Is it possible to make
money as a real estate
investor if you have no
money to start with?
Although this may sound like a contradiction of sorts, it certainly is possible!
What is wholesaling? Wholesaling is the process of finding great real estate deals, writing a contract to acquire property, and then selling the purchase contract to another buyer.
A wholesaler never actually owns the piece of property. A wholesaler simply writes a contract to purchase and sells the contract (called assigning the contract) to another buyer. When the wholesaler sells the contract to a buyer, he/she is paid an Assignment Fee. This is a how the wholesaler makes money. This fee can is negotiable and can range between $500 to $10,000 or more, depending on the size of the deal. Essentially, a wholesaler is a middleman who is paid for finding deals.
Many investors choose to begin with wholesaling due to the low start-up costs. It is a popular strategy taught by the real estate gurus and garners a lot of attention. What the gurus do not tell you, however, is that wholesaling is one of the most difficult ways to make money. Wholesalers must continuously seek out deals in order to have inventory to sell to others, and wholesalers must have a buyer-network in place so that they can quickly assign the property and collect their fee. If a wholesaler cannot assign the fee, they may lose any Earnest Money that was pledged with their original contract offer to the property owner.
Below is a (very) brief example of a successful wholesale transaction:
Wholesaler Wilma finds a property with a market value of $400,000. The current property owner, Seller Sue, is offering to sell the property at a price well below market value. Wholesaler Wilma offers to purchase the property from Seller Sue for a price of $250,000. Seller Sue agrees, so Wholesaler Wilma writes an offer to purchase the property. Wholesaler Wilma will not be listed as buyer on the contract, instead, the buyer name will be: Wholesaler Wilma and/or assignees. Then, Wholesaler Wilma begins to contact her network of prospective buyers. She hopes to be able to sell the contract for a $10,000 assignment fee. (Note: this fee is excessive, and definitely not “the norm”.) Wilma is hoping a prospective buyer will be enticed to purchase the contract, even with this excessive fee, because even after the fee...the property is still priced well-below market value and is a property the new buyer would not have known about without Wilma finding it first. (We can liken the assignment fee to a finders fee.) Back to our story. Wholesaler Wilma finds Buyer Brad. Brad is willing to purchase the property from the seller and pay Wilma the $10,000 fee. Wilma now writes an Amendment to the Contract - a form that clearly states that Buyer Brad is the new Buyer and removes her name from the contract. The Amendment also states that Buyer Brad will pay the agreed upon assignment fee at time of purchase. Once Buyer Brad completes the purchase of the property, Wholesaler Wilma gets paid.
And, that is how it is done!
BUY & HOLD
FIX & FLIP
What is a “Fix & Flip”?
You simply purchase a property in need of rehab and TLC, fix issues with property to make it attractive to a new buyer, and resale the house at the highest price possible. The typical time to flip (from time of purchase to re-sale) is two to six months, depending on how long the “fix” takes.
The advantages of the Fix & Flip strategy include:
1) Quick profit. You get your money back in months rather than years.
2) No management/tenant hassles. No long-term commitment or involvement.
3) Staying liquid. Getting your cash, and a nice profit, out of the property in a few months.
Any repairs done should be targeted to maximize appeal, both inside and outside, for the least cost. That doesn’t mean going cheap, but it does mean being discerning.
Most foreclosures need some degree of repair and renovation and many buyers can’t or don’t want to deal with the hassle of doing it themselves or managing contractors to do the work for them. If you’re doing repairs or upgrades, be sure you focus on the areas that give you the best return on investment, such as kitchen and bathroom renovations or adding additional rooms.
Outside. Keep the lawn cut and the landscaping trimmed and weeded and watered. Repair or replace loose or damaged roof shingles. Check for peeling paint and loose gutters. Keep the garage door closed and store vehicles elsewhere. Give the front door a fresh coat of paint.
Inside. Clean all rooms, address all cracks or holes in the walls and paint them, replace worn or damaged flooring, fixtures and appliances. Be careful though about putting new appliances into vacant homes in bad areas. If you are in a highly competitive mid to upscale market, consider painting accent walls, adding crown molding, or staging the home with quality furnishings. Use popular, safe color and material choices.
Most importantly be competitive with nearby listings and compatible with the neighborhood. There is no reason to put in a granite kitchen if the other listings all have Formica, but you may have to if you are the only one that doesn’t. If every other house on the block has weeds in the yard don’t bother with expensive landscaping. At the end of the day the goal is to present prospective buyers with the best balance of price and quality (value) on the market.
BUY & HOLD - Become a Landlord
FIX & FLIP
Buying and holding
real estate for the
long term is a very effective wealth building strategy. The information below will highlight favorable reasons to buy and hold real estate.
Appreciation: Despite the recent real estate crash, when you look at real estate over the long haul, it’s accurate to assume some level of appreciation in your real estate holdings. Yes, there are market cycles where values rise quickly or fall quickly, but by and large, real estate is an asset class that appreciates.
Passive Income with High ROI: Holding real estate can be a very passive investment that provides returns much higher than could be obtained through other passive investments (ie. stock, bonds, etc.). Enjoying rental income at the same time you can choose to outsource property management, accounting, etc., investors can still make good returns while playing a very hands-off roll in the investment.
Principle Paydown: A commonly overlooked benefit of investing in real estate is the fact that while your tenant may provide you with positive cash flow above and beyond your mortgage payment, they are also helping to pay down the mortgage as well. Before you know it, you will have shaved thousands of dollars off of your loan amount every year until ultimately you own the property outright.
Tax Benefits: Any kind of deduction is helpful. Owning real estate allows for the deduction of mortgage insurance as well as the depreciation of the property itself. In addition to this, real estate can also afford you the opportunity to defer tax liability by using 1031 exchanges to continue investing funds in new properties while deferring tax liability indefinitely.
Hedge Against Inflation: Many analysts believe inflation is coming (if not already here). Owning real estate and using leverage (especially at these low interest rates) is a great way to hedge against coming inflation. If prices rise, so will the cost of housing … owning an asset that rises with the tied is a great way to protect your wealth.
Increasing Rents: Very few people would speculate that housing rents will decrease over time. Most analysts have already stated that rents are expected to increase over the coming years. Owning real estate not only allows you to lock in housing prices and interest rates that are at all-time lows, it also provides you with the an opportunity to increase future cash flows by increasing rents, thus increasing your ROI in future years.
Retirement Income: This is my favorite part! For those investors that look at real estate investing as a very long term proposition, the potential to retire on rental income is very real. I know many investors that have owned real estate for multiple decades as a retirement strategy and ended up very wealthy as a result. Over a 20-30 year period of time, investors can own numerous properties outright and create a net worth well into the millions. Additionally, the cash-flow that can be generated from properties that no longer have mortgages can be very nice supplements to pensions, 401Ks, social security, etc.
Creative Exits: Real estate is nice because it doesn’t have to be a permanent proposition. You can own a property for 1 month or 50 years, and it is completely up to you. When it comes time to sell a property, investors can use any number of different strategies to maximize profits.