“I can’t do real estate because I don’t have any money or access to funding”
This is by far the biggest misconception I have witnessed when it comes to education and real estate investing. So in the blog post, I will share the real, raw TRUTH about the money needed and real estate investing.
Now before you read this, I want you to know that the lack of money is NOT an excuse for NOT getting started.
When I hear someone say “I’m broke, I don’t have any extra money or savings to buy properties or for marketing”
I know that they just don’t know or understand the right “techniques” to make this happen.
It’s just like a person digging for gold, if you don’t know what you’re looking for or don’t have the proper tools or equipment you’re going to get frustrated.
You hearing how everyone is “striking it rich” You’re putting in the effort but ending up with nothing.
AAAARGGGGGG
It’s not that you’re not smart or you don’t have the right talent or skill, it’s that you’re missing “specialized knowledge” and the proper tools.
You see if you had the right “specialized knowledge” you would know exactly what to look for and would know precisely where to dig.
And with the right tools, success would be inevitable. wouldn’t you agree?
Alright, now back to you, money and real estate investing.
Here are three of the most common forms of investing in real estate.
1. Wholesaling
2. Fix & Flip
3. Buy and Hold
So lets talk about the exact money need for each “niche”.
Wholesaling Real Estate
Wholesalers make a profit by signing a contract to purchase a property from a seller and then entering into an agreement with a third party to resell the same property at a higher price for a profit. All rights to the original purchase contract are assigned to the new buyer and the new buyer pays an “assignment fee” to the wholesaler in order to gain all rights to purchase the property at the original purchase price. The original purchase contract usually has an “inspection period” or “contract clause” which allows the original buyer to back out of the contract and not close on it if they do not find a buyer to assign their contract to.
In the United States wholesaling is perfectly legal and every real estate contract allows the buyer an inspection period and any amount of deposit that buyer and seller agree to. The concept of wholesaling a property is no different than a wholesaler in any other industry that signs a contract to purchase goods with the hope of reselling those goods at a profit to a third party.
Here’s an example transaction:
You sign a purchase contract with a motivated seller for say $50,000. You then find a buyer for the property at say $60,000. You assign the contract and all it’s rights to the buyer for the difference between the $50,000 and $60,000. As the wholesaler, you would make $10,000 assignment fee.
Money Needed for Wholesaling
The Deposit: This is negotiated between you and the seller. For me, 99% of the contracts I sign with motivated sellers, the deposit is $10.00.
Marketing to Find Sellers: This is where you can spend the most amount of money, The beautiful thing about wholesaling is that you can start small and scale the business by reinvesting profits back into marketing. If you truly have NO money that’s fine, you can contact sellers via Craigs List. A lot of sellers will post their properties under real estate for sale or rent. They also post on sites like FSBO.com. When I got started I was broke as well, so I got a list of pre-forclosurse and knocked on the default homeowners door. Yes, I got deals, but boy was it tough.
That is ALL the money that is needed for wholesaling, and if money is an issue, than this is the BEST way to get started. I started as a wholesaler and have scaled my business into a multi-million dollar a year operation.
Fix & Flip Investing
Under the “fix and flip” scenario, an investor or flipper will purchase a house at price often deeply discounted from the house’s market value. The investor will then perform necessary renovations and repairs, and attempt to make a profit by selling the house quickly at a higher price (closer to or maybe a bit above market value). The “fix and flip” scenario is profitable to investors because they purchase the property with built in equity and they attempt to improve the property and capture that equity as a profit.
Here’s an example transaction.
You buy a house for $50,000 that is worth $100,000 all fixed up. You spend $20,000 on renovations to make the property move in ready. You then list the property for retail price at $100,000. You find a buyer and sell the property for $100,000. After paying real estate commissions of 6% and closing costs you net roughly $20,000.
Money Needed for Fix & Flip Investing
Deposit: Typically 1% of the purchase price of the property. so for a $100,000 house it will cost you $1,000.
Money to Purchase the Property: Most investors use hard money to purchase the properties. Hard money lenders are asset based lenders that will typically charge a higher interest in return for a fast funding and no credit check. Most hard money lender require 20% to 30% as a down payment.
So on a $100,000 house the down payment will be $20,000 to $30,000.
Closing Costs: Typical closing costs are 2% of purchase price. So in our scenario, it’s $2,000.
Renovation Cost: The renovation costs is one of the biggest variables thus the biggest risk. In our scenario, $20,000 would be the repair costs.
Other Monies Needed: Interest carrying cost, this will most likely be paid monthly and will be determined by the interest rate of the loan. Utilities: gas electric, water and trash for the time the property is being renovated and sold. You might need permits or staging material to make the property sell faster.
With fix & flip investing there are alway hidden cost that creep up in every deal I’ve done. So I alway put a 5% to 7% contingency cash into the budget.
Buy & Hold Investing
The simple strategy requires us to buy a property (today) when values are trading below replacement costs and then sell it in the future when the market value meets or exceeds replacement costs.
The buy and hold real estate investor anticipates that long term population trends will rise, construction costs will rise, and that the normal “rules” for supply and demand will continue to govern the market cycles in real estate, thus this opportunity will arise in a future market cycle.
An investment property is like any other investment: the goal is to generate a profit. In real estate, this is achieved through income (rent, for example) or through a profitable resale.
I’m not going to get into the details as regards to numbers like ROI, IRR, Cap Rate. and CCR, I’ll save that for a different post.
Money Needed for Buy & Hold Investing
Deposit: Typically 1% of the purchase price of the property. so for a $100,000 house it will cost you $1,000.
Down Payment: You would most likely buy a property like this with conventional financing although there are creative financing alternatives like “subject to” investing or buying via “agreement for sale” or “land Contract”. In most cases the good rule of thumb is you’ll need 20% of the purchase price as a down payment.
So on a $100,000 property the down payment would be $20,000.
Closing Costs: Typical closing costs are 2% of purchase price. So in our scenario, it’s $2,000.
Repairs: Unless you buy a move in ready property there will most likely be repairs needed to make the property rentable.
Hold Cost: You have to factor in holding cost such as mortgage payment, utilities bills when the property is vacant. Obviously the goal is to rent the property for more than the monthly costs so you can make a positive rental income.
For me I started with wholesaling and if I run across a smokin deal then I will fix and flip the house to maximize profit. If a good rental property presents itself I will try to a structure creative financing strategy to add to my rental portfolio.
The bottom line is that money is never an excuse for not getting started. You just have to want success bad enough. I see people that say they have no money but they have a 60″ plasma in their living room. What gives…
So here’s a question for you, If money is NOW not the obstacle for you getting started, then what is?
The best answer gets some money. How about $50.00. I’ll pick the best answer and message you via facebook and I’ll send you $50 bucks.
If you want my complete system for wholesaling, join the Flip2Freedom Academy by clocking the Join Now button below.
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