Real estate investing is much like any other business-you have to “get in where you fit in!” Most investors like to find a niche and stick with it while other investors like me get bored too easily and like to try new things.
Most Investors get started either by wholesaling for quick profits, rehabbing homes, renting homes, or building new homes. This has been quite the norm since I have been in business.
It's usually more effective to focus on one niche. Initially, you may start out doing the one you start with but ultimately find out you're better suited or happier concentrating on another. I started out in the business as a rehabber and then gradually started to wholesale. Personally, I like the challenge of learning new real estate techniques.
Finding your niche may take months or even years. You may never find a single niche and may continue experimenting with all facets of the real estate business (like me). Although I have been a better wholesaler than anything else, I have made almost more money building homes than wholesaling.
Unless you are more fortunate than I was and have a wealthy father who leaves you with a huge inheritance, I'm sure that you too will get started in real estate business as a wholesaler, rehabber, a rental landlord, or a new construction homebuilder. You're starting on the ground floor just like I did.
If you need to find a way for you to get started with “No Cash-No Credit!” Wholesaling houses and flipping contracts just might be our ticket!
Traditionally, a real estate wholesaler finds and quickly sells properties to other real estate investors at a price that allows a respectable profit. To make money, a wholesaler must have two things:
- Good sources for finding properties well below market values
- Ready supply of cash.
Most wholesalers buy properties from other wholesalers, private homeowners, real estate owned properties (REO), and foreclosed properties. There are a few other sources, too, but these are the most common.
A wholesaler will typically not make as high a profit margin as a retailer who rehabs the property and sells it at market value, because he must leave enough profit in the deal to attract a rehabber/retailer to purchase it.
However, a wholesaler needs to do more volume and at a faster pace than a retailer. For every property a retailer sells, a wholesaler may sell five.
The retailer will typically make more money from that one property (let's say he made a $15,000 profit), than the wholesaler (he may average $5,000 per property), but the wholesaler has the opportunity to make more money in the same time frame as the retailer. In this example, the wholesaler made $25,000 profit in the same time frame the retailer made $15,000.
In my experience, a wholesaler has the opportunity to make a lot more money than a rehabber, if he can pick up enough momentum to quickly turn the properties fast! If he is successful at doing this, he can earn huge profits of $10,000 – $30,000 per month (or more).
That may seem like a lot of money. However, if you do 1-3 deals with an average of $10,000 per deal, you get a quick $10,000 – $30,000 per month-this is not as impossible as you may think! I can recall countless times producing net profits exceeding six-figures in a given month. “If I KEN do it, so KEN you!”
Making a lot of money as a wholesaler is a lot of fun. You can make a lot of money and live like a ROCK STAR. Here are the advantages and disadvantages of wholesaling.
Advantages of Wholesaling:
- You can make a lot of money.
- You have very little risk (you can execute a contract for $1).
- You don't have to get dirty.
Disadvantages of Wholesaling:
- You limit yourself to only flipping contracts instead of learning the business of flipping homes (I always suggest to my student to rehab a house or two so that you understand the rehab process. Don't limit yourself to only assigning contracts.)
- You are not building long term wealth (i.e., as in being a landlord).
A rehabber purchases his properties from wholesalers, and occasionally retailers buy their properties directly from the same sources as wholesalers (private sellers). This allows them to make bigger profits by cutting out the middle man- but this can be extremely time consuming. Most retailers are also “rehabbers”.
A retailer/rehabber will buy a distressed property (owner not keeping up with it financially, physically, or otherwise), rehab it (which will bring the value up), then sell it to a buyer who wishes to live in the home or hold it as a rental property.
A good rule of thumb is for a retailer/rehabber to net a minimum of $15,000 – $20,000 per property for their hard work. Sometimes this does not work out according to plan. It takes considerable construction skill and willingness to deal with subcontractors to be a successful retailer/rehabber.
Rehabbing houses may seem like a great career and a lot of fun but before you decide to rehab homes you may want to ask yourself a few questions.
Advantages to Rehabbing:
- You are learning the most important aspect of real estate investing, turning a house from “nothing to something!” These are great skills to have if you want to be in the real estate business for the long haul.
- You can make immediate cash (after the house is rehabbed and resold).
Disadvantages of Rehabbing:
- Rehabbing them can be a headache.
- Hidden damages-when everything seems to be fixed, something else breaks.
- You are not going to see a check for many months.
- You may not be able to sell and be forced to rent.
A landlord is someone who owns real estate properties and rents them out to tenants for a profit. I've noticed in my years in the real estate business that most investors get started in the landlord business for one or another reason:
- They were convinced by a friend to buy a home to rent.
- They inherited the home.
- They rehabbed the home and couldn't sell it.
There are several benefits to being a landlord. Some people love the rental business, while others hate it. Again, you have to find your niche and find out what works for you (don't allow others to persuade you).
Building a rental portfolio is not a quick cash turn around. While
wholesaling is the fast-paced rabbit, landlording is the slow-paced turtle.
Landlording takes systematically planning to reap long-term rewards. The rewards may take time, but if you plan well it can pay off handsomely for a landlord.
When buying properties that you are going to hold on to, location is just as important as the purchase price. Your best bet is to buy properties in established high rental communities with easy access to public transportation, shopping and schools.
The next important factor is to look for properties that will rent for more than the monthly mortgage, insurance, and tax payments. The cash from your rents needs to cover needed maintenance and repairs and generate a positive cash flow.
Once you find a property, you'll need to run the numbers carefully before you decide to buy. Ask the seller for copies of maintenance records so you know what has been done to the building and what hasn't. Be sure to factor in anticipated vacancies when you estimate your cash flow and include a reasonable allowance for maintenance.
Advantages to Buying Rental Properties:
- Rental homes should continue to appreciate in value
- There are tax benefits (all property taxes, insurance, maintenance can be deducted from your taxes), this can also be carried over to ….
- Each property should generate a positive cash flow each month (if you buy right).
- You own a home that is paying for itself.
Disadvantages to Buying Rental Properties:
- If you don't screen your tenants right you can be end up with a tenant from hell.
- If the property you own does not have a positive cash flow each month (income – expenses = positive or negative cash flow) you may have to pay out your pocket each month to make up the difference.
- Rental properties can be more difficult to sell than vacant homes (if you decide to sell the home).
- If you are not a handyman it can be a challenge handling surprise repairs on the property (wear and tear) if something breaks.
Although repairs are tax deductible if you don't have any money to tackle the repairs this may present a hardship situation for you and cause friction between you and the tenant (if the repairs are not fixed).
Buying and holding rental property can be a very good investment as long as you invest wisely. Your decision can make the difference between a profitable investment to build wealth or a nightmare.
The key being a successful landlord is screening your tenants. This is where most New Jack Investors go wrong. You can avoid so many unnecessary tenant problems if you just take the time to properly screen your prospective tenants.
Make sure they fill out an application, run a credit check and personal background check, and check their references. It can be more costly to have a bad tenant than no tenant at all in your property.