The very first house I ever purchased only cost me $5,000.
I partnered on it with my dad, who had matched me, and we were so broke at the time that we couldn’t really do anything with it! So, I simply decided to turn around and just sell it “as is” for a slightly higher price. I had no idea what I was doing at the time, but I figured I had bought it so cheap that I could easily turn around and sell it for slightly more. So, we bought it at $10,000 and a week later sold it for $15,000, making a cool $5,000 split between the two of us.
I can still remember receiving that check. It changed my life forever!
A light bulb went off in my head, and I realized, “If I can make $2,500 in a week from one house, what would happen if I sold 5, 10, or even 100 of these a year?” And thus my wholesaling business was born.
Now, at the time, there weren’t many resources like BiggerPockets out there, and I hadn’t even read a real estate book in my life at that point. I just saw the opportunity back in the 2008 crash and simply bought cheap houses and then sold them slightly higher.
It was simple and clean, and it’s been an incredible ride ever since!
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.
One of the Simplest Ways to Make Money in Real Estate
You know, I really love what I do as a wholesaler, and it’s such a shame that people only consider it as a beginner’s strategy.
Today, I want to challenge this and make a case that if it’s done correctly, being a real estate wholesaler is one of the simplest ways to make money in real estate.
Now, notice I didn’t say “easiest” but “simplest.” I don’t know of anything in this world worth doing that is easy 100% of the time, but simple is a different thing.
My company is called “Simple Wholesaling” because I strive to live a life that is as simplified as possible!
Becoming financially successful doesn’t have to be complicated. It just has to work and be done consistently over time.
So many newbies out there think that they have to learn everything there is to know about real estate before they can do their first deal, but if that’s the case, I’m sorry, you’ll never end up actually investing!
Related: Contract Assignment 101: The Beginner’s Guide to Wholesaling Real Estate
I’ve been in this business for close to10 years now, and I’m still learning new stuff about what I do everyday.
It’s all about learning just enough to take your next step, and if you do that, eventually you’ll have made enough steps to truly reach success.
Don’t worry about knowing so much! Just take action and learn as you go.
Why Real Estate Wholesaling is Stupid Simple
The following are the only 4 aspects there are to know about the real estate wholesaling business. Sure, there are some details and nuances to be hammered out beyond the scope of this article, but those just come with time. If you take these 4 simple steps to heart, you’ll find that this is all you’ll need to begin making money. Again, just learn enough for the next step, and with time, you’ll get there. Let’s get started!
1. Take a look at the 65% rule and the 2% rule.
As a wholesaler, 99.9999% of your buyers will be people looking to flip a house, or people looking to hold a property as a rental. So, naturally you need to be buying properties at a low enough discount where it would still make sense for your ideal buyer’s needs.
If they buy a property from you, they need to know that they can still make money from the property you sold them. It’s pretty simple, like I said!
So, your first step is to know exactly how to analyze a deal, to determine if it is a deal or not and then to determine your highest possible purchase price. What I mean by this is you need to first determine how your buyer’s typically run their numbers and then on top of that, you need to factor in your profit.
The 70% Rule
So, let’s break it down:
When someone is looking to flip a house and it comes to determining their purchase price, they typically use a formula called the 70% rule and it goes as follows:
Purchase Price = (ARV * .70) – REHAB
Comparables — which are similar homes that have sold in close proximity to your property within the last 6 months to a year — help you determine the “after repair value” (ARV) or what the house can sell at retail once it’s all fixed up.
Once you have the ARV, you multiply it by .70 because you want to purchase the property at a 30% discount in order to secure your profit margin as a rehabber. After that, you simply subtract what you know the rehab costs will be, and boom — you have your highest available price point. (We’ll cover rehab costs in a minute.)
The 65% Rule
So, now that we know roughly what people looking to flip a house are wanting in a deal, as wholesalers, we need to now factor in our profit margin. Enter: the 65% rule.
Purchase Price = (ARV * .65) – REHAB
This way, we have at least a 5% profit margin to play with in terms of our “highest and best offer” (obviously, you’ll be negotiating with the motivated seller and trying to get the best deal you can, but this is a great guide to start).
