Before people go crazy and start crucifying me in the comments section, hear me out:
I am not saying that being a real estate rehabber or a buy-and-hold investor is bad, stupid, or doesn’t work.
The fact is you guys are my valued customers, and I love that these strategies work for you.
My goal in today’s post is to simply explain the reason why I’ve chosen to wholesale and to show those new and trying to figure out what route to take in real estate why they might consider it as well.
Unfortunately, wholesaling gets a pretty bad rap, and I think it’s a shame because if it is done well, wholesaling can be an incredible business model.
When I first got started in real estate, like most people, I didn’t have a lot of money. I even remember one time, I was on a date, and my debit card was declined because my account was overdrawn. Embarrassingly, my date had to pay for our meal. So believe me when I say I know what it feels like to be dead broke!
Back then, I had never heard the term “wholesaling” before. I just called it the “buying a house and selling it fast without doing any rehab because I don’t have much money” strategy. I thought I would do this until I built enough capital to become a “real” investor, which in my mind was a fix-n-flipper, as that is what I saw people do on TV.
How to Purchase Real Estate With No (or Low) Money!
One of the biggest struggles that many new investors have is in coming up with the money to purchase their first real estate properties. Well, BiggerPockets can help with that too. The Book on Investing in Real Estate with No (and Low) Money Down can give you the tools you need to get started in real estate, even if you don’t have tons of cash lying around.
I bought my first property with only $5,000 (matched with my dad at an additional $5,000) and sold it to another investor because I couldn’t feasibly flip it on my own. During the following three years, I did pretty much the exact same deal over and over again (in terms of numbers). I was doing a lot of volume because my goal was to make enough to transition to flipping houses.
Once I had gained enough experience (and enough working capital), I decided to “graduate” and become a full-time fix-and-flipper! Yay, I had finally made it to the big time. I was going from the little league straight to the pros. I was extremely excited!
Now, I’ll be honest, I had no clue about anything related to contractor work, but to me, wholesaling was a kid’s game, and I wanted to make it “big” as a flipper.
So I become that guy. Every day I’d wake up at 6 a.m. and head over to Home Depot to pick out our supplies for the day. I handled several different projects all at the same time. I remember at first, it was great, but after a while it started to become a lot to handle.
I remember at some point, I told myself I felt like an ATM, handing out $100 over here and $250 over there. Often I’d even have to coordinate a “personal delivery” with contractors to pay them cash because a lot of them didn’t even have a bank account.
It’s very typical to have rehab numbers that end up being way off, and so I remember feeling frustrated that my profit margins were always smaller than what I had originally planned. On top of all of that, most of the time, my contractors would be late in finishing the project, subtracting more from my bottom line. A couple of times, I had contractors flat out rip me off and take money for a job and skip town!
So, needless to say, a couple of years into being a fix-n-flipper, I started to question the wisdom behind this “real” investor’s game. Once I started to analyze how much revenue I was generating from my fix-and-flip business, to my shock, I realized I was actually making more money when I was a wholesaler!
So, I asked myself, “Why deal with all the stress and headache of being a flipper? I can make just as much (if not more) finding great deals and simply selling them as is!”
Do You Want a Quick Nickel or a Slow Dime?
There is a funny saying that I’ve heard a lot of real estate investors use that goes like this: “A quick nickel beats a slow dime.”
The point being made here is that a smaller return is better in the long run if you can make it in a shorter amount of time. If I tell you, “Hey listen! I’ll give you $1,000 to run a 100-meter dash, or if you can run one mile, I’ll give you $2,000,” at first, $2,000 sounds like a lot of money! Just going one mile will get you 100% higher of a return. That’s awesome, right?
Well… not exactly.
There are about 1,609 meters in one mile. If you divide that by 100, that’s about 16 times you could have made that $1,000 if you had chosen the shorter distance! So which is better: $2,000 or $16,000? Obviously the $16,000!
For me, wholesaling has been a lot like making that $1,000 per 100 meters.
In wholesaling, I can make a lot more running the short distances, just as long as I run those distances several times. Whereas with flipping, it’s a lot more like running mile after mile, which can totally wear you out! I know that fix-n-flipping is not as slow of a dime as buy-and-hold, but it’s still a lot slower of a dime than wholesaling.
When I was flipping houses, what would start off looking like a $2,000 mile would end up slowly turning into a $1,200 mile (or less) due to unforeseen expenses like holding costs, maintenance, delayed timelines, inspection responses, and the list goes on. Typically I’d end up running that mile with all my might, only to gain about the same as if I were to save my effort and simply run the 100 meters!
This is the reason, I decided to stick with wholesaling; flipping was a whole lot more stressful.
And I made more with wholesaling, doing less.
Now, when it comes to buy-and-hold investing, typically the mindset behind it is: “In 5 years I want to build up $10,000 in residual income per month.” This sounds amazing, doesn’t it?
Finding What You Enjoy Doing
If you’re smart with your money today, over time you’ll be able just to sit around and do nothing except collect rent checks. Well, I hate to burst your bubble, but this isn’t the reality of it. As a buy-n-hold investor, you will still have to work; you’ll have to manage all your properties and the tenants within them!
Even if you work with a property management company, in most cases, you end up having to manage your property manager–and that’s not really all that fun to me. Also, it can take years to get the kind of down payment needed to get into a good rental property, and it can be unwise to have a lot of debts. The more leverage (loans) you have, the higher your risk is. If you’re over-leveraged and one thing goes wrong, your entire business model could come crumbling down!
Plus, with the headaches I’ve had dealing with evictions and tenants, it just wasn’t the strategy for me. When I see someone with a goal to make $10,000 in residual income long-term, I like to take them by the hand and show them how they can make that $10,000 this month. And sometimes in one deal!
Personally, the saying is very true for me: I’d rather make a quick nickel over a slow dime. You see, working in real estate for as long as I have has taught me very well what I like and don’t like about this business. I don’t like managing contractors; I don’t like swinging a hammer or having to wake up at six in the morning to go to Home Depot. I don’t like having to fuss with making sure rent is paid on time, dealing with toilet issues at 3 a.m., or dealing with the painful process of an eviction.
But what I do like is the chase. I love finding the deal!
Growing up, my grandfather was a bona fide picker. Every time we went for a visit, I remember going to several different flea markets and garage sales, always on the hunt for the next steal-of-a-deal. Those were some of my favorite memories, and I think the love for that carried over into real estate. Instead of waiting to grow wealth or dealing with the headache of rehab projects or tenants, I’d simply rather get paid to find great deals for people.
This is just my personal preference, and there is a lot of room for people to disagree and have their own likes and dislikes in real estate.
(What’s are some of yours by the way? Let me know in the comments section below!)
The point here is that wholesaling, when done well, is a very profitable and lifestyle-friendly business. It is a great option for newbies trying to figure out their career path, so don’t think that it’s child’s play!
In conclusion, all the fix-n-flippers and buy and hold investors out there, I value you what you do, and I am so glad I can serve you with the properties you guys need for your real estate strategy. But for me, wholesaling is the way to go, and today, I wanted to make a stand that it is a serious and valuable business.
For those looking to use real estate to build long-term wealth, consider wholesaling. It has been very good to me, and I know, if done well, will be very good to you.
Now it’s time for you to weigh in: What is YOUR real estate strategy of choice–and why?
Let’s have a conversation in the comments section below!