There are various ways to make money in real estate, from buying and selling properties to fixing them up and selling, renting and leasing to being part of an investment group and mutual fund.
Another little-known way for real estate investors is through wholesaling real estate.
Buy and Hold: Buying a property and holding on to it as it appreciates is the typical way most individual investors look at real estate as a way to make money.
Typically, you buy a home, live in it for a period of years while you pay down some of the mortgages, and sell when the appreciation is high.
This strategy does two things for the investor; one, it lowers the amount of debt the investor has taken on; and two, the home has appreciated making more equity for the seller.
Buy and Rent: Investors that are looking at a long-term investment opportunity for passive income may want to consider buying property and renting it out. The benefit of renting a property is that you can have a steady income stream over the life of ownership.
Of course, some concerns come with renting.
For example, you have maintenance and upkeep costs and insurance costs, and you will need to budget for time periods when you have vacancies and don’t have a renter in the unit. Also, when you sell your property, you may have to pay a much higher rate on the sale than if you were occupying the home.
Real Estate Investments: If you have less money to invest in real estate or want to diversify your assets, one thing to consider is a REIT.
A REIT stands for Real Estate Investment Trust and is a structured organization that pools money and purchases real estate to hold or rent.
The benefit of REITs is that you can invest a little and make some residual money without taking a huge risk or loan. However, the flip side is that your ROI will be lower with REITs as you only own a portion of the real estate holdings rather than owning the property individually.
Fix and Flip: A typical fix and flip are when you buy a property, do some cosmetic upgrades and quickly resell the property for a sizable profit. To make a fixer work, a buyer must find a below-market home, get the work done reasonably, and sell it for 20% (at least) + expenses above the original purchase price.
Wholesaling: A different version of fix and flip is the wholesaling of property. Wholesale real estate is a business model that includes a distressed, motivated seller, a buyer who intends to sell it for above the original purchase price immediately.
You are interested in wholesaling real estate. You would look at properties and find a highly motivated seller to sell their home below the current market value. Then, you would enter into a purchasing agreement, and a buyer to purchase the home above your original price, making you the difference in profit.
In some areas, the laws and regulations are more stringent than others, so you must understand the requirements before entering a wholesaling agreement. Once you know the wholesaling rules in your area, you want to present the buyer with a wholesale real estate contract between you and the prospective seller.
There are three types of wholesale real estate contracts;
- Purchase agreement
- Lease Option agreement
- Assignment contract
Purchase Agreement: The purchase agreement is a simple contract that solidifies your interest to buy and the seller’s intent to sell their real estate. When wholesaling, it may be of interest to include an assignment clause that allows you to assign ownership at closing to a different party.
Lease Option: A lease option agreement is a long-term rental agreement you take from the owner and agree to transfer to a third party. This form of wholesaling is common in commercial real estate, such as restaurants wanting to get out of their 20-year lease. Rather than be on the hook for the duration of the lease, the leasee finds a third party to take on the terms of the lease.
Assignment Agreement: With an assignment agreement contract, the wholesaler never takes possession or risk of possession in the sale; instead, they agree to transfer the sale to a different buyer. This is a strategy a wholesaler would use if they already have a buyer before deciding to a deal with a prospective seller.
There are many different ways to make money through real estate; the best part is that you don’t have to use your own money.
That’s right; you can leverage a loan from a bank or lender to purchase something that will make you money. Be sure to know the laws in your state and municipality, and create the strategy that fits your goals to turn your real estate property into a gold mine.
