How I Bought This House For $0

I'm very proud to say that this property right here was free. It cost me zero dollars. I was able to buy an income-generating property here in Los Angeles for nothing, and I think it's at this point that people are supposed to comment, "It's free real estate!" Well, I mean that's kind of true, but with a little bit of a catch. I mean, we're not talking about buying a property with no money down, or doing a hundred percent financing, or taking advantage of a real estate loophole called adverse possession, where you take ownership of an unclaimed property. Although that would be actually pretty cool.

But now, when it comes down to it, this property that I'm filling in was zero dollars out of pocket to own. So here's how this works and how you can do it too. 24 months ago, I began looking for an income property around the mid-city area of Los Angeles, and I really liked that area in particular because it was close to nearby transit. It was surrounded by several large new developments. It was only a 15-minute drive away from the beach, and most importantly, it was really one of the few areas in Los Angeles where property prices were still selling for under a million dollars. Welcome to LA!

So I started searching for a property, but it couldn't be too new because then I would have to pay a premium for it. But it couldn't be too old either, because then it would take too much time to fix. It needed to have a decent square footage without being overbuilt for the area, and most importantly, it had to be priced below what it was really worth. So I definitely had my work cut out for me.

So after six months of searching and writing offers and getting outbid and otherwise not finding a single opportunity, the perfect place came up. It was a 1920 Spanish duplex, plenty of original charm. It absolutely needed to be fixed up, but it wasn't horrible either; it just needed some TLC. The price listed was for $585,000. The second I saw the new listing notification pop up on my phone, I immediately got into my car to drive over. I called the real estate agent on the way, I told her I was stopping by, I got the lockbox code, and I arrived at the property just 30 minutes later.

Once I got there, I saw it, and I realized that they underpriced it. Even though it was listed for $585,000, I can tell it was easily worth about $675,000. But I knew I had one major advantage working for me: I was the first one to see it, and I had a small chance to get my offer accepted before anyone else could take a look and realize just how good of a deal this was.

Now, here's a quick real estate lesson for everyone in real estate: really, what you pay for a property comes down to leverage. If the seller prices a home well and gets multiple offers, then they have all the power, and with that, they can get an even higher price, knowing that several people want it and expecting each of them to just outbid each other. However, if the seller has no one else interested, the buyer has all the power. The buyer is the one who dictates the terms and the price, knowing that if they walk, the seller has nothing.

So, given that I was the very first one to see it, I knew I didn't have any other competition at the moment, so that was a strategy that I played. It turns out neither the agent nor the seller had any idea what the home was worth. The owner was from out of the area, the real estate agent was also from out of the area, and they just picked an arbitrary price based off what they thought it was worth without really doing any research. So, their loss was my gain.

I made them an immediate offer: I'll pay full price guaranteed to close under the condition that the owner accepted immediately. Two hours later, the owner accepted my offer, which by the way, it was very very lucky because just like I had thought, other people saw the property after I did and realized how well it was priced. How do I know this? Because I found out the next morning that they received an offer at $650,000 from a buyer paying all cash that was $65,000 higher than I offered just a few hours earlier. But they didn't get there as fast as I did.

Now in real estate, everything is timing, and the early bird gets the worm. Then after a 30-day escrow, the property was officially mine. I bought it for $585,000, I put a $150,000 down payment, and I got a loan for $438,000 to cover the rest. Now, if you're confused about how I got the property for free because I just said I paid $150,000 as a down payment, I promise I'll get to that. But it's really important to follow this information because it'll all piece together at the very end.

Now, like I mentioned earlier, the house needed some work. The floors were scratched, the kitchen needed to be torn out, the bathroom was disgusting, the landscaping was overgrown, the roof needed to be replaced, and it needed paint—lots of paint. This costs time and money, so I spent another two months and roughly $80,000 fixing it up. Basically, I was turning it into a more aesthetically pleasing version of itself and bringing back some of those original 1920s characteristics that were just lost over the years.

This meant that when I was finished, I had invested a total of two months' worth of time and about $230,000 into her property, which I claim I now have for free. Now, this is where the magic of real estate happens. No longer did I have a rundown, dilapidated property in need of TLC; I had a remodeled 1920s Spanish entertainer's dream home with charming original hardwood floors and a gourmet chef's kitchen. You can tell I'm a real estate agent!

But anyway, most importantly, that meant this property was worth more than what I had originally paid for it. So I went to the bank and I told them I wanted to do what's called a refinance. This is when the bank will give you a new loan based off the current value of the property, not the price that you paid for it, and the market value was very favorable to me. An appraiser determined the value of my property for a remodeled 1920s Spanish duplex was now $780,000, just shortly after I bought it.

Now this is a big deal because number one, I bought the property for $585,000, I spent $80,000 fixing it up, my total cost was $665,000. Subtract that from the new value of $780,000 and that gives us $115,000 worth of profit. So given the new higher value, the bank is able to give me a mortgage of up to $585,000 and then give me back $145,000 in cash.

Now, if that doesn't make any sense, here's how it works: the current mortgage is $438,000, the bank's new loan is $585,000. The new loan pays off the old loan, and that leaves us with $145,000 left over after paying some transaction fees. So where does that $145,000 go? Well, since there's no more loan on the property, it just goes to me.

