Buying a $400,000 property with just a $5,000 deposit. It sounds like an instantly dismissible headline on a flyer, but it is achievable if you know what you’re doing.

If you’re a prospective investor, or even a seasoned property buyer, and the concept elicits skepticism, you’re not alone. Most investors never consider ‘no-money-down’ or ‘little-money-down’ deals because they believe they are impossible.

It’s a pause for thought. Since most investors never get beyond one or two investment properties and this remains one of the limiting beliefs they cling to, you have to ask yourself if following what the rest of the crowd is thinking is really a smart thing to do. Maybe the concept deserves another thought?

After all, there could be any number of reasons you could be interested in buying property with limited funds. You could be a low-income earner or buried in day-to-day expenses. You could be earning a decent salary but struggle to save up enough capital to get your investment ventures off the ground. You could even have a poor appetite for risk and simply want to use as little cash as possible. Regardless of what situation you’re in, these deals can work – provided they have two ingredients.

“First, you have to have knowledge. Then you have to have focus,” says property developer Nhan Nguyen.

Nguyen has been investing in property for over 10 years and has built a successful property development business from the ground up by specialising in no-money-down deals. His knack for getting projects off the ground without using any of his own cash has earned him the moniker “the no-money-down man” and he believes that without knowledge and focus, investing with limited funds is as impossible as many say it is.

“The key to making a lot of the projects I’ve worked on a success is having the willingness to pitch in hard work. You don’t take no for an answer. Some people think that you need to be a professional developer or only be working part-time to use a no-money-down strategy, but that’s not true. What you really need is focus – the commitment to making the project work and the balls to take it on.     

“Of course, even before that, you need knowledge. Some of the strategies you can use may seem simple, but you have to understand how they work in real life. You can’t just know about the strategy, you have to learn how to apply it.”

For the uninitiated, what Nguyen suggests may seem easier said than done. It’s one thing to know that you need practical knowledge, but how do you actually acquire it?

According to Nguyen, the trick is thinking big, but starting small.

“A lot of people want to do big projects and get into big things quickly. It’s better to start out small.”

Learning about OPM

When trying to wrap your head around the concept of a no-money-down deal, it is important to realise that no-money-down does not mean that no money gets put down at all. It means none of your money. What you’re aiming to do is use other people’s money (OPM) to organise your deals or to net you a buy-and-hold investment.

This requires some creative thinking. “How can you get other people’s money to pay for your investment? That’s basically the trick to investing with a small amount of funds,” says Victorian property developer Ross Hunter.

Hunter says that you can work other people’s money into your deals in two ways: they can either give you funds directly, such as through a joint venture, or you can access it by using the market. The latter entails getting future buyers of the property to provide you with your start-up capital. Again, this could be directly (through the exchange of contracts) or it could be indirectly (through the bank). Either way, the no-money-down investor is using their ability to research a market, coupled with a nose for sniffing out opportunities, to get into a deal they would otherwise have been left out of.

There are multiple strategies to get into a property deal without putting much money down. Most depend on your appetite for risk and your personal skills. Here are briefly some of your options for accomplishing this:

Little- or no-money-down strategies

1. Buying off the plan

Strategy: Buy a property before it is built and, provided it increases in value by the time it is constructed, borrow against the new value to fund your deposit.

Requires: An area where property prices are likely to surge in the future.

Buying property off the plan, as in, before the property has been built, can be a clever way to purchase with little funding – although it can also be highly risky. Self-taught property investment powerhouse Ian Hosking Richards has been purchasing off the plan for years and says it has helped fast-track the size of his portfolio. 

Hosking Richards says the benefit of buying this way is that if the value of the property increases rapidly in between the exchange of contracts and development, an investor can use this newly acquired equity to fund part or all of their deposit. 

“Using this strategy, I can borrow against the instant equity to fund the purchase,” says Hosking Richards. “The key is to buy into a growing market and borrow against the end valuation.” 

