Investors: Don’t Begin by Wholesaling. Take One of These 7 Paths Instead
Is wholesaling the perfect way to get started in real estate investing? Can you easily get started by using none of your own money yet still earn a profit and learn the business?
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As you know from the title, I don’t think so. Wholesaling is not the best way to get started for 99% of new investors.
Some BP members argue that you shouldn’t begin with wholesaling because it has legal issues (here are some interesting articles from Bill Gulley).
But wholesaling as a model for beginners falls apart even before that. It’s simply not an easy business model to successfully execute.
Legitimate wholesaling requires strong sales skills, some cash for marketing, a solid list of investor buyers, a team of attorneys and closing agents, and a big chunk of free time to start hustling.
Most beginners can’t check all of those criteria off their list, at least right away.
But this article isn’t about bad news for beginners. Instead it’s about positive alternatives!
I was a beginner 13 years ago. I began my sprint up the mountain with big dreams, energy, and $1,000 bucks in the bank. So I can truly appreciate those of you eager to begin but not sure how best to get started.
The first thing to figure out is what you REALLY need as a beginner. I would argue you are missing some or all of these:
- Cash reserves in the bank
- Connections with a network
- Specific knowledge and expertise in areas like deal analysis, market valuation, rehab and construction, finding good deals, and real estate laws/contracts
It may take you three months to fill these gaps. It may take two years. It depends upon your situation.
The rest of this article will explore seven alternative paths to wholesaling that will fill those gaps and help you safely and relatively quickly get started as a real estate investor.
Look at these paths as part-time (or full-time) apprenticeship jobs. In some cases you won’t actually be investing in real estate. But you will be investing in yourself (and making money along the way) so that you build expertise that will command profits as you truly move into the core of real estate investing.
Here are my 7 suggested paths.
7 Strategies to Break into Your Real Estate Niche of Choice
1. Hack Your Residence Before Becoming a Landlord
This is the strategy I recommend for getting started in rental properties more than any other. I used house hacking to live with positive cash flow in a quadraplex during the early years of my real estate investing.
BP celebrity Brandon Turner did the same thing, and he wrote a great article about how to do it.
“House hacking” means that you buy a residence, either a house or a small multi-unit building like a duplex, triplex, or quadraplex. Then you rent out either spare bedrooms or extra units.
The rent from your tenants can often pay for your mortgage, taxes, insurance, and more. This means you are getting PAID to live in your home. Pretty amazing!
This arrangement also allows you to learn the rental business with minimal risk. As a beginner, you are bound to make mistakes, but living on site will allow you to minimize the impact of those mistakes as you learn.
I also love that you can lock down long-term, low-interest financing while you live there, and then a couple of years later, you can move and keep the building as a solid rental.
2. Live In Your First Flip
Like house hacking for rentals, live in flips allow you to safely learn the business of fixing and flipping houses.
The strategy works like this.
You find a house that can be purchased well below the full potential value. This usually means the house needs repairs, upgrades, or some improvement (like adding a bathroom, finishing a basement, etc.) in order to reach its full value.
The idea is to buy the house, move in and then carefully do the needed improvements. If you’re like me, you’ll hire everything out and just shop frugally to save on materials. But handy people can save money and learn by doing repairs themselves.
In either case, after two years the home can be resold for a profit. And this is where you benefit from one of the most profitable laws in the tax code.
Because you’ve lived in the property for at least two years, you can make $250,000 as an individual or $500,000 as a couple TAX-FREE.
This is a pretty good deal, isn’t it? You learn the fix and flip business. You make a profit on your residence. And you pay zero taxes on your gain.
This is why so many people choose this method as their preferred path to get started in real estate investing.
3. Learn Your Resale Market as a Buyer’s Agent
Fixing and flipping houses is a competitive game. To win, you need a competitive edge over others trying to do the same thing.
I have found that one of the most important competitive edges is an intimate knowledge of the buyers who ultimately purchase and live in the houses you flip.
The tastes and preferences of buyers are very particular. Color patterns, styles, layouts, amenities, preferred schools, and neighborhoods all change constantly over time.
Agents who help buyers find houses get to know these preferences better than anyone else.
So, if you are new to an area or new to the business of fixing and flipping houses, you could benefit immensely from a short or long stint as a buyer’s agent in your target location.
In my popular BP article “How to Quit Your Job and Invest Full Time in Real Estate,” I recommended getting your real estate license for a number of reasons like access to a broker as a mentor, access to the MLS, and the ability to earn side referral commissions.
If you’ve already obtained your license (it’s not hard in most states), you can then shop for a brokerage that gets a lot of buyer leads in your area. Volunteer to be on desk duty or to service buyer leads for other busy agents.
If you are a quick study and add a lot of value to your colleagues, you can quickly build up a steady stream of buyer clients that will put some money in your pocket and help you learn the retail real estate business.
4. Use Master Leasing to Earn Cash Flow While You Learn
Master leasing is not used by many investors, but it’s an outstanding way to get into rental properties without large down payments or the risk of financing.
Master leasing means that you agree to lease a property from an owner, and in your lease you are allowed to sublease the property to your own tenants (called sub-tenants). Your master lease could be for a few years or for many years.
This arrangement is beneficial to you because you can earn a profit on the difference between the rent you collect and the rent that you pay to the owner.
The arrangement can also be beneficial to the owner because they get a consistent income from you without dealing with maintenance calls, vacancy losses, and turnover hassles.
Two BP articles give helpful explanations of the strategy:
- How to Use a Master Lease to Acquire Commercial Real Estate With No Money Down
- The Master Lease: A Case Study in How to Achieve Cash Flow With Little Capital
Master leasing is a lot like a partnership with the owner because you divide up obligations and benefits. For example, you could negotiate that the owner pays for repairs and improvements costing over a certain amount. You may also negotiate to get an option to purchase the property so that if you improve the rent roll and the property, you can benefit by increasing your potential equity.
