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There are many different ways to invest in real estate, and pros and cons to each different kind of investing. You might choose to be a long-term landlord, invest in short-term rentals, REITs or fix and flip houses. Real estate wholesaling is another way to invest in real estate and may be attractive to some people. In real estate wholesaling, you usually identify potential investment properties and then quickly flip it to another investor. In many cases, wholesaling can be done with less money out-of-pocket than other types of investing, which makes it attractive to some people.
What Is Real Estate Wholesaling?
In real estate investing, wholesaling is usually defined where an investor (commonly known as a wholesaler) signs a contract with a property owner and then sells or assigns that contract to another investor, for a fee. Some rehabbers and real estate investors prefer to focus on rehabbing as their primary business. They may not want to deal with finding deals or negotiating with sellers and would be willing to pay a small fee for someone else (a wholesaler) to bring them profitable deals.
Wholesaling may not be passive real estate investing, but it still can be profitable if you’re able to successfully find and close on deals. To be successful in wholesaling, you may want to be a self-starter and persistent in looking for deals. You might also need to have good people skills as you are negotiating both with the existing property owner and the potential downstream investors to whom you are assigning your contract.
How Does Real Estate Wholesaling Work?
Wholesaling is a way for a real estate investor to act as a middleman between a property owner that is looking to sell and an investor looking to buy. In many cases, the owner may not be able to sell through traditional outlets because the property is distressed or abandoned. The wholesaler finds and identifies these types of properties and negotiates a contract with the property owner.
In most cases, you won’t actually close on your purchase contract and take title to the property in your name. Instead, you can do one of two other things. Either you will directly assign your contract once you’ve found your end-buyer (for a fee), or you will do what is called a “double closing”. In a double closing, you’ll close on your initial purchase and then, shortly afterwards, close on the sale to your eventual end-buyer. This can even happen later in the same day. That could mean that you don’t have to come up with the cash to purchase the property or qualify for a mortgage.
Pros And Cons of Real Estate Wholesaling
One benefit of this kind of real estate investing is that it may be doable with little money upfront and without good credit.
Can be done with limited experience or knowledge about all of the different facets of real estate.
You may have less risk than other methods of real estate investing, since you may not have any or your money invested.
It can be hard to find good deals.
Depending on your market, there may be extensive competition for a finite number of deals.
Wholesaling requires active involvement — if you aren’t constantly finding and closing on deals, you’re unlikely to make any money.
Your income may be unreliable and vary significantly from month to month.
How To Get Started Wholesaling in Real Estate
Before getting started wholesaling in real estate, you’ll want to make sure you have the right mindset to be a successful wholesaler. While wholesaling may not take a lot of upfront capital, you will likely be more successful if you are consistent, dedicated and organized. You may have to contact hundreds of sellers before you find even one deal.
If you’re ready to get started, you might want to start by doing some research on your local real estate market. Knowing what the after-repair value of properties is in different areas of your hometown will play a huge role in helping you determine what makes a good deal and how much you might be able to offer sellers. You could also network with rehabbers and other investors in your area. Most investors have specific requirements for deals that they’re looking for, so understanding those can help you decide what is or is not a deal.
The Bottom Line
Wholesaling can be a good way to get started in real estate investing, if you’re willing to put in the time and effort to find potential deals, meet and negotiate with sellers and be persistent and organized in following up. In many cases, you can be a successful wholesaler with minimal upfront cash requirements and without good credit.
One downside of wholesaling is that this is a more active way to invest in real estate — if you’re not actively finding and closing on deals, you don’t make any money. This is in contrast to other forms of real estate investing which can provide more passive income. If you’re looking to get started investing in real estate, it’s good to explore different ways to invest so that you can pick the one that is best suited for your specific situation.
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Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families to travel for free / cheap. His home base is in Cincinnati, but he tries to travel the world as much as possible with his wife and 6 kids. More from Dan Miller
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