Updated: Nov 29, 2020
The amount of ways to dip into real estate are almost endless. From Wholesaling, to Buy & Hold, to Flipping, to Syndications. We’ve met many folks that have done several of these, to those that stick to what’s tried and true for them. Real estate provides many opportunities to enhance your wealth. Finding the right deals is the most important first step in brokering your first deal.
For many wanting to get their feet in the game, Wholesaling is a potential first step. While not for everyone, the main premise of wholesaling involves finding motivated sellers, offering to buy their property at a set price and quickly selling that contract to a buyer. These individuals are not buying the house per se, but buying the rights to the home and act as a middle man. Often times these deals are found for flippers. In hot markets, this can still be a money saving strategy for a buyer, as these deals are brokered most times before the house even hits the MLS system.
Next, you have “Flippers”. The overall premise of Flipping is to buy a house at an under market value and “flip” it (mainly by adding value through renovations) and then resell at a higher price to make a profit. There is obviously a lot of risk when going this route, so utilizing due diligence is of the utmost importance. Running numbers, looking at comps and knowing the amount of time and money needed to go into the home for renovations are all necessary when deciding if a potential flip is a good idea. Along with knowing you have your numbers right, you need to have a team that you can count on. When starting out, you may do a flip yourself, but it is more likely than not that at some point during the process, you will involve general contractors. It is extremely important that you get a team you can count on and that they stick to the schedule. Any delays in getting jobs done, can be costly to your overall potential profits.
Buy and Hold. This method is simply purchasing a property with the goal of renting out the unit for monthly “passive” income. Along with the additional monthly income, many buy and hold investors look at appreciation of the property when deciding on markets to buy in. When looking at a buy and hold, there are a number of things to look at prior to making an offer. First and foremost, it is extremely important to run the numbers on a potential property. Look at interest rates, purchase price, taxes, insurance, maintenance costs, etc. Then, look at the area the property is in and the potential amount that the property can be rented for. Next, be sure to include property management fees if you aren’t going to manage yourself. These are typically around 8-12% of the monthly rental amount. Depending upon the amount that is put down for a down payment is obviously a large factor into your monthly profits. Cash on cash return and return on investment are both important indicators to look at when determining if you are getting a good deal or not. The ability to provide a larger down payment, purchasing a property with 100% cash, etc., allows you more skin in the game in a hot market. Even if you don’t have a large amount to put down, you can be strategic about borrowing funds for a property that makes sense. Pulling from a HELOC on a mortgage you already have, getting a hard money loan, etc., can make sense for the right deal. However, it is important to weigh risk before pulling the trigger on any real estate deal.
Syndication. A syndication is essentially pooling your money with other buyers on a large transaction. This for example can be a 1000 unit apartment complex. The idea and premise behind this type of deal is to share the risk, while having the ability to own a part of a real estate deal that you likely otherwise would not be able to facilitate on your own. Syndication is generally used to buy multi family property and can be anything from going in with one other investor on a small multi family to syndicating with multiple other people on a large multi family for a hands off pure investment standpoint. Either way you will need to research to make sure the deal makes sense for the amount of cash you are investing.
Compounding factors. Real estate when done right, allows for exponential wealth creation. This can allow an investor to utilize profits from one or several deals to put towards another deal, or cash out smaller investments to go towards larger ones. For example, cashing in several single family properties to buy a multi-family property. The most important thing to realize is that you utilize due diligence, do not get in over your head and make smart and strategic decisions. Ultimately this is your path and be careful with feeling pressured to go after a deal that you are not ready for or does not make sense. As we saw a decade ago, there is always a chance of a severe market downturn and that is why it is important to be able to know you numbers and be able to ride out the worst of times so you can reap the rewards of the good market returns.
Next blog, I’ll discuss methods and strategies to go about actually acquiring properties and facilitating deals through the above processes. Real estate investing is not the best choice for everyone, but I want to introduce some methods that can take your investing to the next level to reach early retirement. Cheers to frugality!