by Lex Levinrad Beginning real estate investors are often attracted to the quick money that can be made by flipping deals. Flipping deals by assigning contracts is a very lucrative way to make a very nice living ” when the market is going up. In the previous boom there were many “flippers” that made hundreds of thousands of dollars assigning contracts. I even bought some of my houses from people that flip contracts. These people are known in the business as wholesalers.” Please note that flipping contracts is not the same as flipping houses. Flipping contracts is essentially transferring the rights of a purchase contract to another buyer. There are three main advantages to flipping contracts: Requires no cash ” you can put down as little as $10 on a contract No risk ” if you dont flip the deal you dont lose anything Quick cash ” money in your pocket now There is no doubt that these advantages are the reason why so many beginners are attracted to flipping contracts. The majority of the wholesale real estate books and courses that exist are related to flipping or assigning contracts. It is without a doubt the easiest way to start out with no money and no experience. However, there are also some distinct disadvantages to flipping contracts. The main disadvantages to flipping contracts are: You are dependent on your buyers to close. You make no money if you cant flip (assign) the contract. Whatever money you make in assignment fees is taxable so dont spend it all or you wont have enough to pay the IRS when your tax bill comes due. You only make a small portion of the profit. Here is an Flipping vs. Buying & Holding example: Imagine a house that is worth $100,000 that a wholesaler has placed under contract for $60,000. This wholesaler manages to sell the contract to an investor for $65,000 and makes a $5,000 assignment fee. Wholesalers often sell their deals to rehabbers (people that buy and fix up houses). Rehabbers typically look to buy their houses at 65% to 70% of the after repair value (market value when fixed up). So a wholesaler that signs a purchase contract to buy a house for $60,000 should easily be able to assign this contract to a rehabber like myself for a fee of $5,000. This fee of $5,000 is taxable so after taxes of 25% assume that the tax free cash that is left over is $3,750. This is the maximum amount of profit that the wholesaler can get from flipping this contract. Compare this to the investor that buys the contract for $65,000 on a property that is worth $100,000. That investor has just added $35,000 to their net worth. If this property is held long term then the equity should grow over time and as long as the property is not sold there should be no capital gains taxes due. Even if the property is sold, if the investor completes a 1031 exchange they should be able to roll their profits into their next real estate transaction without paying any capital gains taxes. The profit potential is far superior for the buy and hold investor than it is for the flipper. Consider that at an average annual appreciation rate of 5.8% (the historical appreciation rate of real estate in the U.S) what that house could be worth just five years later (answer: $132,564.84). If you owed $65,000 on this house then after five years you would have over $67,000 in equity. And still you would not have paid any capital gains taxes. As long as you do not sell you will never have to pay capital gains taxes. In fact, you would have been able to take advantage of a tax deduction (interest expense), as well as another tax deduction (depreciation expense) which would have lowered your income tax bill. Take a look at the table below to see what a $100,000 house would be worth over 30 years assuming that it appreciated at this average historical rate of 5.8%. Year value 1.00 $105,800.00 2.00 $111,936.40 3.00 $118,428.71 4.00 $125,297.58 5.00 $132,564.84 6.00 $140,253.60 7.00 $148,388.30 8.00 $156,994.83 9.00 $166,100.53 10.00 $175,734.36 11.00 $185,926.95 12.00 $196,710.71 13.00 $208,119.93 14.00 $220,190.89 15.00 $232,961.96 16.00 $246,473.76 17.00 $260,769.23 18.00 $275,893.85 19.00 $291,895.69 20.00 $308,825.64 21.00 $326,737.53 22.00 $345,688.31 23.00 $365,738.23 24.00 $386,951.05 25.00 $409,394.21 26.00 $433,139.07 27.00 $458,261.14 28.00 $484,840.28 29.00 $512,961.02 30.00 $542,712.76 Buying & Holding Real Estate Makes You More Money As you can see from the above table, buying and holding real estate has tremendous long term wealth creation potential. In the previous example of $100,000 house that the wholesaler flipped for $65,000 the maximum profit potential for the wholesaler was $3,750 after taxes. And they did all the work finding the deal (which is the hardest part). Just five years later, according to the above table the house would be worth $132,564.84. The wholesaler has long since spent their $3,750. However as a long term buyer you would own a property with over $67,000 in equity that would be giving you a tax deduction every year. This is the only true way to build fantastic wealth. By year thirty the house would have no mortgage (no payment) and would be worth over $500,000. Lex Levinrad has been a full time distressed real estate investor since 2003. He has been involved in buying, rehabbing, wholesaling, renting, and selling hundreds of houses in South Florida. Lex is the founder and CEO of the Distressed Real Estate Institute, which trains beginning distressed real estate investors about how to find wholesale real estate deals. He specializes in