If you’ve spent any amount of time lurking around the real estate investment community online, you’ve probably come across the buzzword “real estate wholesaling.”
To many, wholesaling is the gold standard for getting started in real estate.
To others, it’s downright illegal, it’s unethical, and it should be avoided at all costs.
What’s the truth then? Is it actually illegal?
If it is legal, how does this real estate strategy actually work?
And if it’s legit, is it really the best option for a novice real estate investor?
Over the last few years, I’ve been a blogger, a podcaster, and an actual practitioner of real estate wholesaling in Indianapolis.
I’ll spare you the entire backstory for now (this post is going to be long enough without it), but the gist of it is I worked for a company called Simple Wholesaling.
At first, I was hired to be their designated brand developer. After publishing a few blog posts, crafting an ebook, and starting a podcast, though, the company took a different direction and we decided to switch gears from creating content to focusing more on doing deals.
Over the next couple of years, we went from buying and selling 8-12 properties per month to averaging 25-30.
So, with everything I've seen of the business, you might say I know a little about this stuff!
What Is Real Estate Wholesaling Exactly?
Before we answer these pressing questions, allow me to introduce myself.
My name is Jaren, and I’m the new kid on the block here at REtipster.
If we take the word “wholesale” and look it up on dictionary.com, we get this apt definition:
- “The sale of goods in quantity, as to retailers or jobbers, for resale (as opposed to retail).”
To break this down, it’s the sale of “goods” in quantity, to “retailers” – or businesses, for the purpose of “resale.”
So, when we talk about wholesaling in regards to real estate investing, you could simply define it like this:
- “The sale of real estate in large quantity, to ‘real estate businesses' for the purpose of ‘resale' or making money.”
In short, a real estate wholesaler provides inventory for real estate businesses and investors – primarily for those who flip houses or who are looking for single-family rental properties.
Now, there are three primary methods to conduct business as a wholesaler:
- Through assignments
- Through the “double close”
- Or through the traditional close
We will dive deep into the pros and cons of each method specifically, but before we do, let’s address the reason why so many people consider this to be a good place to start as a beginning investor.
Why Is Real Estate Wholesaling Considered a Great Beginner Strategy?
To be honest … I don’t really know. (Not the answer you were probably looking for, I know.)
There are some incredible perks to getting started in real estate as a wholesaler … but there are also some drawbacks.
Personally, I think real estate wholesaling can be a fantastic strategy for those testing the investing waters for the first time — but only for the right person in the right circumstances.
Let me explain.
Passive Income Strategies vs. Active Income Strategies
There is a lot that gets lumped together under the umbrella of Real Estate Investing: everything from wholesaling, to flipping houses, to buying and selling notes, to REITs, to rental properties, to commercial retail, hotels and so on.
When you boil it all down, though, there are really just two different “camps” or “umbrellas” within the overarching subject of real estate: real estate businesses and real estate investments.
The Real Estate Investment
For me, the word investment is something that signifies a way to make money that is as close to 100% passive as possible.
Take buying into an S&P index fund that matches the stock market, for example. You simply park your money into this entity and wait.
Historically, you will make an average of 8% return on your money. You don’t have to watch it or mess with it – intime, it will do its thing and your money will (hopefully) grow.
Another example (this time in real estate) is investing in farmland. When you buy a valuable parcel of farmland and secure a long-term tenant (e.g., a farmer who takes care of EVERYTHING as if it was their own), you just sit back and collect lease payments, season after season.
Another example would be that of a private lender. As a lender, you can provide your money to an active real estate investor who then uses your funds to conduct their business and, in exchange, provides you with an interest payment.
It’s passive, which means you’re making money regardless of where you are or what you’re doing.
The Real Estate Business
A real estate business, on the other hand, is a form of active income at play.
When I worked full-time at Simple Wholesaling, I worked 6-7 days a week and sometimes put in 10-15 hour days.
