Spend any amount of time in a real estate investment forum and you’re bound to hear about wholesaling.
In wholesaling, the investor acts as a middleman between a buyer and a seller. The wholesaler finds a property selling for below market value, and places it under contract, which means you can make an offer to the seller, but don’t have to come up with the money for another 60-90 days.
Then they look for a seller and offer them the property at a price slightly below the market value. If the seller agrees to the deal, the wholesaler transfers the contract to him and takes the difference between his purchase price and his sale price.
Because it is often touted as a way to help investors get into the market even if they don’t have any money, it’s sometimes viewed as an easy way for investors to get started in real estate. Not only do you gain experience, but the money you make can then be used as a down payment for your own investment property.
On the other hand, there are some things to watch out for if you’re considering wholesaling.
Take a look.
A Few Things To Watch Out For When Considering Wholesaling
The most obvious one is that you have to make sure you have more than one buyer lined up. You’ve signed a contract that you are legally obligated to honor, and in the vast majority of cases, you’ll be held liable if you back out of the contract because you can’t find a buyer.
Second, you also need to spend quite a bit of time maintaining a buyers’ database. And don’t think it will be enough to have a few names in your contacts. You’ll need to make sure you know what each investor prefers to invest in, what they look for in each property, what areas they tend to buy, how much money they have to invest, and how fast they can move on a deal.
Once you gather this information you won’t be able to rest on your laurels. You’ll need to spend time staying in touch with your list on a regular basis, updating information when necessary. Of course, you’ll need to be able to recognize a good deal, which also means you’re going to need to be picky about who is on your buyer’s list.
The most important consideration for wholesaling is that while it allows you to make extra money, it is in no way passive. You’ll need to spend quite a lot of time hunting down deals, viewing properties and doing a bit of due diligence on them, making the match between the buyer and the seller, and closing the deal.
None of this income is guaranteed either, so if your market suddenly becomes over-saturated or a competitor moves in on your area, you could find yourself struggling to stay afloat.
Dozens of TV shows claiming ordinary people have become millionaires through flipping has attracted more than its fair share of gold diggers. The lure of making large profits in a short period of time is too powerful for many people, most of whom end up losing money instead of making it.
There are some benefits to flipping, such as gaining experience in construction, market research, and general knowledge of the how the real estate market works. However, there are of course quite a few cons.
First of all, it’s easy to either underestimate how much you’ll need to renovate the property or be hit with expenses you weren’t expecting. It’s also not too simple knowing exactly what renovations you need to make in order to sell the property – and no more. Get this wrong, and you could easily lose whatever profit you were hoping to make.
Taxes are another area that surprises investors. Whether it’s because renovating the house put it into a higher tax bracket, or the capital gains taxes you get hit with upon selling a property, taxes are an easy way to find yourself in the red. Most flips don’t qualify for 1031 exchanges unless you choose to live in the property for a period of time before you sell it.
You’ll also still need to pay the mortgage and any other maintenance costs such as landscaping and lawn care. Hopefully, you’ll find a seller sooner rather than later, because the longer it takes to sell the property the harder it will be for you to sell the property.
You might be forced to lower the price since a house that sits on the market is viewed suspiciously. In some areas, “sitting on the market” could be as little as 90 days.
If you’ve ever played Monopoly as a kid you know how tempting landlording appears. Charging people rent, collecting large sums of money all seems like great fun… until you realize all the other responsibilities that come with owning a residential property.
Handling tenant arguments, broken appliances or leaks in the middle of the night, weird tenants, tenants who won’t pay, irrational new ordinances passed by city or county governments… the list goes on and on.
That’s aside from the worries about making sure there are no vacancies, dealing with tenant evictions and all the other fun stuff no one talks about on HGTV.
Even if you have a reliable property management company – a miracle in and of itself – you’ll still need to be an active investor. Aside from the obvious fact that they will have to contact you occasionally, you can’t be seen as an uninvolved owner, otherwise even the most scrupulous of managers will get lax in handling your property.
I hope you’re seeing a common characteristic here, and that’s the fact that all of these methods are not only risky but require a tremendous amount of energy and time on your part.
If you’re like most people, you probably didn’t get started in real estate so you could have a second job that eats up dozens of hours a week of your free time. What you really wanted was an additional stream of income, a way to secure your retirement or a source of passive income.
If those sound like your goals, then you need to find a property that is hands-off but allows you to reach your investment goals of a steady income.
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Tags: 1031 exchanges, commercial real estate investments, flipping, landlord, landlorning, Real Estate Investment, wholesaling