Hosking Richards adds that investors have to tread carefully when using this approach. The strategy only works when an off-the-plan property is purchased at a good price and in a growing market. The development also needs to have a long lead time.  

2. Joint Ventures

Strategy: Get a partner to sponsor the upfront costs of the purchase and split the proceeds.

Requires: A partner you can trust, who, in turn, trusts you with their money.

“If you want to buy into a good deal, and you don’t have the capacity to complete it, then finding a joint venture partner can provide the missing link,” says Real Wealth Australia’s Helen Collier Kogtevs. 

Collier Kogtevs says that in a typical joint venture there are two types of partners: equity partners and finance partners. Equity partners usually pay the deposit and buying costs, the finance partner gets the loan from the bank. 

This means that if you’re able to secure a mortgage, but lack savings, a joint venture can be a great way to purchase a property. The catch is that you’ll have to share the proceeds of the deal, but as Collier Kogtevs points out, owning part of something is better than owning part of nothing. 

“[My] joint venture partnerships have been fantastic,” she says. “They’ve allowed me to accelerate the growth of my portfolio when I had little or no more equity to use as deposits to buy property.” 

Property author Jennie Brown has also had great experiences with joint ventures and has used this strategy to purchase property many times over. She says the key to making these projects work is having everyone in the venture on the same page. She recommends setting out a clear budget and timeframe for how long you and your partner will hold the property. 

3. Option agreements 

Strategy: Get the vendor to agree to an option agreement, where you have the right, but not the obligation to buy the property. Find a way to increase the property value and onsell it for a profit.

Requires: A vendor who will agree to an option agreement, usually a distressed seller.

When a buyer and seller agree to an option, it means the buyer will pay the seller a specified amount – usually, a couple of thousand dollars, depending on the property – to acquire the right to purchase the property at an agreed price until a certain date.

This amount, say $4,000, will usually be credited against the purchase price of the property should the buyer purchase the property. If the buyer does not exercise the option, the seller retains the payment.

During the option period, the buyer has the option and exclusive right (but not the obligation) to buy the seller’s property. Before signing the option, there will usually be a contract of sale already drawn up, which means that if the option is exercised it will be under terms already agreed to.

An investor can use these types of agreements to raise finance if they can find some way to increase the property’s value. This way they can sell the option to purchase to another buyer who is willing to buy the property at its new value and net the profit.

It’s a risky strategy and relies on the investor having two skills: the ability to add value to the property in a cost-effective way (such as a cosmetic renovation), as well as the ability to negotiate a fairly low purchase price for the option.

The other issue is that few vendors will be willing to agree to an option unless they have had some trouble selling their properties.

How to find an undervalued property

If none of the options listed above are suitable for you, your next best option may be to look into other ways to get more bang for your buck, this could be by finding an undervalued property. Here's what to look out for:

1. Work the numbers

If you want to find an undervalued property you need to know the market, says Cameron Kusher, Executive Manager of Economic Research at REA Group.

“Data is your best source of knowledge when looking to purchase a property,” says Kusher.

“When considering a purchase ensure that you look at what other properties have sold for in the local area and what price other properties are listed for.”

By assessing the local median sale price over time you gain an insight into what you can expect when buying in a suburb. Make sure you get as much information on the following as possible:

  • What are the historic levels of capital growth?

  • What is the average vendor discount?

  • How long does it take to sell a property?

  • What is the gross rental yield and median weekly rents?

According to Kusher, all these questions can be answered with data that helps the investor become better informed and more capable of targeting suitable suburbs and properties.

However, to get the true story, investors still need to dig deeper.

“The tip is to look for suburbs which have a good level of amenity but in comparison to the nearby suburbs, or suburbs with similar characteristics, have either a lower level of growth or a lower median price.”

Median price reports from data suppliers such as REA Group or CoreLogic can point to these suburbs quite easily. 

