Real Estate Investing 101
Flipping, Wholesaling, and Holding
We’ll briefly, and I mean briefly, visit three different types of investing in this article, but I encourage you to reach out if one of them appeals to you. The when, where, and how of these strategies depends on your goals.
So you want to become a real estate investor? I think that’s an excellent idea!
Investing in real estate provides a lot of attractive opportunities that don’t exist with more conventional investments. Not only do you see some of the best returns on investment with real estate, but it also provides you the opportunity to be an active investor.
For most people who make traditional investments - bonds, stocks, etc. - the return on that investment depends on the efforts of other people. You have to trust in the CEO’s talents, the product or service they offer, and/or the general economy in order to see your money grow. In contrast, the time, effort, and dollars spent in real estate can have a more predictable outcome, and the decisions on where to spend that time, effort, and money are made by you - the active investor.
We’ll briefly, and I mean briefly, visit three different types of investing in this article, but I encourage you to reach out if one of them appeals to you. The when, where, and how of these strategies depends on your goals, and I’d love to discuss how to help you reach those.
What Is a Rehab?
The first strategy we’ll touch on is rehabbing properties, which you’ll also hear referred to as flipping.
Flipping can be executed at varying degrees, and I like to break that into two categories: renovating and remodeling.
When you renovate a house, you’re really just restoring that home to good repair and addressing its outdatedness. This is typically done by identifying a house in a great neighborhood that’s in need of a little TLC - tender love and care. You may need to replace a little rotted wood and a few appliances, but structurally, the house is still in great shape.
During the renovation, your efforts will focus on the cosmetics of the home. You’ll update the surfaces, like countertops and flooring, and freshen up the place. This work can typically be done on a 90-day timeline and requires minimal involvement from the local government, if at all.
In a more substantial rehab, you’ll actually be involved in remodeling the home. Major systems will be changed - electrical, roofing, HVAC - and permits will certainly be pulled.
Because of the financial investment in these projects, the homes involved are typically in older, more established neighborhoods where the housing market has had longer to appreciate and the subject property longer to fall into disrepair. In addition, the neighborhood probably has a distinguished architectural style that keeps the investor from opting for an infill.
It depends on the extent of the remodel, but the timelines here are usually closer to six months than a reno.
An investor involved in remodels will typically have higher margins, and that’s due to the time and money invested into the project. More money and more time equals greater risk, thus the greater financial reward.
What Do You Mean ‘Wholesaling?’
Real estate wholesaling is another type of investing that can lead to great returns, but it must be done in a high volume to be truly worthwhile.
A wholesaler will essentially source great real estate deals and use a network of investors to get the home sold again before it closes. They will contract with the seller at a price below market value, then remarket the home for sale to their network. If they can find an investor to take notice of the potentially great deal, the wholesaler will make a profit on the difference between the contract price and whatever the investor agrees to pay for the house, sometimes including a finder’s fee premium.
You can liken it to day-trading in terms of the risk and margins involved.
Due to the complexities involved in a real estate transaction, and the ramifications of a signed contract, wholesalers are typically licensed real estate agents.
Building Wealth through Holding
The third type of real estate investing we’ll cover is holding.
Rental holdings can be a great way to build wealth and naturally, there are a few directions you can take it. Whichever direction makes sense depends on your goals and to a large degree, your position in life.
A person who’s looking to replace income will want a home that cash flows well on a month-to-month basis.
Certain neighborhoods will prove to perform better in this regard. While the community may not show the year-over-year appreciation levels that real estate typically enjoys, this investor is more concerned with the difference between rental rates and monthly expenses. Any appreciation he or she can realize when it comes time to sell the property is just a bonus.
Someone with more time to let the investment mature might not be so concerned with the monthly cash flow but be more interested in the long game of appreciation.
This strategy is usually associated with a more expensive neighborhood. If you can find an area where the rental rates at least cover the monthly expenses, this is a great strategy. Since appreciation is a percentage of the home’s value, a higher purchase price should equal even greater returns on investment in a neighborhood that consistently increases in value.
So What’s Your Strategy?
Now imagine the possibilities of being a wholesaler who cherry-picks which properties she wants to flip, which ones to assign to other investors, and which ones belong in her hold portfolio.
Talk about being an active investor!
If you’re reading this article because you’ve been milling through real estate investment strategies, give us a call today. There are tax ramifications, financing options, and a myriad of other considerations that all hinge upon your goals and objectives.
Based on your goals, we’ll help you identify neighborhoods that might support your strategy, introduce you to lenders and other professionals that will help you be successful, and provide you with the tools and resources you need to make great decisions.
speaking of tools: want to see our worksheet for quickly analyzing rental properties?