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THE BIG PICTURE OF REAL ESTATE INVESTING
For many, the concept of âreal estate investorâ conjures up images of a skyscraper-owning mega-developer. For others, the image of real estate investor comes from those so-called reality shows about house flipping, where tens of thousands of dollars are made in a few short simple weeks of renovations. Neither of these offer an accurate representation of the real-world investor: The reality is a mash-up of people from all backgrounds, levels of experience, and income.
The Vehicle and Strategy
People get started in real estate investing typically because they have a desire to make money and create a lifestyleâand it can be done with great results. Real estate investors come in all varieties: Yes, there are skyscraper developers and there are house flippers making fortunes, but there are also average landlords cashing rent checks every month. There are mom-and-pop house flippers and there are real estate wholesalers crafting deals to pass along to other investors. The things that distinguish them from each other are the investment vehicle and the exit strategy used to realize profits and create a lifestyle. Itâs important to know that aspiring investors donât need to have deep pockets or prior experience to invest in real estate. Certainly education and caution are warranted, but the barriers to entry may not be as challenging as many people think.
The investment âvehicleâ is the asset class a real estate investor chooses to invest in. Some choose residential properties such as single-family homes, multi-units, or apartment buildings. Others focus on commercial properties such as shopping centers, mini-storage facilities and warehouses, or industrial-use buildings.
The investment âstrategyâ is the method used to reposition a property for profitability. Strategies are defined mostly by the âexitââthe technique used to realize profits. Our focus is on wholesaling, fixing and flipping, and buy and hold investments.
So, what makes an investor choose one investment vehicle or exit strategy over another? For the most part, itâs any of three things: time, money, or skills. These three important factors impact not only the investment vehicle, but also the strategy.
Three Common Real Estate Investment Exit Strategies
1.Wholesaling. A wholesaler specializes in finding great deals on properties and passing those deals along to investor buyers for a fee. The buyer of wholesale properties is usually a fix and flip or buy and hold investor. Many people are exposed to wholesalers on a regular basis but donât realize it. When you see a WE BUY HOUSES sign, you are probably seeing the marketing efforts of a local wholesaler. The wholesaler acts as a middleman and earns a fee for finding the seller (i.e., the property), negotiating the deal, and executing the contract. Once wholesalers have a property under contract, they find a capable investor buyer and use an assignment clause to transfer the right to purchase the property to the investor, who then fixes and flips it or keeps it as an income property.
2.Fixing and Flipping. Flippers, as they are often called, bring a distressed property up to market standards and resell it for profit. Fix and flip investors need to find great deals on properties that can be renovated and resold in a relatively short turnaround time. Flippers often rely on local wholesalers to locate properties with good profit potential.
3.Buy and Hold. Probably the most familiar investment strategy is buy and holdâcommonly known as âlandlording.â Landlords purchase property for the express purpose of holding it to generate passive rental income and the potential for long-term gains through market appreciation.
With each of these strategies come unique needs in terms of time, money, and skills (see Table 1-1).
For anyone involved in real estate investing, it is helpful to consider the end goal as you approach each opportunity. Questions to ask include:
â˘How do the properties you are looking at fit into the big picture?
â˘What do you want the property to do for you in terms of short- or long-term gain?
â˘How does the property fit with your capacity to invest your time, money, and skills?
If you have a lot of money but not a lot of time, a buy and hold strategy could be your thing. If you have more time than money, wholesaling could be the ideal gig for you. It pays to really take a close look at the personal commitment that the different investing strategies require and determine if a strategy fits your ideals.
Table 1-1. Three Common Real Estate Investment Strategies.
More About Exit Strategies
Having clear exit strategies is critical for any investor in any niche. Every property should have a Plan A to take it toward profitability. Understanding how to apply strategies that target short-, mid-, and long-term goals will help to make determining your exits even easier. Experienced investors in all asset classes know that you have no business getting into an investment unless youâve got a clear path out.
Consider the End Before Beginning
So whatâs the endgame you can consider right now, given your level of time, money, and skills?
For a buy and hold strategy, questions to ask include:
Whatâs your monthly income going to look like?
How will you fund the acquisition of the property?
How long will you keep the property and why?
What will you do with the proceeds when you decide to sell?
For fixing and flipping, you need access to funds to get you where you want to go. If you donât have a clear exit strategy that demonstrates expected returns and timelines for repayment, donât expect an easy road to funding. Questions to consider:
How long until you can cash out?
Whatâs the cost of your funding?
Whatâs your expected profit?
What will you do with the proceeds?
Is this something you want to do again and again?
If you are wholesaling only:
How much in wholesale fees would you like to earn?
How many marketing leads do you need to make enough offers to close enough deals?
What market will you target?
What will you do with the money you make, and are you willing to wash, rinse, and repeat to keep the fees coming in?
A Path to Success
Itâs not uncommon for those new to real estate investing to start as a wholesaler and then progress toward both flipping and owning income properties. Wholesalers donât need cash to get started, but they do need to develop certain skills. As a successful wholesaler, you learn how to find great deals, assess property repairs and values, and negotiate contracts. These skills readily transfer to fix and flip investing. The smart wholesaler can learn the game and use earnings from wholesale fees to actively buy, fix, and flip properties for even more gain than is realized by wholesaling. Then, profits from fix and flip properties can provide lump sums to purchase rental properties that generate income more passively. Over time, the investorâs time, money, and skills develop, allowing for the use of higher net profit strategies.
Chapter 18, âHow to Land the Best Loans for Your Deals,â covers the types of funding and loan features that can best facilitate your exit strategy and big-picture plan. Each investor and asset class has different needs when accessing capital for investment properties and projects. The next chapter more broadly covers the types of funding options available to investors.
TAKEAWAYS
