How to Invest in Real Estate
So many new investors don’t realize just how many options they have when it comes to flipping houses, and this can make it feel difficult to find a solid starting point to take action. Now everyone is going to have a different opinion on which methods they prefer, but I’m going to share what we did when we first started flipping houses (and as you can see it definitely worked out great for us!).
First, have you joined our private FlippingJunkie facebook group? Come network with us!
Real Estate Investing vs Flipping
So you want to get into real estate investing. But what exactly does that mean? There are a lot of different ways that you can invest in real estate, so just stating that you want to become an investor is not going to be specific enough.
At the most basic level real estate investing is long-term, while flipping is more of a short-term approach. I”m going to break down a few different methods down for you below and share some pros and cons of each. Especially as a new investor, it’s important to focus on a specific mode of investing versus taking on everything at once. Read on to find out which might be right for you.
Let's look at the main ways of types of investing to help you get an idea of what you want to laser focus on!
Real Estate Investing
This is what most will consider ‘true’ real estate investing. There are a lot of people that just love rentals. I'm not one of them. The hassles of dealing with tenants and management take a lot of the excitement out of it for me.
That’s MY preference though. If you’re more of a people person then this can be a great option for you. If you don’t mind paying someone to manage the rental or doing it yourself, then this can be a great option due to tax reasons. Alongside the tax benefits, you get appreciation over time.This is a longer term strategy of investing.
NOTE: I only recommend rentals if you have a cash reserve to handle rainy days, or rainy months for that matter. All too often I hear about investors that love to talk about how many 'units' they have. What they don't talk about is how much debt that have trying to paying for those rentals. As soon as they have a couple that go vacant or get trashed by tenants and run out of money, they face the dreaded domino effect and lose most, if not all of it. So be careful if you go this route.
Rehabbing is what most people think when talking about the concept of flipping houses. This is most likely due to the many “flipping,” fixer-upper-esque shows out on T.V. these days. People buy a beat up, piece of junk and fix it up (with a lot of drama along the way, of course) and then sell it for an incredible profit.
Rehabbing is MY preferred flipping category.
I like taking ugly properties and giving them new life. There is something that gives you a great sense of accomplishment and pride when you take a neighborhood eyesore and turn it into THE house that everyone wants to live in.
With that being said I do NOT recommend new investors start with rehabbing, for several reasons:
- Contractors can be difficult to work with and can take advantage of a new person rather easily
- Holding costs can eat you alive. ***BIG AND COMMON MISTAKE: There can be a tendency to fix a place up as if you were going to live in it. This is called over-improving.
- You're going to need to be able to borrow money without experience, assuming you don't have the cash yourself.
- If the house is not bought properly (aka cheap enough), there is a very real chance that you could lose a large amount of money.
Now the flip side is that there is a LOT of money to be made rehabbing, but you have to be willing to take on a greater risk and find a lot more funding, two things that are very difficult to do when you’re just starting out.
The other flipping strategies are BIRD DOGGING and WHOLESALING. These are the methods that I recommend and feel the majority of people would benefit the most from when starting their flipping business.
A bird dog is someone that finds leads and then gives them to an experienced investor to carry through.
Here is an example: You drive around and find vacant houses and send letters to the owners of the vacant houses. One of the owners calls you and tells you they are interested in selling the house. You then tell another investor that has the ability to act quickly about the lead and he/she sets an appointment to see the house and makes an offer to the owner.
If they come to an agreement and the investor ends up buying the house, he/she will pay you a finder's fee. This fee can be as much as $2,000 or more. I typically ask for $1,000 to $2,000 depending on how much potential I feel the deal has. I think most investors probably pay closer to $5000 each if the leads are screened as well as I screen mine. Screening means that I make sure the potential for a deal is really there; The sellers have enough equity in the home and there are signs of motivation to sell.
Some investors will pay small fees even just for the lead, but don't expect very much if this is the case (probably between $25-$50).
Wholesaling is one of my favorites. It's where you actually contract to buy a house and sell it 'as-is' to another investor. Here are the different ways to do just that:
Assignment of Contract - Where you contract to buy a house and then sell the CONTRACT to another investor for an agreed upon assignment fee. The other investor will then close on the house and you will get paid your assignment fee. If there is a lot of room in the deal and you stand to make a large wholesale fee, you might want to consider what’s called a double-close.
Double-Close - Where you contract to buy a house and then market the deal to other investors or anybody with the ability to be able to definitely close the deal at a markup (your wholesale fee). With this method, there are actually two closings and most of the time those two closings are happening on the same day. You close the transaction between you and the homeowner, and then you close the transaction between you and your buyer.
Some title companies will allow a pass through of funds for the closings. This means that the end buyer will pay you the money to close their transaction with you and that money will also go to close your transaction between you and the homeowner. This way you don't have to have the funds to buy the house beforehand. This used to be the way that most title companies would do this, but things have changed and usually they will require disclosures made to the end buyer that their funds will be used for the front-end purchase.
With a double-close the end buyer doesn't necessarily know how much you are making because they don't know how much you bought it for. This is best when you are making a huge wholesale profit and you don't want to scare away any buyers. Yes, some investors will have a problem with you making a large amount of money on the deal.
Buy and Sell Later - This is where you buy the house from the homeowner and market it to sell after closing to an end buyer, either 'as-is' or as a 'prehab' where you complete minor renovations like cleaning out all of the trash and cleaning up the landscaping.
A pro of this method is that you are not on a tight schedule with this one because you have already closed and own the house. This means that you have more time to find a buyer who is willing to pay more.
This is great if you feel that you can find a landlord or someone willing to buy it as-is to move into. A con of this type of wholesale is that you have to be able to buy the house first meaning you'll need the money or a loan.
Reasons Why I Suggest Starting With Flipping
Less Risk - You aren't putting up any money when bird dogging and very little when wholesaling (I usually just pay $10-$25 without any complaints from the homeowners). You also aren't sitting on a vacant house that could be vandalized or someone could get hurt messing around in.
Education - You find out very quickly what other investors want. You learn the ropes without being as stressed out as you would be completing a rehab. You can also follow what the investors that buy your property do with it. Stop by the rehab often and see how it progresses, talk to the contractors, and really take in the opportunity to learn as much as you can throughout the entire process.
Networking - You find out who the movers and shakers are in your area, and they find out about you. Once you befriend other investors (and trust me, they will want to be your friend if you become a source of good deals), they will be willing to help you with questions you may have.
Wholesaling is an amazing way to make some serious money. We've made anywhere from $1,000 all way up and over $40,000 on several occasions. You can bet we closed those high dollars ones first, for the reasons I just discussed. Another investor might suggest differently but this is what we recommend because this is what worked in OUR OWN business.