The wholesaling of real estate and the flipping of real estate have several similarities when it comes to Acquisition. The way you exit the investment and the variables involved in this process is where these 2 mediums differ.
The concept of flipping real estate (or rehabbing & selling) is purchasing a property at a discount, adding value through strategic repairs and reselling this property at a profit.
The concept of wholesaling real estate is finding deeply discounted property, putting these properties under contract and either assigning their rights to that contract to another investor or taking advantage of a double (simultaneous) close for a fee at closing. This type of transaction typically requires no renovation.
Each of these methods has there pros and cons and to determine which method is best for you will typically depend on your access to the necessary resources.
The Pros & Cons Behind House Flipping
Reality Television has brought a lot of attention to the concept of rehabbing and selling properties, both good and bad. While this delivery method can be lucrative to the experienced investor, rejuvenate local communities and can be very entertaining. It can also cause a lot of problems and headaches if you do not have the proper systems and processes in place.
Rehabbing and selling properties is a speculative investment vehicle. At a high level, you a purchasing a property at a discounted and assuming that someone will pay you a full market value when the property renovations have been made. While there are certainly ways to mitigate your risk and increase your profits. Sometimes the profit margins on your flip's can be somewhat slim ($20,000 - $30,000) and a couple mistakes on your forecasts can dissipate your profits and even cause large losses.
If this is the exit strategy that you choose to invest with, we suggest that you take time to educate yourself on the process, put the right systems and processes in place and leverage the necessary people and knowledge to compensate for the knowledge that you lack. Rehabbing and selling has many more variables involves and much more room for failure.
The Pros of House Flipping
Obviously with so much attention and so much of a following, there must be a list of benefits for this specific exit strategy, and there is. Here are some of the benefits of using this exit strategy to invest in real estate:
1) Potential to Make Larger Profits: The most intriguing piece of this exit strategy is the possibility to make large sums of profit flip. While these large profits are possible, as we talked about, a lot of things have to go right to make that intended profit.
2) Being Your Own Boss: In my opinion this can be both a pro and a con, since running a house flipping business can be a full time job. If you do have the right systems, processes and resources in place, you will have the ability to free up your time and still profit from this business.
3) Improving Your Community: To me this is one of the greatest benefits of being in the house flipping business. You are adding a tremendous amount of value to your community by taking old, distressed properties and bringing them back to life.
4) Bettering Others Lives: The amount of people that you add value in 1 real estate house flip is amazing. Just think about it, you are typically using a lender to purchase the property (making them money), you are either using contractors or your own team (adding jobs, making them money), you are selling the property on the open market thus using a real estate agent (making them money) and you are delivering a great product to a new homeowner.
5) Increased Real Estate (Business) Knowledge: As we stated before, there are several different variables that need to be executed to be successful flipping houses. From the concept of raising money, to marketing, to construction, to negotiations and selling. This exit strategy will give you valuable experience in all of these different facets of business
6) Broadened Network: There are several third parties involved in a house flip so this will allow you to meet different people and grow your network. You will be dealing with other investors, contractors, real estate brokers, homeowners, insurance agents, attorneys and the list goes on.
7) Increased Problem Solving Skills: If you are in this business, you know what I mean by this. You will spend a lot of your days being a problem solver. Every day there will be problems that arise whether with home sellers or the construction process. Your job will to be to put together a plan to solve these problems in the most efficient manner
The Cons of House Flipping
1) Potential For Large Losses: Just like you have the ability to make a large profit on a flip, you also have the ability to take a large loss. If you do not do the proper due diligence and have accurately accounted for all the costs, you will be exposed to large losses.
2) Stress: With any business, there typically comes stress. This business is no different. Stress levels in this business can run very high due to the amount of people that are involved in a transaction. The performance of a project is very dependent on your team and resources, so when they do not perform to plan, stress levels will run high
3) Time Consuming: Depending on what stage of your business you are in, the systems you have in place and the resources you have available. This business of flipping houses can be very time consuming. Once again the reason for this is due to the amount of people involved in a transaction and how management intensive this can be.
4) Unanticipated Expenses: You can count on this one. No matter how much due diligence you do and how much knowledge you have, you will spend more money than expected. It is inevitable.
