The explosion of real estate reality television has made many people consider a future in real estate investment.
The two main investment strategies people consider are wholesaling and flipping houses.
While neither are as glamorous and easy as many shows would like their viewers to believe, they both have the potential to be rewarding and profitable for those with a strong work ethic.
Before deciding if wholesaling is right for you, it’s important to understand the differences between it and the more commonly discussed process of flipping houses.
No matter which business model one decides to use, it will be more work than what the shows depict. Fortunately, wholesaling and flipping can also be far more profitable as well.
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What is Wholesaling Real Estate?
Wholesaling real estate involves an individual finding a property for sale that is undervalued. They then estimate the amount it would take to renovate the property, and the amount it would then be likely to fetch at market. This takes a great deal of knowledge about current real estate market values, the cost of labor and materials, and what consumers are looking for.
They use this knowledge to find incredible deals and then they find investors looking for those deals. The last component in being able to successfully act as a wholesaler is having access to a vast network of individuals interested in investment properties to flip, or to purchase for other purposes.
Wholesaling real estate usually works in one of two ways. The first option has the wholesaler putting the property under contract with the owner. Then they use their connections to find someone interested in the property and they assign the contract to them or set up a simultaneous closing where it is immediately sold to their investor once the closing is complete. The other option has the wholesaler purchasing and holding the property for a few days or weeks while waiting for the secondary closing.
The ideal arrangement is assigning the contract to the secondary investor so the wholesaler never has to invest his or her own money in the real estate. If their market analysis is off, or if their connections are not as robust as they initially believed, this can result in the wholesaler being stuck with a property he or she has no need of and cannot sell.
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How Does It Compare to Flipping Houses?
Many people think wholesaling real estate and flipping houses are essentially the same thing. In reality, the process for each is quite different. Wholesaling relies on being able to find the best deals and quickly make an offer and then immediately find someone willing to pay just a little more to take it off your hands.
This process is incredibly fast when done properly. Flipping houses takes substantially more time, depending on how much work the home needs to sell for to secure a significant profit. There are lots of projects out there that don't take a lot of work to see a profit, but there are plenty out there that require essentially gutting the home. Sometimes, it's hard to tell exactly what you're getting yourself into.
Once someone purchases a home to flip, they are fully committed to that project. Once renovations begin any number of issues can, and often do, come up. Many examples of just how financially devastating unforeseen renovation issues can be are evident in the plethora of reality television shows devoted to the topic.
On the other hand, the profit margin for flipping houses can be much greater when the project is completed on or under budget. The reward is usually greater, but that is correlative to the risk. If you're starting with limited capital and don't have a backup plan to address any kind of unforeseen issues that could arise over the course of the project, flipping may not be the way to go.
Which Is Right for You?
If you have a wealth of connections in the real estate business that are interested in purchasing a property but have difficulty knowing where to look and what to invest in, wholesaling real estate may be the perfect fit. It allows individuals to leverage their personal connections and knowledge without risking their own money. With remarkable relationship building skills, wholesaling can be the quicker and more lucrative option.
If you have a wealth of construction and renovation experience, and the ability to invest your time and money, flipping houses may be a better fit. Someone who is able to complete the majority of the work themselves, and who has the time to put into the renovation process, can make a greater overall profit in buying low and selling high.
If you have a wealth of construction and renovation experience, and the ability to invest your time and money, flipping houses may be a better fit. Someone who is able to complete the majority of the work themselves, and who has the time to put into the renovation process, can make a greater overall profit in buying low and selling high.
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Can Either Approach Be a Profitable Business?
Wholesaling real estate and flipping houses can both be profitable businesses. While it is possible to make money investing in real estate, there is a steep learning curve with both methods. These are investment projects that should not be undertaken by amateurs who are looking to invest their retirement savings and give it a boost.
The risk is far too great for that sort of purpose. Investors who find themselves with extra cash, and a broad knowledge of the real estate market, can indeed turn this into a profitable business. Once begun and mastered it is relatively easy to scale up investments and build the business quickly.
The housing market in many areas continues to be fertile ground for investors who are willing to pay close attention to local trends. A career in wholesaling real estate, or in flipping houses, is as risky as any other high reward investment.
People interested in pursuing it as a career need to realize the commercialization of the process by Hollywood is not an accurate portrayal of the work and dedication required to be successful. For those willing to put in the time and effort required of any new business venture, wholesaling has a great deal of potential.