The Numbers Game: Real Estate Investing 101
Real estate is arguably the greatest investment on the planet and the quickest way to attain a million-dollar net worth. As a matter of fact, there’s not one millionaire that I’ve met that doesn’t own a piece a real estate. Everyone needs a place to live and every business needs a place to conduct business (even Facebook needs a fancy building known as the corporate headquarters). With that being said, investing in real estate has the potential to yield you some serious profits.
This article will discuss the three most popular ways to build wealth in real estate. They are wholesaling, fixing and flipping, and buying and holding.
Wholesaling is the process of finding a property (from a motivated seller such as someone going through a divorce), analyzing the property, making an offer to hopefully get it under contract, then turning around and selling that contract to an end buyer. Another fancy term for wholesaling is paper flipping. You’re simply “flipping” the contract to another buyer (most likely because you don’t have the money to buy the property). Why in the world would a buyer buy a contract from you? Because the deal you found is so good that the end buyer either couldn’t find it on their own or you beat them to it first. This is a very quick strategy that most real estate investors start out with, although it yields the lowest profit ($5,000 on average).
In order to properly analyze a deal, you have to first find what’s known as the After Repair Value (ARV). This is simply how much someone will pay for the property after it’s been fixed up. This figure will be based on comparables (similar properties that have been sold in the area within the past 3-6 months). A realtor will certainly be helpful in this area. Note that the best wholesale deals aren’t even on the MLS so it’s best to find off-market properties on sites such as Craigslist. Next, you have to estimate the repairs on the property. This will most likely require a contractor in the beginning, but as you look at more properties, you’ll be able to estimate the repairs on your own. These two critical components will ultimately let you know the maximum amount you should offer on the property. The key is to find a really good deal and have buyers line up at your door to buy that deal from you. For more details regarding this strategy, I would recommend reading the book, “The Real Estate Wholesaling Bible.” Once you build up enough cash wholesaling, you can then move to the next strategy.
Fixing and Flipping
Fixing and flipping has virtually the same steps as wholesaling; only now, you’re flipping the actual property instead of your rights in the contract. This is where you find a really good property, fix it and make it look pretty, then sell it for full retail price to an end buyer such as a family. There’s much more skin in the game and it’s best to have some type of reserves in the bank in order to successfully master this strategy. Since there’s more skin in the game, the profit potential is huge with this strategy. I personally won’t pursue a fix and flip unless it yields me at least $20,000 in net profits. You have the opportunity to make a ton of money with this strategy so be sure to do your due diligence. The key here is to flip the property as quickly as possible. Be sure to consistently communicate with your contractor (the guy that fixes up the property) to ensure timely repairs on the property.
Another very key party to this strategy is the lender. Most people that fix and flip in the beginning use what’s known as a hard money lender. They can care less what your credit score is and will lend to you based on how good the deal is. Because if you default and run off to another country, guess what? They simply take the property and sell it themselves. So they will lend you the money, but only if it’s a really good deal. Some hard money lenders will even lend you 100% (purchase price, closing costs, repair costs, etc.)! This is an excellent strategy if you know what you’re doing and are willing to take on a little more risk. Most real estate books discuss fixing and flipping and the book, “The Millionaire Real Estate Investor” mentions some critical components of fixing and flipping. Once you build up some steam with this strategy, you can now move on to the most popular real estate strategy there is.
Buying and Holding
Buying and holding is where true wealth is built. The exact same steps as fixing and flipping apply, but now, you’re holding on to the property yourself, building long-term wealth, and you may not even need to fix up the property. This is where you buy the property and rent it out to other people that will pay you consistently (hopefully). What you do not want to do with this strategy is manage the properties on your own or this will cause you a huge headache. There’s arguably nothing worse in life than having to deal with tenants. Instead, hire a management company that will take care of your headache for you. The nice thing with this strategy is that you can make money off the rental income and the appreciation of the property through a refinance (and pulling out the equity). This makes buying and holding the best strategy out there because it's an opportunity to build long-term wealth. Virtually every investor’s dream is to build a large portfolio of cash flowing rental properties while they sit on the beach and get paid. You can even get the seller to finance the property for you through what’s known as seller financing. It is best to have a pretty nice reserve of money to deal with the unexpected such as large maintenance projects on the property. The book, “The ABC’s of Real Estate Investing” is a really good for the buy and hold strategy.
Real estate is arguably the greatest investment you can make. From fixing up a property and flipping it to living off passive income for the rest of your life, there’s nothing more rewarding financially than investing in real estate. These are some of the most popular investment options out there. Others include tax sales/deeds, sale leaseback options, and many more. I would advise reading some of the books mentioned in this article and getting more general knowledge before getting started. I hope that you someday join the real estate investment journey. The key is to apply what you learn and take action! Please don’t hesitate to reach out if you have any questions.