Wholesaling Real Estate As An Introduction To Real Estate Investing
Investing in real estate isn’t like traditional investing, such as in stocks and bonds. With traditional investments, you can invest a small or large sum and liquidate your investment as needed.
Real estate provides investors with many different channels to get involved and make money through ownership, rent, or other methods.
In fact, there are all types of real estate that can be purchased, from single-family homes to apartment units, even land purchases like the family in Finland that bought an island and rents it out at $2,400 a night.
While it may seem attractive to own your island and rent it out, many things are required to get that dream and make it a reality.
Real estate transactions require contracts, time to execute, and in most cases, capital to purchase the property.
Most forms of capital come in the way of mortgages and loans, though some buyers can make payments through a cash purchase.
In most real estate transactions, a purchasing agreement would be agreed upon between the seller and the buyer. In addition, there would be terms and needs of a down payment, which in some areas can be as high as 20% of the property.
And then there’s the issue of financing, which has become more challenging to secure.
As inflation has increased the price of everyday items like gas, oil, and groceries, the Federal Reserve, or the Fed, has increased the Prime Rate to control the inflation rate.
The Prime Rate is the interstate rate that the Fed loans money to other financial institutions like banks and credit unions, who then use that as the basis point to lend out to others.
As the interest rates increase, lenders are more hesitant to underwrite loans, making money harder for people to secure.
Suppose you’re interested in becoming a real estate investor and want to avoid dealing with the increased costs of securing money. In that case, there is one significant alternative to traditional real estate investing. The concept is known as wholesaling.
Wholesaling Real Estate
Wholesaling or wholesale real estate is an investment that is a unique opportunity. In wholesale real estate, the investor never takes hold of any property or real estate.
Instead, it is a process of securing a purchasing agreement from a seller before taking that purchase agreement to another buyer, making a small profit in the process.
Wholesaling is the process where the wholesaler agrees to a purchase contract from a seller, secured by a small deposit. The real estate wholesale contract will spell out how much the wholesaler will sell the property for and the length of time required to execute those terms.
Typically, a wholesaler will charge a 5-10% fee on top of the price of the home, and that percentage is the wholesaler’s profit.
To succeed, a wholesaler will look for a distressed property that the owner won’t or can’t spend money on improvements to increase the sale value.
The owner may be motivated to sell but doesn’t want to work with standard real estate agents, and that’s where a wholesaler comes in.
Another benefit of wholesaling is that with traditional real estate contracts, the financial component of securing a loan is no longer an issue, making it much easier for a person without much funds to get into real estate investing.
To get started, an investor would need to find a distressed property, convince the owner to sell and agree to a wholesaling contract, negotiate the price of the sale and the agreed price of the resale, and execute the contract.
Ideally, as a wholesaler, you’d look to work with cash buyers, people with the liquidity and cash to purchase the contract without the length and delay of financing.
Benefits To Wholesaling
- Real estate wholesale is a legal way for people without much capital or financing to invest in the real estate market.
- It’s low risk as it requires little upfront money
- Depending on your network of investors, you can turn a quick profit
- No construction expertise needed
- Since there’s no financing, there’s no credit score needed.
Downside To Wholesaling Real Estate
- Wholesaling requires a steady network of investors
- Requires a lot of sweat equity; the ability to find, negotiate and execute agreements
- Some states require a real estate license, so check with your states regulatory body first
- Smaller profits than other real estate investment opportunities
- Risk of lost deposits due to lack of investors
- Difficulty and lack of familiarity with wholesaling for the seller
As an entry-level way to build a network and some equity, wholesaling real estate is a good way for individuals to start investing in real estate.