buying foreclosures and bank owned REO homes and offers private mentoring, bus tours, boot camps and home study courses for real estate investors. Lex Levinrad is an accomplished national public speaker and has shared the stage with some of the countries best real estate speakers. Lex Levinrad has authored numerous books about real estate and is also the the founder of the Distressed Real Estate Investors Association (DREIA) and the co-founder of the Port St Lucie Real Estate Investors Association (PSLREIA). This post provided by REIClub.com for creative real estate investors. Copyright 2002-2011 All Rights Reserved. Published with Permission of Author. No part of this publication may be copied or reprinted without the express written permission of the Author and/or REIClub.com. American Apartment Owners Association offers discounts on products and services for all your property management needs. Find out more at www.joinaaoa.org. Hi Robert, You could also offer to take over a seller's other debts such as credit card payments instead of a down payment. This is something you could pay off over time. Put the agreement in writing, as if you don't pay the credit cards on time the seller's credit rating will be negatively affected. J. Edward Barth S M T W T F S Jamal Okon on January 28, 2016 2:48 pm Who pays for the inspection normally? If that is me (buyer), then I’m assuming I would be out that money if I decided to pull out of the deal? Baron Hicklin on August 8, 2015 4:16 pm Pet Policies, Part One: 6 Ways Landlords Can Make Money from Pets How Much Money Do The Top Income Earners Make? (1286) One type of investment often overlooked is the vacation property. Overnight and short-term vacation rentals are purchased similarly to single-family homes, but they are operated like hotels/motels. They can be as simple as a shack in the woods, as common as a beach-side condo or mountainside chalet, or a luxurious as a private island retreat. Brett Snodgrass on January 27, 2016 9:15 am Jan on January 20, 2015 9:06 am What subdivision is the property in? No More Having To Send Out Thousands Of Yellow Letters And Post Cards Available Properties When I’m asked by sellers what we do . . . I tell them. Nothing hidden, total transparency. Some are OK with that, some refuse to allow us to help . . . but in all cases we retain our integrity and reputation . . . and if/when that happens, we move forward to find someone else who needs our help! Feedback Michael J. Ostermiller 12.9% August 3, 2016 at 4:21 pm You can also deduce the cost of the improvements from the rental income, while the added value to the property is yours to keep. Reuben Alarcon says: When structuring the , will there 2 Purchase Agreements (1 signed by motivated seller and wholesaler and another signed by the same wholesaler and end buyer)? Let’s say the wholesaler has a house under contract for $50K and the assignment fee in total is $10K. Should there be a 2nd contract to the end buyer for $60K? If so, should it be for $50K PLUS the assignment contract for the $10K fee? Or should it be for $60K? Investment Property: 3330 Clydesdale Dr, Holiday, FL 34691 How To Invest In Real Estate Without Banks: No Tenants, No Rehabs, No Credit four free bonus gifts! Raleigh, NC Real Estate Market Trends & Analysis More Home Buying Insights BOOK ME $65,228 per year Subscribe to the Mailing List ios icloud Lock says: Canadian Real Estate Mentor/trainer/speaker Download Blog in PDF Format 1.Own Rental Property Length: 252 pages Word Wise: Enabled Enhanced Typesetting: Enabled Balance Transfer InsightNews Doing Business Create enough income to get out of the rat race. Get Funding chevron_right Blogs chevron_right Pricing chevron_right How Jared, Bylaws & Code of Ethics Pat Porter 4 star How do you find these Motivated sellers?? where do you find them? Your first deal is always the scariest. But if you utilize these six steps when wholesaling, your deals will be successful. And what could be easier? You're only six steps away from your first paycheck! The specifics of how mortgages pay down is another subject – for now, all you have to remember is that every time a rent payment comes in, a progressively larger portion of your Principle & Interest payment goes toward paying down your mortgage, which effectively build up your equity with your tenant's money. Chuck A. Jake K. on February 8, 2018 7:24 am This article is SO insightful and will help me tremendously in building my wholesale business. I listen to your podcast and you guys do a wonderful job as well. Looking forward to learning more and becoming more involved in the Bigger Pockets community. I really appreciate it Brandon! Architecture Coach 6 7 8 9 10 11 12 "I wish to know more." Frank on May 9, 2014 12:00 am Cash for Keys How Much Should People Have Saved In Their 401Ks At Different Ages (875) January 21, 2014 at 4:30 PM Flipping Junkie Thanks for sharing your thanks Kent – I’ll certainly take that into consideration. I once asked my handyman what was the easiest money he had ever made in his life. His answer was that although he had been in many small businesses and had done countless handyman/contracting jobs over the years, the easiest money he made was in roofing. He explained how that roofing work is higher risk work that many folks dislike and fear doing, therefore the mark-up is tremendous. LLC. Click here to learn more Great, very thorough list of real estate opportunities. While I don’t have any other ideas to add (at this time,) I do want to comment