I (Almost) NEVER Wholesale Real Estate: Here’s Why
It’s time to stir some things up here on BiggerPockets!
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I know there is a large community of wholesalers on BP, and I am coming right into the middle of that community and saying that I almost never involve wholesaling in my business. So I’m pretty much getting on BiggerPockets and picking a fight.
Crazy of me? Perhaps. Before you stop reading, though, let me plead my case! My intent is not to pick a fight but to get some healthy conversation going. So let’s get a good debate going on here — feel free to make some counterpoints in the comments section!
2 Important Reasons I Don’t Wholesale
1. Wholesaling Does Not Build Wealth
While it can be very lucrative, wholesaling is not wealth building.
That’s probably the number one reason I don’t do it. I am in this business to make a difference and to build long term wealth for my investors, my employees and myself. Bottom line. I would rather build a business model that can actually buy the rental lead or go out and do the fix and flip, versus take that opportunity and sell it to another person to build their wealth.
Wholesaling creates assets — for others.
I can understand the wholesaler’s business plan of taking the money they make on one deal and buying a rental with it. I actually think that is the intent of most wholesalers, but I have met very few that actually do that. The problem is that to be an effective wholesaler who is regularly producing deals, you have to invest time and money to build a business model. That business needs to be fed, too.
I see the wholesalers I know take a percentage of the profit for themselves and roll the rest into growing their wholesaling business.
2. Wholesaling is Work
Every time you do a deal, you have to start over again and hustle for the next one. You are pretty much trading hours for dollars. It will be that way until you build a systematized business, which will take time and money.
Many wholesalers are doing deals that involve a short sale, meaning that the loan amount on the property exceeds the property value. There is a ton of back and forth that needs to be done between the owner and the bank. These deals can take quite a long time depending on how cooperative the owner is and which bank you are dealing with (some are easier than others). This process can be very time consuming â and at times the deal can fall through for a number of reasons.
Wholesaling is also taxed as “earned income,” as if you were working. On top of that, there is self-employment tax, as there is for most other business owners. Although you can write off some of your travel and office expenses, you are missing out on the great tax benefits of holding real estate assets longterm.
You could argue that fix and flips are trading hours for dollars and are taxed the same as wholesale deals, which I agree with. Still, I would take the fix and flip because it allows me to build a team of contractors — and even in-house employees if I want them. I have already built this team in my business and use the same contractors and employees on my fix and flips that I use on my rentals.
2 Reasons Wholesalers Do What They Do (With Counterpoints)
Of course, I know and respect several wholesalers, and I buy many of our properties from them. I even have one of them as a tenant here in my office complex. It’s a necessary business in the real estate investing industry, as not all the good deals are on the MLS.
Wholesalers do lots of marketing and detective work to find good deals, and I am grateful for that.
That being said, I already know some of the major reasons why wholesalers are in the business, and I have listed them below. I also listed my response to these reasons as counterpoints.
1. Wholesaling is High Velocity
The overall timeline for a wholesale deal can be very short. In some cases it can take only a month to find a deal, find a buyer and get to closing if you play your cards right. Wholesalers can make a fee north of $5,000 for run-of-the-mill deals and very large fees for slam dunk deals.
It can be very quick money. Do a few of these every month, and the earned income can really add up!
It’s also high energy. The adrenaline rush I have seen some of my wholesaling buddies get on a quick hit deal seems intoxicating. I have also heard it’s addictive. Once you hit a few deals that make a 5-figure fee in a short timeframe, you can get hooked!
My Counterpoint: It’s quick money, yes. But as I said, it’s highly taxed money, and you have to run around to earn it each time you make it.
2. It’s a Good Way to Get Started in Investing
Most “newbies” will say that they want to wholesale to get started either because of limitation of capital or because it’s a lower risk way to dip your toe in the water. It’s a good way to network and get to know the ropes without putting too much money at risk.
My Counterpoint: While I may agree that it is a low risk alternative, I think that most of those risks can be mitigated with the right strategy.
I would rather see a newbie do a brief internship with a seasoned investor to get the experience or ask someone to mentor them through their first few deals for a fee. If capital is the issue, you have two options — get out there and raise some private lenders first or bite the bullet and do a wholesale deal or two to raise money, then transition.
But don’t invest much into building a “wholesaling” business. Focus on your longterm goal of building a rental or fix and flip business. If a wholesaler is buying every third opportunity themselves with the money they made on the first two, that’s a nice equation.
When I WOULD Do a Wholesale Deal
So I did say “almost never,” right?
It’s true; I do wholesale a property or two every year.
Most of the time it’s because we don’t have the current capacity to complete a project. We may have our team on other deals and won’t be able to get to the project in a reasonable timeframe. I also won’t do a deal if it’s outside of a 30 minute radius from my office (more to come on that rule in a future blog post!).
There have been times when a great deal has come up outside of our trading area, and we sold the deal off to another investor who was willing to do it. I’m an opportunist also, so if a chance comes up to make a few dollars on a deal I can’t do myself, I will take it.
I can’t preach wealth building enough. I am in this business to accomplish my longterm goals and live in the WHY I am doing this. With that goal in mind, Liz and I committed very early on to build a sustainable business that can process large and small opportunities — both buy and holds and fix and flips.
Even though we may be passing on making the quick dollar on some deals, we are investing in the longterm gain for ourselves and our partners. It’s not hard to build a business that can actually do these types of deals; it just takes a long range plan and baby steps in place to take us there.
So who agrees with me? Who disagrees?
I hope to have spurred a bit of a debate here! I want to hear your arguments — please comment below!