5) Capital Gains Taxes: Any profit that you make from a house flip will be subject to capital gains tax.
6) Selling The Property: The exit on a house flip is very speculative and every day you do not sell the property you are continuing to accrue your holding costs. This step of the process is very nerve racking because you are counting on the property selling for your initial ARV during your analysis. If the property does not sell for that amount, you risk large losses.
7) Necessary Resources: In order to successfully flip a house, you will need more resources to create a profit. (you can get in with little money and be creative but for the sake of this article, well stick to the traditional model). Flipping houses is very capital intensive and cash flow management can be a serious issue. No matter if you are raising capital or using your own money, cash is a necessity. You will also need a good team of contractors to perform up to standards to get the house in condition to sell.
Knowing the pros and cons of renovating and selling a property will help you determine if this investment strategy is right for you. These pros and cons should give you insight into what to expect when taking on this approach. Be selective in your purchase decisions and make sure you do the property due diligence in order to mitigate your risks and secure your forecasted profits.
The Pros & Cons Behind Wholesaling Real Estate
The concept of wholesaling real estate is a far less talked about exit strategy when it comes to real estate investing. Wholesaling real estate can be a very lucrative way for investors to get involved. Some real estate investors prefer this delivery method over rehabbing and selling properties due to the simplicity and far less variables involved in a transaction. This medium is far less management and capital intensive and allows the real estate to leverage their time, capital and resources much better. The barrier to entry for this medium is far less than house flipping and if you have the drive, ambition and skill set this delivery method can be very profitable.
The Pros of Wholesaling
1) Less Capital Intensive - The only major out of pocket costs that you will have to incur when it comes to wholesaling is marketing. Unlike house flipping, where you will have to have capital to purchase and renovate a property. With wholesaling, you will just be marketing to put a discounted property under contract and assigning your rights to a fellow investor.
2) Faster Returns - Unlike the house flipping process, where you may see you return in 4 - 6 months. The wholesaling process, may only take 14 - 30 days.
3) Less Management Intensive - There are less resources and processes that you have to manage during the wholesale process
4) No Credit Involved - Even if you have no/bad credit, you can participate in these transactions.
5) Being Your Own Boss: Similar to the House Flipping benefit, this can be both a pro and a con, since running a wholesaling business can be a full time job. If you do have the right systems, processes and resources in place, you will have the ability to free up your time and still profit from this business.
6) Increased Problem Solving Skills: Another similarity to a benefit of House Flipping. You will spend a lot of your days being a problem solver. Every day there will be problems that arise whether with home sellers or the construction process. Your job will to be to put together a plan to solve these problems in the most efficient manner
The Cons of Wholesaling
1) Inability to Find A Buyer : The key to the wholesaling business it to have an extensive buyers list. You will need buyers who are looking to use this property to rehab and sell, buy and hold and maybe even a few homeowners looking for a discounted property. The reason for this is because each of these investors will have different profit requirements/criteria so you want your property to have as much exposure as possible.
2) Profit Margins : Depending on your local market, the macro real estate market and the property you have under contract will determine your wholesaling profit margins. However, in general wholesaling profit margins tend to be less than house flipping margins.
3) The Legal Process: If you do not have a bullet proof contract with your buyers, you may end up being obligated to purchase the property yourself. Make sure you consult with your local real estate attorney to make the contract you have in place clearly states your ability to assign.
4) Seller Issues: If you have ever put a property under contract direct to seller, you know that there are several issues that may arise. The seller also has the ability to back out of the contract at any time (even though they are contractually obligated to purchase). This will result in sunk costs in both time and money.
Hopefully these pros and cons surrounding the wholesaling process will give you some more details into whether this type of exit strategy is best for you. Be sure to read over these advantages and disadvantages and determine what type of house flipping works for you. If done right, both of these strategies can be very lucrative.
Wrapping Up
All real estate investments require a certain amount of knowledge, capital and time to be successful. Make sure that you further educate yourself on each of these delivery methods before diving in. If you are able to comprehend the process and set up a certain systems to streamline your operation where you can create a repeatable & profitable outcome, you have found success.
Comments