2. A motivated seller

Finding a motivated seller is a surefire way to secure an undervalued property. Pay particular attention to the circumstances of the sale – why the property is being sold, what the seller's circumstances are – and try to get an understanding of how motivated the seller is. By knowing how motivated a seller is, you will know how much opportunity you have to negotiate.

Asking pointed questions about the sale can provide you with valuable information, says buyers agent Chris Gray.

“Look for someone that has bought somewhere else, is in financial trouble, has just filed for divorce, or lost their job,” he suggests.

While an agent isn’t going to tell the general public that the seller is motivated, Gray says that by developing strong industry relationships investors can obtain this information from selling agents more readily.

“Speak to the agent privately after an open house. If you can make the agent's life easier – by offering a good deal to make a quick sale – then that will help you secure a bargain,” he explains.

“A cheaper price guaranteed right this instant can be worth more to a motivated seller than the dream of a better price tomorrow.”

3. An ugly duckling

Remember that age-old real estate-ism about buying “the worst house on the best street?” That saying generally holds true for investors looking to maximise their capital gain over the medium to long term.

Cameron Kusher agrees that finding something a bit run down can yield good results.

“The best advice is to look for properties that need a little bit of TLC,” he explains. According to Kusher, if the property doesn’t present well the selling point will be hampered.

“It is amazing the difference some paint, some work in the garden, or some new cabinetry can make on a property which previously did not present well,” he says.

However, Property Investment and Finance specialist at InSynergy Jason Pitkeathly cautions investors to make an educated decision when buying a property that needs a bit of tender loving care.

“There are dangers as these properties tend to be tired, run down, and sometimes damaged.  We find purchasers often pay too much for the property and then don’t fully factor in the costs of repairs, renovation, and holding costs through the duration of the remedial work,” he says.

Do your numbers correctly to avoid paying more than the real cost of the property.

4. New infrastructure

Many undervalued suburbs boom after increased spending in local infrastructure and amenities. New train lines, shopping centres, parklands, and access to other amenities all help increase rental yields and capital growth.

Pre-approval for large developments is often dependent on the inclusion of large areas of parkland, so buying an undervalued property in a closely built-up area that is scheduled for development can increase both rental yields and capital growth through the extra level of amenity that the new development will provide.

Also, consider light industrial areas that have recently been rezoned or where councils are planning to rezone, this can provide investors with a great opportunity to pick up undervalued properties.

Pitkeathly, an experienced property valuer agrees.

“Often newly gentrified areas can be difficult to value,” he says.

“If a property has architectural significance, is unique in flavour, of the first of its kind in an area a valuer will find it difficult to find comparable sales evidence and the fair market value can be somewhat subjective.

“If you are confident in your research and purchase decision and can cover any shortfalls because of a low valuation, it should not take long before you can realise some of the equity in that property.”

5. Unsuccessful auctions

Properties that are passed in at auction provide investors with a great opportunity to negotiate a bargain, says Gray.

“An agent might over-quote a property. If it’s worth $600,000 and the agent says $650,000, if no one turns up to the auction the property gets a label that the owner or agent wants too much for it and it stays on the market for months,” he explains.

“Once it’s got that label it is easier to negotiate a price of $570,000.”

Mortgagee auctions are worth following too, as these are almost always committed sales that can provide an investor with an excellent opportunity to negotiate a good price.

6. Buy into a new development after completion

While buying off the plan and selling upon completion can provide an opportunity to net some good profits while attracting no holding costs, you can also pick up bargains after construction is complete.

Look for properties that are being sold three to ten years after completion. A lot of developers do a lot of presales in the construction phase, and a lot of people think that they will make a good profit when they sell post-construction;  if the market doesn’t move in their favour a lot of people want to exit the building.

That creates a flood to the market that drives prices down: investors who wait and buy the first resale within this three to ten-year window can get a good buying opportunity.