One of the most common questions we receive from new borrowers is:
“If the deal is so good, why do I need to put any of my own money into it?”
It’s a fair question.
After all, real estate investors are constantly being taught to use leverage, preserve cash, and scale their businesses by using other people’s money.
The problem is that somewhere along the way, many investors begin chasing a dangerous goal:
Getting into deals with none of their own capital at risk.
While that may sound appealing on the surface, it can create significant risk for both the borrower and the lender.
The Myth of “No Money in the Deal”
There is a popular idea in real estate investing that the ultimate goal is to never put a dollar of your own money into a deal.
In theory, it sounds great.
If the deal works, you make money.
If the deal doesn’t work, you have nothing to lose.
The problem is that real estate doesn’t always go according to plan.
Contractors quit.
Permits get delayed.
Material costs increase.
Properties sit on the market longer than expected.
Unexpected repairs appear.
When a borrower has no capital available and no liquidity reserves, even a small problem can quickly become a major one.
That’s why responsible lenders don’t simply evaluate the property. They evaluate the borrower as well.
There Is a Healthy Middle Ground
On one end of the spectrum is the investor who puts 100% of their own cash into every deal.
On the other end is the investor who refuses to put a single dollar into anything.
Neither approach is ideal.
The most successful investors typically live somewhere in the middle.
They use leverage intelligently while still maintaining enough liquidity and personal investment in the deal to navigate challenges when they arise.
This creates alignment.
The borrower has something at risk.
The lender has something at risk.
Both parties are motivated to see the project succeed.
Why Lenders Want Shared Risk
When a borrower contributes capital to a project, it accomplishes several things:
It demonstrates confidence.
If a borrower isn’t willing to invest in the project, why should the lender?
It creates commitment.
People naturally protect what they have invested in.
It provides a cushion.
Real estate projects rarely go exactly according to plan. Having cash invested often means the borrower has additional resources available if something unexpected happens.
It aligns incentives.
The lender and borrower become true partners in the success of the project.
This isn’t about making the borrower uncomfortable.
It’s about positioning everyone involved for the highest probability of success.
The Hidden Risk of Second Position Financing
Recently, we’ve seen more borrowers attempt to satisfy their required down payment by raising money from a private lender in second position.
Let’s look at an example.
Assume:
- Property ARV: $300,000
- 608B lends 70% of ARV = $210,000
- Borrower is responsible for:
- Down payment
- Closing costs
- Origination points
- Monthly interest
Instead of using their own capital, the borrower finds another lender willing to fund all of those costs in second position.
At first glance, everyone wins.
The borrower gets into the deal with little or no money out of pocket.
The second-position lender earns a return.
The project gets funded.
But what actually happened?
The borrower’s equity position has effectively disappeared.
The leverage on the project has increased dramatically.
And perhaps most importantly:
The borrower still has little to no liquidity available if something goes wrong.
Now there are two lenders involved.
Two sets of payments.
Two sets of expectations.
And often, very little cash available to solve problems.
In many cases, the borrower has simply replaced their own capital with additional debt.
That’s not reducing risk.
It’s increasing it.
Why Liquidity Matters More Than Most Investors Realize
One of the biggest reasons lenders require skin in the game has nothing to do with the down payment itself.
It has everything to do with liquidity.
The strongest borrowers aren’t necessarily the ones with the largest net worth.
They’re the ones who have accessible cash reserves.
When a project hits a bump in the road, liquidity solves problems.
It pays carrying costs.
It covers overruns.
It buys time.
It prevents small issues from becoming catastrophic issues.
When borrowers stretch every available dollar into a project and finance everything else with secondary debt, they often leave themselves with no margin for error.
Real estate is hard enough when things go right.
It’s much harder when you have no cash reserves and no flexibility.
What We Believe at 608B Capital
At 608B Capital, our goal is not to make borrowers put money into deals simply for the sake of doing so.
Our goal is to create loan structures that give both the borrower and the lender the highest probability of success.
We believe leverage is a powerful tool.
We use it every day.
But leverage works best when it is paired with responsible risk management, adequate liquidity, and aligned incentives.
The best borrowers understand that having some skin in the game isn’t a penalty.
It’s protection.
For the lender.
For the deal.
And ultimately, for themselves.
Final Thoughts
The goal should never be to put all of your money into a deal.
The goal also shouldn’t be to put none of your money into a deal.
The goal is to find the right balance.
Use leverage wisely.
Maintain liquidity.
Keep reserves available for the unexpected.
And remember that the strongest deals are often the ones where both borrower and lender share in the risk and the reward.
Because when everyone has something at stake, everyone has a reason to make the project succeed.