There are a lot of different ways to make money in Real Estate, but the way I see it, there is really only one way to “INVEST” in real estate and that is for the long term.
Most other forms of real estate “investing” such as rehabbing, retailing, wholesaling, etc, are great ways to make money and each is an important piece of the real estate investing business, but they are primarily based on speculation in one form or another and there can be a long period of time between paydays.
I think exactly backwards from a lot of the real estate investors out there. Most investors are looking for quick cash and wholesale properties quickly. They will only rehab or rent a property if their speculation turns out to be wrong and they are unable to sell it.
How I “Invest” In Real Estate
I buy all of my investments with the intention of renting the properties for long-term passive income. When my plate gets too full and I can't physically, mentally, or financially take on another project, I then turn to wholesaling as the solution.
I have been focused primarily on buying REO deals for the 2 1/2 years I've been in business. This is the business model taught to me by my first real estate mentor. (Best $500 I had spent to date!) It works well, but this method does have its drawbacks.
There is a lot of competition on REO's for starters, and it requires making a lot of offers on a lot of properties that in the end usually get rejected by the bank.
In the spring of 2011, I started rethinking my business model and after seeking out and getting direction from a new mentor I found through REIClub.com, (another great investment), I decided to start marketing for distressed sellers through the web, direct mail, bandit signs, etc…
By the middle of September, I was extremely frustrated at the lack of deals my marketing efforts had produced. My phone was ringing, but nothing had materialized. By this time I was frustrated. It had been a very long, very hot, very dry summer here in Texas and I hadn't completed a single deal all year.
Two weeks later the tide had turned. I had two smoking hot deals under contract and a third in negotiations.
The properties each had 3 bedrooms, 2 baths, 2 car garages, brick exterior, solid slab foundations, pitched roofs and each had an ARV of around $100K.
Both properties rent for just over $1000 per month. These houses are typical of what I consider the perfect bread and butter deal in my market. And to add to the excitement, I closed on both of these houses on the exact same day, a first for me.
On October 14th, I closed on two single family homes to add to my rental portfolio!!!!!!
House #1 – HUD REO Foreclosure
I purchased directly from HUD. The condition was terrible and needed a lot of rehab. My initial offer for this property was rejected because it was “too low”. No surprise there…
A month went by and I made another offer on the same house at $15K less than my original offer. This is my standard practice and surprisingly enough tends to work out quite frequently with HUD REO's.
I waited and waited and eventually forgot all about this pending offer. Five months later (near the end of September); HUD informed me that my offer had been accepted.
My initial reaction was “Great! What offer? On what house?” When they told me the address and what my offer price was, I almost flipped! The house would appraise at a $105K and my offer had been accepted at $50K.
For those doing the math that's approximately 48 cents on the dollar!
I called a private lender that I've done several deals with in the past and got funding of $70K. I closed on this house 3 weeks later and walked away from the closing table with a check for just over $18,000 to do the rehab with.
After all is said and done and the long-term financing is in place this house will net me $35,000 in equity and a positive cash flow of over $300 per month. The best part is… I have NONE of my own money in this deal!
House #2 – FSBO Private Seller
This was another great deal. In this case, the seller was a private party who needed to sell quickly and for cash. They had gotten my phone number off of the magnet signs I purchased for my truck just 2 months earlier. Those magnet signs may have very well been my best marketing dollars spent to date!
After a short negotiation with the seller, we agreed on a purchase price of $47,000 cash if I could close the house within 2 weeks. After we signed the contract, I immediately started doing the money scramble.
Within 2 hours, I had someone willing to fund the deal. Unfortunately, a few days later, that lender backed out and I now had 10 days to come up with the cash and close or I would lose this deal.
I called up a hard money lender that I've worked with several times in the past and we went to work. This time the house appraised at $85,000. That meant that my purchase price equated to about 55 cents on the dollar!.
The house was in great shape! Technically the house was already move-in ready, another first for me. It did however, need a little minor cosmetic updating like wallpaper removal and a fresh coat of interior paint to make it sparkle.
When the smoke clears and long-term financing is in place, this house will net me $30,000 in equity and over $450 per month positive cash flow. Once again, I managed to complete this deal with NO Money out of my pocket!
Why I Love Real Estate Investing
Both of these deals have turned out to be very profitable for my real estate investment business.
I could easily have wholesaled these two houses for a nice profit. Or even yet, I could have rehabbed and retailed them walking away with a very sizable chunk of cash in my pocket. However, if I were to sell these two properties, I only get to profit from them once.
As newly rehabbed rental properties, I can enjoy the profits every single month for as long as I decide to own them and I still get the large payday in the end should I decide to sell. With no, out of pocket costs on these houses I have an infinite return on my investment.
Two years ago, I didn't believe it was really possible to buy real estate without using my own money, now I've just done it twice in one day; I love this business!!