There are 3 popular methods for investing, or making money, in real estate. Buyer and hold, wholesaling, and flipping. By this point in your research, you probably understand the differences between those 3 and you’re wondering which one is the best to invest your money in.
Whether you have $30k, $50k, $100k, $300k, or $1m, there is a clear winner.
Warning: There may be some bias. However, having a personal portfolio of cash-flowing rentals and seeing many investors succeed (and some fail) it comes with experience.
I'm not a massive fan of wholesaling. It has its time and place, but there are a lot of negatives to it. So, if you’re looking to be convinced that’s the best way to make money in real estate, I’m not your guy.
Essentially you’re telling someone you are the buyer when you aren’t. Or, even if you are being extremely transparent in your method, there’s a good chance it’s not the best option for the seller and they simply don’t know that. To be fair, there are times and some people who have entire businesses built on transparent, ethical wholesaling.
I’ve just seen it done with questionable ethics more times than not. On top of that, it’s hard. You have to find someone who wants to sell their house largely discounted to you, when you aren’t even the buyer. Lots of people aren’t serious, houses are often times in bad condition, and many other “obstacles” inevitably come up along the way when wholesaling.
✓ Takes less money to get started (on a small scale)
✓ Can make a nice chunk of money per deal if executed well
✓ Can be quick money... if you have a deal
✓ Difficult to execute one time, let alone consistently
✓ Hard to find the deals (people who wholesale consistently usually spend a lot of money on marketing)
✓ Blurs the line on ethics if not helping people explore their options or being transparent
✓ Usually an uneducated or desperate seller
✓ Houses are usually very rough (otherwise they would just put it on the market to sell it)
✓ Fast (6-18 months usually) way of making a chunk of money
✓ Plenty of resources and education available from people who have done it successfully
✓ Highly competitive in today’s market
✓ Slim margins
✓ High Skill, capital, and resources required
✓ It’s a job, not an investment (since you’re selling the asset for the profit)
Flipping can be a decent way to make some extra money if you’re willing to push through the obstacles. It’s not easy. It’s tough to find a deal and be confident in the rehab and ARV (after repair value) numbers.
You can do the work yourself thus having the biggest margin, but at the cost of your time/labor.
You can hire individual contractors and manage them. More difficult to manage others and a medium margin.
You can hire a general contractor for the project. Pretty tough to make the numbers work as a GC will be the most expensive so you would want to be really confident in the numbers.
Buying a house or multi-unit property and renting it out. The rental income pays for your PITI (principal, interest, taxes, insurance) plus covers a little extra maintenance, repairs, and vacancy. If you do it well, you’re left with some additional cash flow each money which is your “cash flow."
I’m going to try to keep this concise, but I’m obsessed with this method for making money and more importantly, building wealth through real estate. Buy and Hold real estate investing is the common man’s path to obtaining great wealth. This is because the way your capital compounds in multiple ways when you buy and hold real estate. There’s a reason the majority of the wealthy people in the world exercise buy and hold investing.
Cash Flow
As stated above, if done right you can pay all monthly expenses, budget for future expenses, and still be left over with some cash flow at the end of the month.
Appreciation
When you hold on to the property and don’t sell it, the value of the home naturally increases in value. Being that they aren’t making more land, and it’s expensive to build new homes, and populations are increasing, the value of a house will generally increase around 3% each year for at least a few hundred years
Principal Pay Down
While you start with a loan on the property, then tenants rent covers your monthly principal until its down to zero. So even if nothing else, at the end of 30 years (assuming a 30 year mortgage) you will have an asset that’s worth more than what you bought for (appreciation) but it will be completely paid off (by the tenant)!
Tax Benefits
Rental property expenses are tax deductible. There’s also this thing called depreciation. You may/may not understand it, that’s a completely separate blog, however, at this point in the game, just trust that you pay WAY less taxes on rental property income. In short, this is because it’s a good thing for the economy so the government purposefully makes it advantageous to encourage good behavior through investing. Another huge one is cost segregation and accelerated depreciation. A bit more advanced but we can visit that later. Just know it's out there and at some point you’ll need to learn to do it.
You put these 4 things together and the amount of “wealth” you build in 1 year, 10 years, and 30 years is compounded so greatly, that it's virtually unmatched by any other investment vehicle out there.
✓ Has been done successfully by many people. Therefore, there are lots of learning resources to copy
✓ Own a cash-flowing, appreciation asset that pays for itself while being subject to great tax benefits.
✓ Is more passive than wholesaling or flipping
✓ Not completely passive. You still need to be educated and skilled at doing it well.
✓ Need 20-35% for down payment and upfront repairs
Clearly, there is some bias here. However, that comes with good reason. Wholesaling and Flipping are jobs, and not easy ones to boot. Buy and hold, while not necessarily easy, is mostly a process that can be easily repeated over and over to not only create extra monthly income but also be a fantastic course to build wealth.
Here at FIRE Realty Team, we are fortunate enough to be in the most incredible buy-and-hold market in the country. It comes with a relatively low cost to entry with the best price/rent ratios and solid investment neighborhoods that have been proven to be successful by many other investors.
