Wholesaling: A Wholesaler is a person that finds a property for sale (usually distressed property), then puts it under contract and assigns or sells that contract to an investor/buyer. For example:
John Wholesale finds a property that’s going into foreclosure in 2 weeks. After speaking to the owner, he finds that foreclosure is due to the fact that the owner lost his job and can’t continue making payments. Since the property is worth $200,000 and the owner only owes $130,000 including all arrearages, John sees a great opportunity. He signs an assignable contract with the owner to purchase the property for what he owes ($130,000). Then he contacts his list of investors to let them know that he has a great deal on his hands and that they can buy it for $140,000. Everyone wins in this situation. The owner gets to sell his property and avoids a foreclosure on his credit, John makes an easy $10,000, and the Investor buys a property at a great price!
A good Wholesaler focuses on two things; finding great deals and building their list of ready, willing and able investor/buyers.
REITs: REIT stands for a Real Estate Investment Trust. In the most simplistic definition, a REIT is to a real estate property as a mutual fund is to a stock. A large number of individuals pool their funds together, forming a REIT, and allow the REIT to purchase large real estate investments such as shopping malls, large apartment complexes, skyscrapers, or bulk amounts of single family homes. The REIT then distributes profits to its individual investors. This is one of the most hands-off approaches to investing in Real Estate, but do not expect the returns found in hands-on investing. You can buy shares in a REIT via your stock account. They often have a relatively high dividend payment. Simply put…. REITs are an excellent way to invest in commercial real estate if you don’t want the headache of property management or just don’t have the money.
Buying Notes: When you think of a real estate note, you probably think of a mortgage in order to finance the purchase or refinance of a piece of property. Well, buying real estate notes is also an investment strategy used by thousands of investors. You can earn a return on the money you invest in the real estate note. When talking about investing in real estate notes, you may also hear terms such as hard money lenders or private notes because personal money is used as financing funds for the property. When you invest in real estate notes, you receive monthly principal and interest payments based on the note amount and continue to receive the monthly payments until the note is paid in full. Here’s an example of a note buyer in action:
Nick Noteholder sold his home 2 years ago for $200,000. However, since the buyer of his home could only come up with $150,000 for the purchase Nick agreed to hold a note (secured with the house as collateral) for the remaining $50,000. The terms of this note specified that the buyer would pay nick 60 payments (5 years) of $833 per month (interest not included for scenario simplicity). 3 years later, Nick finds himself in a financial bind and needs some quick cash. At that point, the buyer already paid Nick about $30,000 but still owes $20,000 on the note. Nick finds YOU (the notebuyer) You agree to buy the note at a discount for $15,000. Now the buyer ends up paying you the remaining $20,000 by simply continuing to pay his $833 per month for the next 2 years.
Now you have an extra $5,000 in your pocket not including any interest that may have been attached to the note.
Partnerships/Syndication: (AKA Equity Share Partners) This is one of my favorite strategies. With this strategy, you’re truly only limited by your own imagination. Anyone can use it regardless of their credit situation or lack of capital. It’s used everyday by investors large and small. It’s used to buy single families, multi families and even large apartment complexes and strip malls. It’s even used by fortune 500 companies in their various business acquisitions. Bottom line… Equity Partners is the way to go. So how do you find an equity partner? Equity partners can be friends, family members, colleagues or perfect strangers. As long as long as they possess qualities that you don’t have (i.e. capital, credit, expertise or even time to manage the property) you could use them as a business partner or just a partner for a particular deal. If you’d rather not deal with family or friends, believe me, I can understand that. One way to find equity partners is to join your local REIA (Real Estate Investor Association). Most REIAs have monthly or weekly meetings at local hotels or conference centers. There are a few of them here in Connecticut. Email me here for more information on REIAs in your area. Another great way to find them is to find high net worth individuals that are looking for a higher return on their investments. This can be your family doctor, attorney or even your financial advisor. You could even find individuals that currently own investment property and ask them to partner with you on a deal or two. One thing that I’d definitely advise you to do is to be aware of the SEC (Securities and Exchange Commission) rules and regulations governing solicitation of investors if you’re planning to talk to someone out of your immediate circle. You don’t want to end up in deeper debt via fines and penalties by illegally soliciting.
Deal structuring flexibility is another great advantage with equity partners. As long as it’s a win-win situation for all parties involved, you can make a lot of money using this strategy. Let’s say you have plenty of cash available but you have bad credit due to unfortunate circumstances that may have occurred in your life. You could structure the deal whereas you and your partner set up a business entity such as an LLC (Limited Liability Company), then you use your partner’s credit to finance the property and use your cash for the down payment. Or let’s flip that scenario. You have good credit and your partner has the cash but he’s uncomfortable splitting the deal 50-50 because he’s putting up all of the money. You could structure the deal whereas he owns 75% and you own 25% of the property. You then agree to manage the daily responsibility of the property and you have the option to buy back equity at a set price until you own 100% of the property. So as you can see, using equity partners is extremely flexible and only limited by your own imagination.
Private Mortgage Lending: Investors seeking alternatives to the stock and bond markets will find refuge in the world of private mortgage lending. If you’re careful and diligent, you can earn solid returns while minimizing risk. On average, Private Mortgage Lenders can earn between 10%-20% interest when making a loan. Here’s an example of a Private Mortgage Lender in action:
John Flipper found a foreclosure property and signed an agreement to purchase it from the seller at $120,000. His Realtor did a CMA on the property that showed that it could sell for about $200,000 after John puts in $20,000 in renovations. John doesn’t have the cash to complete the deal so he goes to YOU. You agree to loan John the money at 15% interest (Not uncommon for a rehab loan). You loan him the full amount of the purchase and renovation ($140,000). It takes John 3 months to complete the project and sell the property. Now John sells the remodeled property and grosses $55,000 in profits, you made $5,000 in profits (just for loaning him the money), a new family gets to purchase a newly renovated home at a fair price and the seller gets to sell his property and avoids having a foreclosure on his credit. EVERYBODY WINS!!
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