This technique will require some upfront education about landlord-tenant laws and about master lease contracts. You’ll also want to consult with a good local real estate attorney to draft a desirable master lease. But you would have these start-up tasks with any rental property, and this technique eliminates many of the other financing challenges of getting started as a rental property investor.
5. Become an Expert On Finding Tenants as a Leasing Agent
You’ve probably detected a theme so far. I’m dividing up the entire real estate investing business into pieces, and then I’m getting you started by specializing in one small piece of the whole.
Well here’s another slice — leasing.
Just like my example of becoming a buyer’s agent to gain a competitive advantage as a flipper, you can do the same thing to gain a competitive advantage as a landlord. You do this by becoming a leasing agent.
A leasing agent earns a commission, sometimes equal to a half or one month of rent, in exchange for finding a tenant for a landlord. You will need a property manager or real estate license in order to earn this commission. This job will require a lot of running around and talking on the phone, but it can be done with low overhead and on a part-time basis.
Along with making a little bit of money, becoming a leasing agent will give you a keen sense of which properties are most attractive to the good tenants and which tenants are the best for a landlord. This skill will be invaluable as you begin owning, managing, and then training others to manage your properties.
To get started, you will want to find landlords who manage their own properties but need help with the time and effort required to list, show, and get applications on vacant rentals. These people aren’t as hard to find as you may think.
BP author Elizabeth Faircloth wrote a very helpful article called “Every Landlord Should Hire a Leasing Agent: Here’s Why.” Read that to get more of the nitty gritty details of this strategy.
6. Specialize in Deal Finding As a Bird Dog
Finding good deals can be difficult as a beginner, but it’s one of the most important skills to learn as a real estate investor. My own story began by learning this skill as a real estate bird dog.
A real estate bird dog is different than a wholesaler in that the bird dog does not put properties under contract to buy. Like a real bird dog who simply points to birds in a bush for its owner, a real estate bird dog sniffs out good deals, brings them to an experienced investor, and then earns a referral commission once the deal is bought.
Like the buyer’s agent and leasing agent, you’ll probably need a license to do this legally.
I got started by sniffing out deals for my father, who at the time was purchasing rental and fix-and-flip houses near Atlanta in my hometown of Newnan, Georgia.
I was studying intensely, but there were many investing concepts I did not know yet. And as a recent college grad, I had zero business experience.
So my arrangement was helpful because I could focus on a very narrow objective — to market and prospect for interesting deals, talk with the owner or agent, and let my father decide the actual offer.
I was released from the responsibility of the many other necessary components of real estate, like contracts, financing, bookkeeping, property management, rehabbing, and reselling. But I was able to observe and learn all of those components as I followed the deals through the funnel.
As wonderful as this strategy was for me, the difficult part for you may be convincing an experienced real estate investor to take the time to let you apprentice with them. I had my father, who perhaps had ulterior motives for helping me.
While I did find him 12 deals in my one year with him (most but not all made money), I did not have to prove myself up front.
So, unless you’re already close with an experienced investor, you will need to do a good job of selling the assets you have, like free time, energy, enthusiasm, being coachable, and being a self-starter.
Perhaps you can start on a trial basis. Perhaps you can also do some other odd jobs for that investor. Perhaps you can study their business from a distance, find some obvious needs, and make a proposal that costs none of their money up front.
Whatever you do, place that investor’s needs first and show him or her that you won’t waste their time.
7. Get Your Hands Dirty With Rehabs as a Project Manager
The final option to get started as a real estate investor helps you learn about the construction and rehab part of the business. Unless you are already a contractor or builder, the remodeling process can be intimidating as a beginner, even if you’re handy.
How do you learn the costs of labor and materials? How do you learn the flow of a rehab project? How do you learn the dozens of tricks needed to manage people, stay under budget, and complete a job on time?
You could read about it in books, like J Scott’s The Book on Estimating Rehab Costs, which I highly recommend. But the best education is simply doing it.
A project manager position is basically someone who oversees all of the different subcontractors of a job, coordinates schedules, manages materials, and keeps a job running smoothly.
Some higher volume flippers and builders like to use project managers and pay them a flat fee for their time. While construction experience is nice, sometimes the best project managers are the young, energetic, and eager-to-learn people who can pick up on the experienced flipper’s system.
Flipper Mike LaCava wrote a good BP article explaining “How to Flip Houses Using Project Managers.”
If you think you’d be interested in that type of job, put a plan together and seek out experienced flippers in the BP Forums or in the local networking groups in your area.
How Do You Eat an Elephant?
Eating an elephant (if you actually liked that kind of thing!) would be overwhelming. It’s just too big.
The solution, of course, is to take one bite at a time.
Starting out in real estate investing (or any professional field) poses the same challenges. You must walk before you run. You must apprentice before you become an expert. You must slice the bigger project into a lot of smaller pieces.
The ideas and solutions in this article are just specific suggestions that aim to help you reduce the overwhelming prospect of learning and getting started as a real estate investor.
Whatever you choose to do, the point is to break the big goal into pieces and then to get in motion. Find a niche you like and get started.
Understanding the words in an article is theory. It’s actually the easy part! The real challenge is to practice what you learn.
Best of luck as you get started (or restarted) in your real estate investing!
[Editor’s Note: We are republishing this article to help out our newer readers.]
What do you think about the paths to beginning in real estate investing that I’ve offered here? Are there others that I forgot? How did you get started as a real estate investor? Or if you’re just starting, what challenges are you struggling with?
Let’s start a conversation. Be sure to leave a comment below!