“OK, I know I want to invest in real estate—but now what?”
That’s a question that every real estate investor—whether full-time, part-time or just thinking about it—has asked himself or herself at some point. And that leads to a whole bunch of other questions, including:
- What do you do?
- Where do you go?
- What is the process?
- How much money is involved?
- What properties do you look at?
- What properties do you buy?
There are so many questions running through a new part-time investor’s mind that it can be very overwhelming. And we won’t be able to answer them all in this blog post. There is no silver bullet or one simple answer. But there is a framework you can follow that will help you chart a course and then navigate through the world of real estate investing.
So let’s lay out that simple framework that you can customize based on your objectives as a soon-to-be part-time real estate investor.
In preparing to become a part-time real estate investor, you no doubt have educated yourself on the subject to a certain degree. You have read books, gone to seminars and talked to investors. You may have gone through some training. You probably have listened to podcasts. There is a variety of different things that you have probably done that has piqued your interest and gotten you to the point where you have convinced yourself that it is time to get into real estate investing and you are ready.
The many questions you now have are a result of all that exposure and education. You are probably overwhelmed and confused, thinking, “Gosh, now what do I do? Where do I go? How do I start?”
These are all questions that I hear frequently as I talk to new or potential investors. Also, “What’s the easiest way to get started?” Or perhaps, “I am ready to get started, but I have no money and no credit. So how do I begin?”
Let’s try to answer some of those questions and give you a framework that will apply to whatever scenario you might find yourself in as a soon-to-be or potential part-time real estate investor.
A Framework for Getting Started in Real Estate Investing
As we walk through this framework, keep in mind that this is a fluid process. So the sequence of steps I am about to lay out will vary, based on your situation, your priorities and your resources. The path you follow will be determined by what you want to do, how you want to do it, when you want to do it and what you are able to do.
These are not necessarily exclusive steps, meaning that you focus only on one step at a time: complete step one, check the box, move to step two. You can approach it that way if you prefer. But you also could view it as a cumulative process. You can prove yourself proficient and comfortable in the first step and then you can add the next step to what you are already doing, and so on—building your real estate investing business as you navigate through this framework.
Another point to keep in mind is that as you enter into real estate investing, you have be nimble and prepared to adapt as you go. What I mean by that is, every market is going to be different. Every real estate investor’s capabilities are going to be different, as well as his or her resources, situation and objectives. That is where fluidity comes into play. You have to recognize that one size will not fit all. Every real estate investor is going to approach his or her business in a slightly different way based on his or her own personal situation. The nature of real estate investing will require you to be nimble and be able to react to the unexpected things that come at you, such as changes in the market condition.
So with that being said, let’s lay out a framework. This is a framework that I have seen and experienced myself as a full-time real estate investor and HomeVestors franchisee in Dallas. I have navigated myself through this framework, and I have seen other successful investors also navigate their businesses through this framework as they started investing and ultimately built their investing business.
Step No. 1: Assignments
First off, many investors begin with assignments. With an assignment, you as an investor place a property under contract and then find a buyer for it before you actually close on that property. You simply assign your contract to that end buyer for a fee paid to you by that end buyer.
The reason a lot of investors start with assignments is because it requires no capital. This gets to our point earlier of, “Hey, I have no money and no credit; how do I get started?” Assignments are a great way to do that. You are simply placing properties under contract, but the person to whom you assign the contract is the one who ultimately purchases the property and provides the capital outright. Essentially you incur no costs at all in this scenario. That’s the good news.
Keep in mind, though, you need access to some distressed sellers, because you need to be able to purchase these properties at a low enough price that you can offer them at a cost that is appealing to another investor and still provide you a worthwhile takeaway. Those type properties are not easy to find. So you have to have a good source to steer you to them.
Then on the back side, you have to have a good buyer’s network. You are not going to assign properties to owner-occupants. You are going to assign properties and contracts to investors. So you need a good network of investors who are interested and willing to take assignments of contracts.
All in all, assignments are very low risk because if it doesn’t work out—if you can’t find a buyer—you simply terminate your contract and walk away. There are no penalties, and there is nothing illegal there. The risk to you is very low.
Step No. 2: Wholesaling
Wholesaling is the next logical step. The big difference between wholesaling and assignments is that with wholesaling you are actually going to purchase the property. You are going to have the funds in some form to actually purchase and close the property. Then you are going to turn around and sell that property. Because it is a wholesale deal, you are probably selling it to another investor at a wholesale price. That investor will go on to rehab the property to sell it or rent it.
You are selling it typically off-market, at a wholesale (typically cash) price. The reason you would do this versus assigning it, is you typically can enjoy a greater margin when you wholesale a property. The difference between the price you pay for it and the price at which you sell it is typically going to be greater than the fee you would charge or earn on an assignment. That’s the good news on wholesaling.
Keep in mind though, this does require capital. Once again, you are going to need a source for these properties. They typically are not listed on the MLS, so you have to have some direct seller access. You also need an investor network to which you can market the property. The good news is that you start to see a greater margin of profit versus assignments.
Step No. 3: Rehabs
As you navigate yourself through assignments and wholesaling, you are probably going to get to the point where you are ready to rehab properties, and that is the third step in this framework. This is where you are really going to start to maximize your returns. You are going to buy distressed assets, invest in them, fix them up, and then you are going to sell them, typically to owner-occupants via the MLS. This is where you are going to see a much greater profit margin than with assignments or even wholesales. Be aware that capital required here, too, much like with wholesales, but it’s going to require even more capital because you have to pay for the rehab of that property.
It may look easy on the home-flipping shows you see on TV, but you need to be cautious and do not underestimate the amount of time, experience and risk that is involved in rehabbing properties. You have to have some knowledge. You have to have a network of contractors. You have to have some experience. You have to have some tolerance for risks and the unknowns because they will occur. That’s just the nature of rehabbing.
The key point with rehabbing is that you are going to earn more and you are going to maximize your margins, but be prepared for the time, the experience, the capital and the risks that are involved with rehabbing. That is why this step is a little farther down the framework. After you become confident in assignments and you become confident in wholesaling, you will be better prepared to take on the complexities of rehabbing.
Step No. 4: Rentals
The fourth component to this framework is rentals. I will tell you—with a big caveat—that rentals can be a part of your business at the beginning, middle or the end. I have saved this step until the end here because often, people will do assignments, wholesales and ultimately rehabs. They will accumulate profits, and they will set those aside so that they can purchase rentals.
Unlike the other three components of your framework—assignments, wholesales and rehabs, which are generating cash profits—your rentals are more of a wealth-building component. Rental properties will create passive income, unlike the other three components, which create more of an active income.
Keep in mind that not only do rentals require capital, but they also are going to tie up that capital for a long time. Traditionally, you are going to put 20 percent down, and you may even do 20 percent down on the rehab expenses. You are not going to sell this rental next month and get all of that back. These are going to be long-term holds that tie up your capital for many years until you either sell them or perhaps refinance them and pull that capital back out. One of the bigger challenges with rentals is that they do require capital initially and they do tie up capital for the long-term.
To wrap up, remember that this is simply a framework. Look at these four components: assignments, wholesales, rehabs and rentals. Look at your own experience, capital, time, access to sellers, access to buyers, and determine how this framework best fits your situation, objectives, knowledge and experience.
Beyond this, there are many other things you can do that we will talk about in the future. The key here is that you get started on your path to building a successful real estate investing business.
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