The 5 Major Ways to Profit in Quick-Turn Real Estate
A couple of weeks ago I discussed flipping vs. holding, which I got a lot of feedback on and quite a few questions on “flipping” so I wanted to elaborate on that this week …
Refresher: If you remember, my personal investing philosophy is something I affectionately call “Pump & Dump”, which basically means flip 3, hold 1.
“Pump” is your active business operations where you flip properties to generate lump sums of cash and cash flow … and “dump” is where you take all or a portion of your profits from your flips … and sink it into a long-term rental that spins off residual cash flow.
A number of readers had some questions about flipping and automatically assumed it meant rehabbing properties. It does, but in my world it’s only one method of flipping.
Here Are the 5 Major Ways to Profit in Quick-Turn Real Estate (Flipping):
1) Wholesaling – This is the business of locating properties well below market value, usually in serious dis-repair, and then quickly passing them along to bargain hunters or rehab investors who typically buy with all cash.
2) Rehabbing – This is the business of finding properties at bargain prices, fixing them up, and then reselling to owner-occupants who typically buy with long-term financing. This is the standard “flipping” strategy that most people are familiar with.
3) Seller Financing – The business of finding nicer properties in good areas by taking over existing debt or creating some form of owner/seller financing.
4) Lease Options – With this strategy, you take control of a property by leasing it from the owner and obtaining an ‘option’ to purchase it at an agreed upon price and terms. You would also negotiate the right to sub-lease it to a new tenant/buyer and giving them the right to purchase it from you.
Depending on how well you negotiate and how you structure the deal, you can profit up to 3 different ways: Up-front on the option deposit you collect, the spread on the monthly payment, and the back-end profit when/if your tenant/buyer exercises the option.
What if they don’t exercise? You may be able to do it all over again … and collect another round of profits!
This is such a powerful strategy … but one I find that many investors don’t quite fully understand or know how to utilize – as both a buying AND selling strategy. Anyway, we’ll try to fix that and discuss this strategy in greater detail in future issues.
5) Options – Similar to a Lease Option, but without the Lease. It’s an agreement that gives you the right to buy a specific property at an agreed upon price and terms, but not the obligation.
So what’s the best method and the one you should be utilizing in today’s market?
In my opinion, all of them!
Become a transaction wizard, not a one-trick pony.
One of anything is not a good thing, which is a lesson I had to learn the hard way.
You see … early in my career, I got seduced into doing only fix & flips at one point because the first few I did went well. Probably too well … because it got me hooked into employing that one and only strategy.
A big mistake. And one that basically led me to my first wipe out.
The big lessons for me? A couple I think …
First, there is such a thing as a Property Cycle and proper timing, so it’s important to know what phase of the cycle your market is in. Bottom line: There’s an optimum time to be buying & holding … and there are times when flipping is the more viable and optimal strategy.
Second lesson: Become a transaction wizard, with multiple strategies in your tool kit and the ability to provide multiple solutions. This diversifies your risk and allows you to take advantage of far more many deals.
If you’re only doing rehabs, you’re only taking advantage of 25% of the potential deals out there. That’s a lot of money being left on the table!
So these days, I still utilize all 5 methods. But I do have favorites.
Yup… Seller Financing and Lease Options. Especially on higher-priced properties.
Less competition for one. Waaaay less!
The overwhelming majority of investors (probably 95%+) are focused primarily on #1 and #2 (Wholesaling and Rehabs), which means you have to buy properties at deep discounts and well below market value.
It’s definitely still a viable and profitable sector and we still operate there as well, but we’ve really had to ramp up our marketing efforts … just to get the same amount of leads we’ve been accustomed to.
And that’s because distress sales throughout most of the country have come way down. Foreclosure filings have plunged. Bank REO inventory has shrunk considerably. And so have short sales.
Equity plays are still out there though, so I’m not telling you to give up on them. I’m simply suggesting that you might want to expand your repertoire to include Seller Financing and Lease Options.
Here’s another reason why: There are more opportunities in these 2 arenas as there are in the Wholesale/Rehab arenas. And you can oftentimes generate much bigger profits (especially on higher-priced properties), with far less grief and far less risk!
Plus, these strategies allow you to create up to 3 different income streams, unlike wholesaling and rehabs (which are one payday strategies). You can make money up front on the down payment or option deposit … on the monthly payment you receive … plus on the back-end when your buyer either sells, refinances, or exercises their option.
Anyway, I’ll be discussing, breaking down, and sharing a lot more about Seller Financing and Lease Options in the coming weeks.
If this is something new or foreign to you, fasten your seatbelt … you’re about to discover what I consider to be the ultimate #1 way to build cash flow AND wealth in today’s economy!
P.S. I mentioned suffering my first wipeout above. In case you haven’t seen it yet, here’s a 4 minute video where I share little of my story and how it happened.