy Below Market Value

This is not a drawback but a management technique for reducing risk in Low and No Money Down deals. At Axis we focus very hard on negotiating the lowest possible BMV price.

* The higher the discount, the closer you get to NMD

* The higher the discount, the more equity you have

* The higher the discount, the higher the rental yield

* The higher the discount, the lower the risk if you need to sell in a hurry

* The higher the discount, the lower the loan finance you need

In every way a high discount reduces risk and therefore it remains a key negotiation for Axis when preparing Low and No Money Down deals for our clients.

Summary

Frankly there are NO drawbacks with Low Money Down investing the Axis way, but substantial risks in LMD deals. We can work with you to manage and minimise the risks but as a result we only recommend NMD for experienced investors with substantial assets, an existing portfolio and liquid cash funds available. There will be some marginal investment opportunities when the potential drawbacks exceed your assessment of the benefits.

No Money Down is, in our view, a specialist tool and not the right thing for all investments. It's up to you to weigh up the benefits and drawbacks and reach a conclusion. Of course this will also take into account your own investment resources.

On the other hand, Low Money Down involving BMV purchasing is a perfect way to maximize your returns, reduce risks and gain immediate equity!

Use a combination of Low and No Money Down deals and you really can make possible the impossible!