Whether I was at church or at a birthday party (shoot, even on Christmas), I was calling, texting and answering emails, trying to hustle the next sale.
Sometimes, the stress was crazy. Many times, when we were a week away from the month finishing, we were either about to have the best month of the year or the worst one, all depending on what deals successfully closed before the 1st of the following month.
Real estate businesses have the potential to generate much higher returns when compared generally to real estate investments, but the key difference (as you may have already suspected) is you are actively working to get things done.
Flipping houses, functioning as a residential or commercial broker, selling properties as a wholesaler, even managing your own rental properties – these are all what I consider a real estate business. Without your active, ongoing involvement, energy and oversight, things just won’t get done.
The money can be great, but it all boils down to what you want out of life.
If you want to have some control over your time and make great money, but you don’t mind the hustle and long hours, jumping into a real estate business is a great way to go.
I personally believe business is the single greatest wealth generation vehicle in the world … but it’s definitely not passive, and therefore, it’s not an investment.
Now, if your main objective is to have as much control over your time as possible, and you want to live that sexy four-hour-work-week lifestyle, then you want to focus on setting up real estate investments, not businesses.
But What If I Want The “Four Hour” Lifestyle But Don’t Have The Money To Get Started Investing?
That’s a really good question, actually, because most real estate investment strategies require a lot of capital. To be fair, so do most real estate businesses.
Generally speaking, with a real estate business, if you have the right amount of hustle, there are ways you can outwork your lack of capital.
What a lot of people end up doing is starting out in some kind of real estate business as a cash generator, and then slowly, over time, they use that cash to transition into becoming an “investor” in the truest sense of the word.
Okay, So Back to Wholesaling!
To me, real estate wholesaling is one of the best real estate businesses out there.
It trumps flipping houses, being a broker, being a property manager. s a matter of fact, wholesaling pretty much trumps most of the alternatives out there.
You never have to hire a contractor, pick up a hammer, fix tenant repairs or worry about going over your rehab budget.
With wholesaling, it’s simple: You find a deal and then sell it — that’s it!
Why You’ll Thank Yourself for Trying Real Estate Wholesaling
What is incredibly powerful about wholesaling is when you do assignments or the double close, you never have to use your own money to buy properties.
Let me say that again: In wholesaling, you never, ever have to pay for acquiring your inventory. This is a huge deal!
Let's say your goal was to begin wholesaling three properties a month. Even if your market is cheap and you can buy these houses for $10,000 each, if you do it with the traditional close – where you buy all of your inventory prior to selling it – you would need at least $30,000 in working capital to do it.
With assignments or the double close, however, all you need to focus on is your marketing efforts. The gold standard is direct mail, and that can be expensive. If you hustle, though, there are free (or nearly free) ways to generate deal flow – you just have to put the time in to make them work.
The Money Can Come in Quickly with Wholesaling
In wholesaling, you can make really good money really fast.
The expected profit margin varies from market to market (and some markets are better than others), but for us in Indianapolis, we averaged a gross profit of $6,500 per property, with an average turnaround per property of about two weeks.
So, as you can see, with just a few deals a month, being a wholesaler can help you build capital quick!
here are some extremely affordable ways to get deals, but even if 50% of your revenue was sucked up by your marketing efforts, at three deals a month, you’d still make $9,750 ($6,500 * 0.5 = $3,250 * 3 deals), based on our average in Indianapolis.
Now, imagine if this was 10 properties a month! Think about just how much revenue that is coming in the door!
From here on out my goal is to take you on a journey. I’m going to dive deep into everything I personally know about the real estate business and provide you an in-depth overview of all that’s involved in getting started and being successful as a real estate wholesaler.
So, be on the lookout – what I’m about to teach you in this series of articles, people spend tens of thousands of dollars to learn. Stay tuned for part two!
The post The Ultimate Beginner’s Guide To Wholesaling Real Estate (Part 1) appeared first on REtipster.
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