How Does NMD Work?

Let's look at an example which shows the differences between 'standard' property investment and the Axis approach of Low and No Money Down.

We'll look at the impact of this investment in three areas:

Capital Required
Cash Flow
Return on Investment

At the end of this example I'll summarise the key points to highlight the distinctions between the three types of investment.

To start with, let's make one critical assumption. Many investors typically purchase property at market value through estate agents. They are not aware of sourcing companies such as Axis who find and negotiate below market value (BMV) property deals on behalf of investors. The ability to purchase Below Market Value is critical to making Low and No Money Down deals work!

Our example will assume:

Purchase of a house
30% Discount below market value achieved by Axis - see What Is Low and No Money Down Investing?
Standard mortgage at 80% of open market value. LMD at 80% of net price based on BMV purchase, NMD finance at 80% of Market Value. This distinction between borrowing based on market value, versus net purchase price, is also a key part of No and Low Money Down financing
A variable discount to illustrate the difference between achieving a full No Money Down deal and achieving a Low Money Down outcome

	Standard Purchase	Low Money Down	No Money Down	Comment
Market Value	£150,000	£150,000	£150,000
Discount	0%	30%	30%	Have to get big discounts for NMD
Investor Price	£150,000	£105,000	£105,000
Mortgage	£120,000	£84,000	£105,000
Cash Contribution	£30,000	£21,000	Nil
Fees and Costs	£5,000	£5,000	£7,500	Costs are higher for NMD deals
Cash Required	£35,000	£26,000	£7,500

This above table illustrates the huge difference in capital required between a standard purchase at one end of the spectrum and a No Money Down deal at the other. We've reduced a capital requirement of £35,000 to £7,500. Along the way the Low Money Down proposition is also an excellent result with the capital requirement reduced to £26,000.

Let's consider the impact of Low and No Money Down Deals on your annual cashflow. We'll stay with the example above, adding in the rental component.

Assumptions:

Rental Achieved of £750 per month
Mortgage rate payable of 4.5% pa on standard and LMD purchase, 7% pa on NMD (you will often pay a higher rate for a higher borrowing percentage)
Service Charges/ Ground Rent/ Insurance of £1,000 a year
You manage the property yourself

	Standard Purchase	Low Money Down	No Money Down	Comment
Investor Price	£150,000	£105,000	£105,000
Mortgage	£120,000	£84,000	£105,000	Mortgage higher for NMD
Rental Income	£9,000	£9,000	£9,000
Annual Mortgage Interest	£5,400	£3,780	£7,715	Interest rate higher for NMD
Service Charge etc	£1,000	£1,000	£1,000
Annual Cashflow	£2,600	£4,220	£285
Return on Cash	8.66%	20.1%	3.8%

Looking at the NMD scenario, you can see that the combination of higher mortgage and higher mortgage rate has reduced the annual cashflow from this property. In some cases a full NMD deal will take the cashflow to neutral or even negative although LMD deals mostly provide positive cashflow.

This reduction has to be balanced against lower capital contributed by participating in a Low or No Money Down deal.

If an investor is trying to balance a prudent approach with getting the best possible deal, then the LMD approach combined with BMV purchasing is clearly the best route and is the core approach that Axis takes. On this example this is how it would stack up if you take the LMD option:

Capital committed: £26,000

Return on cash: 20.1% - increasing as rents rise

BMV: £30,000 of immediate equity

ROI: If prices double in 10 years, your ROI would be 750% - simply outstanding!

The NMD option does illustrate key points:

1. Cash flow is rarely more than breakeven and can be negative

2. Very high yields are necessary because of higher borrowing costs

3. Risks are considerably higher because investors are paying more for finance and borrowing more.

4. There is no 'padding' for unforseen costs or expenses or future changes in interest rates

5. If you have to sell in a hurry you may be in negative equity