on #40-Tax Liens. I want to add that with a little research and education on the subject, tax liens are a fantastic way for the beginning investor to jump in with little money out of pocket! Like all real estate investments, it has some risk, but if do your due diligence, you will be seeing big, fat redemption checks. Like this one, I just received from Louisiana: Tweet This Share This Share This Pin This Subscribe Grocery Store Whichever way, you’re going to negotiate with them and put it under contract at a significant discount. When you put a piece of real estate under contract, you gain what’s called equitable rights in the property. This gives you the right to re-market the property in order to flip it and earn your profit. BLOGROLL Expert Advice Posts Buyer's Guides It is no secret that a well located, reasonably priced real estate investment can effectively generate more revenue than the cost of the money used to finance it. What subsection of real estate makes the most money? Finding the property before you find the buyer is like buying a fast car before you have a license . . . check Hot Deals - Immediate Notificationinfo Marcus on July 7, 2016 7:52 pm I would think you could accept the funds in any way – as long as you can verify that the funds have/will clear your checking account (and a cashier’s check would be a fairly solid way to do that). Balanced Investing I find most of my properties on MLS, but it is difficult to wholesale them. Most investors keep an eye on MLS properties; the competition makes it tough for wholesalers to buy properties cheap enough. I think a wholesaler has to be able to act very quickly to get properties from the MLS, much like when I buy properties. It may be wise to get your real estate license and make a commission on these deals if you want to wholesale MLS properties. My Account A few days after my dad gave me the check, he knew I was scared and doing everything I could to find a job and fast.  He had been investing in Real Estate on the side for several years, and told me he thought I may be good at it.  Seeing as how I had no job prospects, I decided to listen to some of his CD’s and read a couple of his books.  The one thing I remember from everything I heard and read was how easy the instructors made Real Estate investing out to be.  Work 10 hours a week and make six figures a year!  This was the promise they made, and I jumped in head first. When I'm not very confident about the property's true market value. Booties Editorial Disclaimer: Opinions expressed here are author’s alone, not those of any bank, credit card issuer, airlines or hotel chain, or other advertiser and have not been reviewed, approved or otherwise endorsed by any of these entities. Wholesaling Made Simple! A Comprehensive Guide To Assigning Contracts 58.) Appraiser – An appraiser works with lenders to determine the value of a piece of property. Working as an appraiser will give you in-depth experience in determining how much a property is worth. About RPOA Digital List Price: $25.00 Gustavo Magalhaes on March 1, 2016 7:30 pm Sell Your Apps on Amazon Turn on 1-Click ordering for this browser Real estate sites are are a great place to find distressed properties but you need to know which ones to look at. You want to utilize sites where motivated sellers are able to post their own properties. SAVE PASSWORD Investment Property: 3330 Clydesdale Dr, Holiday, FL 34691 There is nothing wrong with using assignments however you should be prepared to closing the transaction whether you find an investor/buyer or not, that is the ethical point I think you are making. An assignment contract without any intent to close yourself is like asking for a free option to purchase but not telling the Seller your true intent. April 24, 2017 at 10:13 am Yes, wholesalers get a bad rap but it’s not because they’re making $5,000 on a deal it’s because they’re trying to make $20,000 on a house that’s being sold to them for $20,000 and they’re trying to do some sneaky stuff to hide that from both sides. View All Jeremiah on November 25, 2016 2:50 pm Jarom J. Bergeson Richard on March 26, 2013 2:49 pm But it’s definitely not all it’s cracked up to be. 3rd Floor, Wholesale Real Estate Learning Objectives Tex. Occ. Code § 1101.004 (West 2017). How To Create An Awesome Real Estate Landing Page For Free Read my article: Is the NVAR Regional Sales Contract assignable? The contract you are assigning should also specify what happens if the seller doesn’t perform. However, there is also something called forced appreciation. This is where an owner can help increase the value of a property by improving the property itself. For example, you might renovate the kitchen and bathrooms in a home enabling you to sell it at a higher value. This item:How to Make Money in Real Estate in the New Economy by Matthew A. Martinez Paperback $2.02 Louis Young on March 29, 2017 2:29 pm Stay up to date with the latest tips for Traditional & Airbnb Investments THANKS I read somewhere that if I buy a home and finance one at the same time plus buy a third home after the first year that in ten years that investment will yeild me Today we will discuss how you can get started in real estate investing without breaking the bank, even if you don’t have hundreds of thousands of dollars. raleigh wholesale real estate|wholesale houses for sale raleigh wholesale real estate|wholesale properties raleigh wholesale real estate|wholesale properties atlanta
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