Buy a Multi-Family With No Money Down

The option contract is one of the most powerful tools that you have in creative finance. This has allowed me to buy deals actually $0 down and own them without any partners. There's two main uses in creative finance that we use option contracts. I'm going to go over both in this video. But seriously, if you are starting with $0 like I did, you can buy hundreds and hundreds of rentals by correctly using an option contract in your deals. Here we go. So first of all, the most common and my favorite way to do it. Conventional or seller financed, if you need to bring a down payment into a deal, or if you're working with a bank and you need another partner to either bring the down payment or even just qualify for the bank debt, you can use this trick with the option contract in every single deal that you do. Here's how it works. When you draft your operating agreement for your LLC, which anytime we buy a piece of real estate that's multifamily and there's a partnership, we're going to have to have it in an LLC that represents the interest of the partnership. We're going to lay out in that who put in what capital contribution, how much money, how much equity everyone owns, and on the back end, we're going to attach an option contract. Now, what is an option contract? This is an option to purchase the individual's equity in a property at a fixed price in a fixed period of time. For example, I'm 50/50 partners with someone named Ryan. Ryan puts 100% of our down payment for a million-dollar property, let's call it $100,000. That is his capital contribution. Now in this deal, I found the deal, I put together the deal, and I'm going to be the primary day-to-day operator of the deal. Our option contract says that Ryan's equity, even though he put in $100,000, I have the option to buy him out in, let's say, 5 years at $200,000. In this scenario, Ryan would double his money I would own 100% of the real estate and it gives me time to find the $200,000. Now, where does that money usually come from? Well, as we operate the deal and 5 years passes, rents go up, we get better at operating, we make improvements to the property. Typically what happens is that's when we do a cash-out refinance. Even if it was seller financed, 10% down, we're gonna go ahead and get conventional financing. We're gonna pull money out of that deal, pay Ryan his $200,000 The real estate bought the real estate. Now, if you're tracking the math here, how much money left my bank account during this transaction? If you're tracking with me, $0, and $0 is correct. Option contract allows the real estate to buy the real estate. It's very similar to treating the other person's equity like debt, except that it's optional. I have the option to buy them out at a fixed price in the future. Now, if they're expecting the buyout and that's part of the expected compensation, one thing with an option contract, they are in fact optional as per the definition. You cannot make it required, that's debt. Or you're creating a security, which you do not want to do. There's different legal and you have to file those with the SEC. For this video, we're going to try to avoid that and keep it very, very simple. So you can create penalties if you don't buy them out. For example, I find this deal, it's $1 million, it's a 10-unit building, it's beautiful, and it has some value-add where we do think we can increase the value enough to pull out the money to double Ryan's money with us putting $0 into our deal. However, Ryan and us don't want to be partnered together forever. We want to have that clean break. He would like to be bought out for that $200,000 by no later than year 5. We can put a penalty in there that says, well, you provided all the money and I found the opportunity, and in the event that I do not buy you out, you get 100% of my equity, which means Ryan had all the financial risk in this deal. And if we were unable to double his money and buy him out, my equity is now forfeit to him. It's not mandatory. It's not a requirement. It's still an option. But my option is either I give my equity to Ryan at the end of this project, or I give him $200,000 and I get to keep the deal. This structure allowed me to buy a deal with no money. And by the way, if this was bank financed and I didn't qualify for that bank debt, Ryan's qualifications would also count towards that loan. Now, in 5 years, I still have to qualify for the new debt, but it gives me 5 years to work on whatever I need, be it the net worth, be it the credit score, whatever it is, it gives me 5 years to position myself to be in a position to qualify for the debt, take it out, buy the property, and the real estate will buy the real estate. The option contract as an addendum to your operating agreement when you create the LLC, this is the way that you buy so much real estate and how I've bought so much real estate in my own portfolio and how I am the sole owner today. Now, if you don't attach an option contract and you don't have a fixed price to buy your partners out, you can still buy them out, but it's going to be a total negotiation in the future. You don't know how expensive it will be. You don't know if they'll agree to it. It is a best practice to put these in place in the beginning of your deal. Now, what happens at the end of 5 years if the partnership's been fantastic, you love working together? Well, guess what? The option contract's optional, and anything you put in writing, as long as all parties agree, can be renegotiated. If you guys get to year 4 and you decide, hey, we love this partnership, in fact, we want to go buy more buildings in this partnership in a similar structure, you can go ahead and amend your operating agreement cancel out the option agreement and its associated penalties and move forward with a new partnership. The beautiful thing about option contracts is it gives you options, but it also gives you a path to own your portfolio sans any partners. It is a beautiful, beautiful agreement that gives you fixed timelines, fixed prices, set terms. Add this to every single partnership you have. Don't design your partnerships to be a marriage. You do not want to be partnered with everyone forever. You do in fact want the ability to control your real estate. You found the deal, you lined up the capital, you got them their return. Keep the real estate. Okay, let's talk about the second use of option contracts. And this one's super interesting, by the way. If you have a deal that does not cash flow day one, and by the way, our rules for real estate are buy deals that cash flow day one, no matter what. We buy a deal, our income goes up, period, full stop. But what if there's an underperforming property and the owner won't let you get creative with the finance to a place where you can get the deal to cash flow. Essentially what I'm saying is, what if there's no deal structure available that gives you the cash flow you need and gives the seller everything they want? They want too high a price, they only are okay getting cashed out, so they need bank financing or a check for the entire dollar amount. We solve this with the option contract. We can actually do what's called a management option contract, very similar to a lease option, but in this case, I get management of the entire building, with, you guessed it, an option contract to purchase at a fixed price in a fixed period of time. So if a property is underperforming, the owner is having difficulty getting it into a position where it would be bank financeable, you can take control of the property through the management agreement. You'll typically pay an option fee, which again can be structured out of your own money or out of raised capital like our first example, but you bring in an option fee, you take control of the building, In this one, you would write a business plan for them and say, this is how I intend to get this property in a position in which we can get the bank financing to get you your price. If it's a property where the price is good in the future, if the property was doing better, this gives you a solid chance to execute your business plan and close on the seller's terms. Now typically you want to negotiate for seller financing or another creative route. This option is only to be used if there's no other way to do it. Ultimately, the goal and what you really want to happen is the day you guys come up with an agreement, you go under contract, and you own the property. If there is not a way to do that, but you do love the deal and you believe in your business plan, this is a way that you essentially could put a pin in the map and say, I know when I'm acquiring the property, I know what I have to do to make the property worth equal to or greater than the price that they want. This gives you control of the property. The option contract can be used to buy the real estate in the future. And again, this could be done no to low money down. Honestly, I don't know why more channels don't talk about the option contract or the creative ways to use it. This This is how you buy massive amounts of real estate when you have literally no money or just less money than the amount of real estate that you want to buy. If you want to learn more about creative finance and how to master this game, buy properties with or without money, follow this channel right here. If you haven't done it yet, click that subscribe button. I will see you on the next episode.