Most likely, when you’re first starting out as a new real estate investor you have very little money. I know I did. You probably have just enough money to do some marketing (such as direct mail or bandit signs) but there isn’t much to spare.
Well… if you’re new and short on funds, then there are certain types of deals you’ll want to do and certain types you’ll definitely want to avoid. For example, I highly recommend that all new investors start out wholesaling. This is the least risky type of deal to do and you get incredible leverage.
What I mean by leverage, is that you’re putting down a $10 deposit (never put more) and you end up making $5,000 to $10,000 when you assign your contract to a buyer. Turning $10 into $5,000 sounds pretty good to me. And like I said, this is the least risky method because if for some reason you can’t find a buyer to assign your contract to, then all you lose is $10.
As you can see, this is perfect for the new investor with little cash to spare.
More importantly, once you’ve done your first wholesale deal you can fund your marketing activities with a percentage of the money you make from the deals you do. In other words, you don’t have to pay for marketing expenses out of pocket anymore, you just take a portion of all the deals you do.
After wholesaling, the next best methods for beginners are either lease options or subject-to’s. Both of these methods require zero money down (if you know how to do them right) and you can walk into instant cash flow of several hundred dollars a month. The only risk with these methods is if you sell the houses on a lease option you could have vacancies. That’s why you’ll want to thoroughly screen your rent-to-own tenants to try and eliminate this problem as much as possible.
Now let’s get to the method I would never do…
If you’re a new investor I would avoid rehabs like the plague. I’ve known many new investors who were hell bent on doing a rehab for their first deal and almost always it turns out bad. First, with a rehab you have to put way too much money down. You have to pay the closing costs, insurance and the 5 points on a hard money loan.
Also, ask any rehabber, and they’ll tell you that no rehab is done without “surprises” popping up. You may think you’re doing a $30,000 rehab and before you know it, it turns into a $50,000 rehab.
Simply put, there is just way too much risk in rehabs for the novice investor. Once you become experienced, then go ahead and do one. But starting out, you want to make things as easy as possible. Especially because you want your first experience as a real estate investor to be positive, that way you’ll enjoy this business and want to keep doing it for years to come.
Photo: Ben Sutherland