Now, when it comes to determining rehab costs, this is more of an art than a science. If you don’t have a construction background, the best way to learn how to determine rehab costs is to hire 3-5 contractors to give you bids on the property. This is time consuming and costs money, but it’s the simplest way to get an accurate feel for costs in your particular market.
The 2% Rule
Now, when it comes to buy-and-hold investors, the typical rule-of-thumb is something called the 2% rule. In essence, what a buy-and-hold investor is looking for is to gross at least 2% of the purchase price on a monthly basis.
Depending on your market, this may be a 1% rule or a slightly less than 1% rule, but you’ll have to learn your market to determine that. In Indianapolis where I live, it’s a 2% rule market (sometimes 3%).
So for simple numbers, if I purchased a 4-plex for $100,000 I would want the property to make at least $2,000 every month in order for the deal to work.
So as a wholesaler, I need to make sure I get the property discounted enough that I can resell it under the 2% rule.
So, using the same numbers as above, if a buy-and-hold investor purchased a 4-plex at $100,000 and it grossed $2,000 a month, I would need to get that same property at $90,000–$95,000.
That way, when I resell, I make a little profit, but the numbers still work for the buy and hold investor.
Make sense? Great!
2. Find deals.
Once you learn how to analyze deals, the next thing you need to know as a wholesaler is how to find deals. Now, I’m at a point in my business where I spend thousands of dollars a month in direct mail marketing, but when you’re first starting out, this may be impractical.
There are several free ways to find deals that you can use when you’re first starting out, but they aren’t glamorous — they take a lot of hard work!
The first I’d suggest is searching Craigslist daily in the FSBO section. Most of these will be junk, but through Craigslist, you can probably get at least one deal a month, depending on your market.
Another strategy is to make several extremely low offers on properties through the MLS, both personal residences and REOs.
This will require that you have MLS access either as an agent or through an agent, but it’s a strategy that can work pretty well.
When I first got started, I would make an average of 500 offers a month and would usually close about 3 percent of those.
The final strategy I’d suggest to consider is something called driving for dollars, where you simply jump in the car and drive around looking for houses that look distressed.
Once you have a list of addresses, you use a software like TLO to pull the names and contact information of the owners and simply ask if they’d consider selling for quick cash.
Whatever marketing strategy you end up choosing to use, the mindset behind what you do needs to be “network, network, network!”
When you start a business, you have to become an evangelist for your brand. It’s just that simple.
3. Find buyers.
Now that you know how to determine if a house is a deal or not and how to go about finding those deals, the next step is to find buyers.
This goes back what I just said in the last section — you have to tell everyone about what you do!
That way, the word will get out and you’ll be surprised who ends up buying from you!
The easiest way to find consistent buyers is to advertise the properties you own on Craigslist.
Again, the vast majority of the action you’ll get on their will be trash, but even in my business today, probably about a third of our buyers come from us posting our inventory on Craigslist.
The next best way to find buyers is to go to real estate networking events around town. If you join your local real estate club, it can serve as a great way to become known in your market. Once seasoned investors know that you’re a legit wholesaler who knows how to find deals, you’ll have A LOT of people wanting to begin a working relationship with you — I promise!
4. The Purchase Agreement
The final thing you’ll need to learn to begin wholesaling successfully is how to write up a purchase agreement.
The easiest way to go about this is to simply ask your real estate agent for one (or if you are one, printing one out) and simply reading through it. As you read, on the sections you need clarification on, you simply turn back to your agent’s guidance and ask.
After a few rounds of this, the purchase agreement will be something you’ll know like the back of your hand, and you’ll be able to write one up like it’s nothing!
So, now that you know how to analyze a deal, find a deal, find a buyer, and write up a purchase agreement, you now have everything you need to begin wholesaling.
It’s only 4 items! It’s finding a deal, buying a deal, and then selling a deal.
Can you see it now? Real estate wholesaling is extremely simple, and between you and me, it’s also extremely profitable!
For about 3 years, I decided to try out flipping houses, and you know what? I personally found that I made more money as a wholesaler and for a lot less headache!
I just want to leave you with an encouragement today to consider wholesaling as a serious option.
Why do YOU wholesale properties? If you’re not a wholesaler, would you consider this strategy? Why or why not?
Let me know with a comment!