Real Estate Investment Types For Beginners
We all know that the ultra-rich and wealthy individuals and institutions of the world are heavily invested in real estate. Even since the Roman Empire, there has been an emphasis on the ownership and control of hard assets like land or real estate. Aspiring real estate investors can be intimidated by the idea of the work or capital that would go into the acquisition of real estate as an addition to their portfolio.
There are so many benefits to owning real estate that it would be a bad use of your time as a reader to cover all of them—I’ll save that for another article! Rather, I think it would be more helpful for people to get an idea of a few “beginner” real estate strategies that could get them in the door of the real estate game and best of all, without risking a large amount of capital to do so.
Before We Start…
As with any investment strategy or goal for that matter, it’s important to do the following as diligently as possible:
- Develop your strategy
o You’ll notice a few long-term strategies and a few short-term strategies. When developing a strategy for anything, make sure it fits your ethos, risk tolerance, ability, etc. and most importantly, be honest with yourself about this
- What are the goals
o Whatever you choose to do, whether it be a mix of a few or one, it should be consistent with your system for money and be in line with where you want to go from a goals standpoint
- Learn, learn, learn
o You’ll make mistakes, it’s the nature of being an entrepreneur. The old saying, “never make the same mistake twice” rings true here. Learn every step of the way and learn from people who have done what you want to do—that’s where 99.9% of my education has come from in the past.
Wholesaling Real Estate
If there was a strategy that was truly a “no money down” strategy, wholesaling is it. Wholesaling is where many real estate enthusiasts will start when they want to get their foot in the door.
Wholesaling consists of someone finding a real estate deal, getting it under contract, then instead of keeping the deal for themselves, selling it to another real estate investor.
For instance, let’s say you find a single-family home that is in an area where you could renovate the property and turn around and sell it at a large profit. What you would do as the wholesaler is get this property under contract, find a real estate investor who tends to buy or own these types of properties already, then turn around and sell the contract to the real estate investor. The reason you’d do this is because you may not personally have the funds to rehab this project, but you may know someone who does. By selling the contract to an investor at a profit, you’re creating a win-win-win for the seller, yourself, and the investor.
- The Seller Wins
o In most wholesaling situations, the property being sold is usually by way of some type of financial distress—divorce, foreclosure, estate, etc. The target market for wholesalers is highly motivated sellers. By taking over the contract, the seller makes their money, albeit less than they may have liked, but in the end the process is over, and they can walk away with money in their pocket and not have to worry about the property anymore
- The Wholesaler Wins
o By taking on the contract of this property, you can now go sell this contract to the investor who will ultimately do whatever they do with it from there. You can generally sell the contract to the investor at a decent mark-up, assuming the numbers are beneficial to yourself and the investor. You’re the quintessential definition of bringing a scolding hot lead to an investor—you should be compensated for that. Wholesalers will generally bring in anywhere from $2,500 to as high as $20-40k, in some cases.
- The Investor Wins
o One of the more difficult process of being in business or real estate is finding deals and/or qualified leads to drive income into your business. This is true in literally any industry you can possibly think of. For someone to bring a deal to you and only ask for potentially 10-20% of the overall profit of the deal is a dream for any business owner or investor. They get the deal, they do what their best at, and ultimately extract the profits from the deal in whatever strategy they use themselves.
Positives to Wholesaling:
- Can do it with little-to-no money
- Strictly transactional—no management of the property whatsoever
- Great way to make valuable connections in the real estate investing world
- Creates a win-win-win for three parties (seller, yourself, investor)
Negatives to Wholesaling:
- Requires a lot of base layer work to find deals
- Need to have an end investor(s) in mind or you’re just finding deals for nobody
- Requires a fair amount of networking before you dive in
- Says it’s “no money” but in reality, you’ll need at least $1,000 (ish) to start up—LLC, title papers, networking, “driving for dollars,” etc.
The big thing to remember with wholesaling is that it’s a total numbers game. Not just numbers from a financial standpoint, but a numbers game in the sense that you’ll likely have to look at, analyze, and door-knock many deals before your first deal that makes fiscal sense for everyone involved. Another thing is, you’re not necessarily doing this concept without using any money, it’s just not the frontloaded, large amounts of capital that you may see from a larger investor because you aren’t fronting the down-payment—you’re just buying the contract from the seller.
Look, I’m a fan of Chip and Joanna too, but let’s be honest, flipping houses isn’t as glorious as it may seem. From a 10,000 foot view, flipping houses is generally what people relate all real estate investing to. Mainstream perception of real estate is you buy a house, fix it up, and then sell it. Make no mistake—flipping houses is simply a strategy in real estate investing, and a viable one at that.
The concept is simple: you buy a house, you fix it, and then you sell it for a profit at the newly appraised value of the property. This type of investing is meant to be fast, efficient, and as transactional as possible. Meaning, you need to have your proverbial “poop in a group” to ensure you don’t bleed money on a project.
Some key data points when considering flipping a house are the following:
- A growing or appreciating market in which the house stands
- Sufficient capital to handle the repair costs of the distressed home
- Reliable partners to take care of the renovation in a timely manner—plumbers, drywall, painters, etc.
- A legitimate timeline from start to finish, with room for mishaps
Keep in mind, flipping houses is work. It’s made out to look glorious on HGTV because their sponsors and advertising is geared toward getting you to emulate what they are doing on the show. Kitchen renovations end up sounding great, but the work to get there can be tasking, to say the least.
I know a lot of people in the flip world, and they do very well! However, most of them are putting up paint at 10 p.m. on a Saturday night and dealing with unreliable contractors during the week-- so it ends of being a question of whether that’s a hurdle you’re willing to jump over or not. I’m not saying flipping homes is inherently bad, I’m simply coming from my perspective of what I’ve seen in the marketplace.
Positives to Flipping:
- Transactional—no need to manage the property because you’re end goal is to sell it at a profit
- Great in a hot real estate market
- Builds trust with banks or other lenders—if you do a good job of course
Negatives to Flipping:
- One or two missteps can cost you substantial amounts of money
- Only one way to make money, which is through appreciation of the property—as opposed to buy and hold, for instance
- Can run into hidden problems you didn’t originally see—plumbing, HVAC, insulation, etc. that may potentially cost you more than is worth your time
Flipping is a viable real estate investment strategy that has its positives and negatives, just like anything else. The important thing when considering flipping is being rock-solid on your numbers and whether the project is worth your time. If you have the sufficient capital or have a person who does that is willing to partner with you and front the capital, flipping can be an amazing venture for you and everyone else involved.
Know your market, understand your numbers, and execute accordingly.
There are so many more concepts you could discuss as it pertains to real estate investing and where exactly you should start. Unlike most investment types, real estate is all about the resources you have at your disposal—mentor, capital, market, etc. There’s risk to making money and starting a business. Make no mistake when I say real estate investing is most certainly a business, not a hands-off investment.