This means I was originally $230,000 out of pocket to buy and remodel this property, but then I got $145,000 back, meaning that at this point, my only out-of-pocket cost to own a property here in Los Angeles is $85,000. Now I realize that's still not zero dollars, as I claimed in the title. I promise I'm getting to it; it'll happen just stay with me here.

So anyway, that was a year ago, and guess what's happened since then besides smashing the like button if you haven't done that already? Well, so far my property predictions from 2017 when I bought the place have been correct. The new developments that were under construction two years ago have now been finished and have attracted new talent and new business into the area. The new tax reform that went into effect in 2018 also made owning real estate valued more than a million dollars just slightly less desirable from a tax perspective. So more and more people wanted to buy anything they could under a million dollars and that happened to be right in the area that I bought.

Now, in addition to that, we also had something unexpected happen. All of this recent economic uncertainty has led to interest rates going down. At the time, I was paying 4.6% interest on my mortgage of $585,000 which at the time was actually a pretty competitive rate given that it was a cash-out refinance. But now, since interest rates went down, what I was paying was just too high.

So what does any good real estate investor do when this happens? Well, they go shopping. No, not that type of shopping—interest rate shopping! I went from bank to bank to bank to get a quote on a new mortgage. Now I started off by getting a quote of 4.2%, which would save me about $140 per month on my mortgage. Now that's not bad, but I knew I could do better. I then took that quote to another bank and had them beat it, and then took that quote to another bank and had them beat it, and another bank and had them beat it. Soon it became really just like a race to the bottom to determine which bank would give me the lowest interest rate just to get my business.

And from that, ladies and gentlemen, is how I got a 3.75% fixed-rate 30-year mortgage on a cash-out refinance. Now for anyone not in real estate, that right now is pretty much like a unicorn of the deal. But the size of that loan was still undetermined. It all came down to a third-party appraiser, which determines from a neutral perspective what the property is actually worth.

Thankfully for me, property values in the area have gone up a lot in the last year. So much, in fact, that the appraiser valued the property at—you want to take a guess? $965,000! That is almost $190,000 higher than I received just a year earlier! But this also meant I can do yet another cash-out refinance not only to lower my interest rate but also to get some cash back. Given the new $965,000 value, I was allowed a $675,000 mortgage, leaving 30% worth of equity still in the property.

Now, just like the last example, my current mortgage is $585,000, the bank's new loan is $675,000. The new loan pays off the old one and that leaves us with about $85,000 left over in my bank account after paying some transaction fees. That meant that after everything is said and done, not only do I have $290,000 worth of equity in the property, but I now save an extra $200 a month on my mortgage interest payment, and I get back all of the $230,000 that I invested, leaving a total out-of-pocket cost to own this property in Los Angeles for zero dollars.

Like I said, the first refinance got me back $145,000, and then the second one got me back $85,000. That was everything I invested in this property, so now it's basically free real estate.

Now yes, I know people are going to get triggered, and I'm sure some people will say, "But it's not free, Graham, because you had to spend $230,000 to do this. That's not free!" Now yes, this is true. But first of all, this isn't exactly rocket science either, and many of you can do something similar and buy a property to get all of your investment back with substantially less money than I have invested. You don't need $230,000 to do this, and I know many people who have put down substantially less money to have very similar results.

Secondly, in real estate, the only number you really care about is the net return. That's it! If you invest $20 into a property for one year and then you get all of your $20 back, but now you still own the property, that's what's important to focus on—not the cost of the original $20. That's how any successful real estate investor thinks.

And yes, I know if people didn't get triggered from the first example, they'll say something like, "Yes, but you have to pay it all back. That's not real money 'cause that's a loan; you're taking a loan." And yes, while you do need to pay that back, you're pretty much borrowing money from yourself—you're just becoming your own lender and lending yourself money to go and spend. So you're paying yourself back.

In real estate, your ideal situation is that you can control 100% of an income-generating asset by having as little of your own money invested in it as possible. This really gives you the opportunity to invest your money in other higher-generating opportunities than keeping your money tied up in an asset where it isn't actively working for you. And no, this is not what caused the real estate crash of 2008.

There is a very big difference between speculating on real estate appreciation on stated income, 100% financed variable interest rate short-term loans, and then expecting the market to appreciate and value to pay for that loan versus taking out a 30-year fixed-rate mortgage on an income-generating property, leaving 30% equity in the deal. If people don't understand that, then I give up. I quit.

There's no other way that I can say that this is really just the name of the game when it comes to real estate. It's about finding a good deal, putting your money in it, making it work for you, refinancing your money back out of it, keeping the property, and then going and using that money to do it again.

And it's by doing that over and over and over again that you could soon build up your own real estate empire for free—by just smashing that like button if you haven't done that already.

So with that said, you guys, thank you so much for watching. I really appreciate it! Like the last one, these types of videos take me forever to edit; like this is probably like 12 hours' worth of editing to do this. If you wouldn't mind just hitting the like button for the YouTube algorithm, it just really helps out the channel dramatically. Just something as small as that—that's it! Otherwise, the video is free; just if you do that, that's great.

Also, if you made it to the end and you haven't already subscribed yet, make sure to subscribe; that also is totally free to do. Also, feel free to add me on Instagram. I post there pretty much daily, so if you want to be a part of it, feel free to add me there.

Thank you again for watching, and until next time!