Wholesaling is Not Investing
You heard me.
Want more articles like this?
Create an account today to get BiggerPocket's best blog articles delivered to your inboxSign up for free
Wholesaling is, however, an excellent job that will give you amazing amounts of experience in the real estate investing field. It is a great way to make connections and network, learn the ropes of investing (especially the numbers) and make some serious cash.
Why Wholesaling is Thought to Be an Investing Method
Wholesaling is the only job I can think of that is 100% related to real estate investing. In wholesaling, you learn how to negotiate prices, find deals, find motivated sellers, talk to investors, run quick numbers, and understand the physical condition of a property. What other job teaches you all of this about real estate investing?
None I can think of.
Because you are working with investment properties and you are talking mostly to investors and because you are coming out with a nice chunk of change in your hand at the end of it, it’s easy to think that being a wholesaler means you are an investor.
Let’s let good ‘ole Wiki confirm what an “investor” is:
An investor is a person who allocates capital with the expectation of a financial return.
Source: Wikipedia, http://en.wikipedia.org/wiki/Investor
Nowhere in there does it say the person has to work for the financial return. Second, wholesaling is well-known for being a way to get into “real estate investing” with little to no money down, i.e. no capital.
So how does “working” and not having to use any “capital” constitute “investing”? It doesn’t. Wholesaling is not investing.
Why do I bash wholesaling being called an investment method?
Some because it just drives me crazy to see so many people claim to be investors just because they are wholesalers, but more importantly, it makes me realize that those who think wholesaling is investing don’t understand the difference between active and passive income. Not understanding the difference between those is dangerous territory in real estate investing. You have to understand that difference because knowing it is what will allow you to perfect your strategy and potentially make a heck of a lot more money in your “investing” career than you would if you don’t understand the difference.
Active versus Passive Income
Active income means you are doing something in order to receive that income. Some kind of work. Some kind of effort. You are not hands-off. You have to exert some kind of energy and time towards earning that income. Passive income means you are earning regular income with little to no effort required to keep it coming. You are for the most part hands-off.
Why does it matter which one you are earning if it’s all income? It doesn’t in terms of making the money, but it does matter for how you maximize your earnings. Why? Value of time. This is a concept that a surprising number of people don’t truly understand. It took me a long time to understand it fully even. I knew the definition but not how important it really is. Every hour that you spend working is one less hour you are doing something else.
The point of this article isn’t too go into detail about active versus passive income (though if you want a more detailed explanation of these terms, see The Truth About Active Income vs. Passive Income). I define these terms briefly here only to make sure you understand that wholesaling is active income only. There is nothing passive about it.
Wholesaling is Just Fine
As I said, wholesaling is a great way to learn the ropes of investing, make great connections, and make some money.
But it is a job. A job. An actual, job. It can be a full-time job or a part-time job, or even just a small gig on the side. But it is a job. At least with flipping, which is technically an active income investment method as well, there is still a component of passive income to it. When someone flips a property, they invest two things into it- time and money. The flipper, if the deal goes right, gets paid for his time and effort of work he put into the property, but then because of the value increase due to that work, he also gets paid out on the money he invested. So it’s a two-part thing (in an abstract way). Whereas wholesaling, there is no return-on-your-money component, so you are only being paid for your time and effort, i.e. work. Therefore, it is only a job and not an investment method.
Knowing Your Options
The reason most people get into wholesaling is because they want to earn capital that they can use for investing. That is excellent. If you get into wholesaling as a way to fund your future investments, you are setting yourself up to have a great foundation to work with and you are likely to be a lot more solid with your investing decisions because of what you learned during that experience.
However, don’t for a second think that wholesaling is the only way to build capital to fund investments. By getting into wholesaling, you are essentially starting a business. That’s great! It’s what Robert Kiyosaki says you should do- start a business so you can use the income from that business to buy passive income investments. But what people don’t realize is, you can start any kind of business to do that. You can start a cupcake shop, or create a smart phone app, or sell beaded necklaces near the beach. Okay, a couple of those obviously won’t earn you a lot of capital, but you get my point. You can do anything you want. If wholesaling is your thing, and you love it, and you are willing to exert the amount of effort it takes to become successful at it, then go for it. You will learn a ton. But if you are like me, and wholesaling isn’t your thing, do something else!
For any newbie showing up on BiggerPockets or anywhere online or anywhere related to real estate investing, it always seems that wholesaling is the first step. Everyone starts there. It probably seems like it is the only place to start. But it’s not. If you are getting into wholesaling, it’s likely because you think it makes you an investor and it will put a lot of capital in your pocket. However, it doesn’t make you an investor, it makes you a business owner. And it’s not as easy to wholesale as people make it out to be. It’s a simple concept, but it’s like any other business you start, it’s not easy.
So have fun with whatever business you want to start in order to earn capital to buy investments with. If that’s wholesaling, awesome! If you aren’t so much into the wholesaling thing, don’t do it. Do something else that fits you better. It’s not like if you do something else you will miss out on being able to call yourself an investor!
What kinds of things, of businesses have you started, to earn capital that can be used for investing?