The following is a guest post from my friend Eric Moorman, who has made a killing in small-town real estate investments.
I have been a full-time Real Estate Investor for three years. I got started with a mix of desperate need (a Masters degree, no job, and no money), and the promise of huge profits with no experience or start-up money needed.
I had never taken a Real Estate class and had no idea how to fix anything. I didn’t even have or know how to invest with $1000! The one advantage I had was a father who was an amazing mentor, the quintessential entrepreneur.
My dad invested in Real Estate on the side and thought I may be good at it, so I decided to give it a try. The first obstacle I faced was the fact I had no money to buy a house.
But when you hear you can buy houses with no money, believe it. Today I want to share the three best ways you can make money in real estate, with the positives and negatives to each.
Ways To Make Money In Real Estate Investing
Before I get started, let me say I am only going to give an extremely basic explanation of these ideas.
I could easily write a book on each one alone, but here are the bare bones to investing with no money or credit. Here’s another great read from Jeff on the best short-term investments out there, so check it out as well!
1. Lease With an Option to Buy
The first way I make money in real estate that I want to break down for you is acquiring a property using a “Lease with an Option to Buy.”
How It Works
This is where you lease a property from a seller for a set amount of money each month, with the exclusive right to purchase the property within a certain time frame.
There is no closing at the onset of this transaction, simply a contract stating the agreement.
Now that you have a contract with your seller, you find a “tenant buyer” to move into the property. You sign a Lease with an Option to Buy with them, and hence, you have a sandwich Lease Option.
Your tenant buyer will give you a Non-Refundable deposit for their exclusive right to Option the property at a set price for a set amount of time and pay you a monthly lease while they are living in the property.
As a side note, I never sign anything or conduct any Real Estate transactions without my attorney reviewing the documents. It’s worth the extra money, trust me. We’ll talk more about the importance of attorneys in another post.
As I stated, there is much more that goes into putting a Lease Option transaction together, but that is basically how it works. There are several positives and negatives to this type of transaction. Let’s take a minute to look at a few. First, let’s look at the positive.
What You Gain
You have acquired a property with no money and made money from your tenant buyer with their Non-Refundable deposit, as well as their monthly payment (You should always make money on the monthly spread between your buyer and seller.
Pro Tip: I have a rule of at least $200 positive cash flow a month per property. I have some as high as $600, but as a rule, I like to have at least $200 per house each month. In theory, your tenant buyer will at some point go to a bank and cash you out, and you will make a big chunk of money when he/she does that!
What You Risk
Here is the reality, and something you will not hear at a majority of Real Estate Investing seminars, where the individual speaking is attempting to sell you his/her program.
Ninety percent of the time, your tenant buyers are B & C credit buyers. They are attracted to your “Rent to Own” program because no bank would EVER loan them money.
In this economy and market, these buyers are everywhere.
The reality is, few of them (only 10% in my experience) actually clean up their credit and end up buying the house. Also, you will have a huge number that you will be forced to evict who will tear up the property. I say this not to scare you, but to prepare you if this is the Real Estate vehicle you choose to pursue.
If you do this, make sure you get a huge Option deposit to cover lost rent, attorney’s fees and damage done to the property.
Is It Worth It?
Is there money to be made with Lease Options? Yes.
If you find the right tenant buyer, regardless if he/she buys the house, you will make money on the Option deposit, and the monthly rent spread. If you are not forced to evict this person, and he/she does not tear up the house when they leave, consider yourself lucky.
Is Real Estate investing with Lease Options easy? No way. I have had more headaches from Lease Options than any other type of transaction.
On the one hand, you have a seller yelling at you to sell their house and get the loan out of their name; regardless of how long a time frame you have to get it done. On the other hand, you have a B/C credit buyer who is far less than motivated to do what he/she needs to actually finance the house.
If you engage in this type of transaction, you MUST have a thick skin and be ready to deal with lawsuits, headaches and nowhere near the profit potential you have been promised by the “Gurus.”
I have over twenty Lease Options going on at this very moment. I still pursue them, but I am very cautious and semi-reluctant to pursue more. The main reason? There is easier money to be made in Real Estate, and I will show you not only what it is, but how to do it….. the right way.
2. Option a Property
A second way to make money in Real Estate investing without money or credit is to “Option” a property.
How It Works
This type of transaction is similar to a Lease Option, but very different as well. Consider it a Lease Option’s cousin, who is much hotter and more fun.
Here is the simple difference between the two:
- Lease Option: the seller has agreed to take a monthly payment for a specific amount of time, with a set purchase price to come at some point in the future. I do not accept any less than 5 years for these transactions and try to get ten years.
- Option to Buy: the seller is not accepting monthly payments. They have simply given you the exclusive right to buy a property at a certain price for a certain period of time.
Why would a seller choose one over the other?
Let’s look at a few circumstances and reasons that may persuade a seller to decide one way or another.
- With an Option, the seller can continue to live in the house. At the same time, he/she will continue to make the monthly payment and take care of all maintenance and repairs. The seller may not want to accept monthly payments, with the idea of someone else is living in their house. While they may be motivated to sell, the thought of someone else eating dinner and walking around naked where they raised their children may be too much for them to handle.
- They may not have the time required for a Lease Option. If a seller is ten months behind on their payments with foreclosure knocking on the door, and you (the investor) does not want to make up those payments but there is still a TON of equity in the house, an Option may be your only choice, short of paying cash.
- With a straight “Option” the seller has nothing to lose. You have a set amount of time to buy their house, which you will only do if and when you find a buyer at a higher price than you have an Option for. In this type of transaction, your target audience is not the B/C credit buyer, but rather the individual with cash or the ability to go to a bank and get a loan.
Why You Should (or Shouldn’t) Invest
The positives for you the investor, are as follows: You are not dealing with tenant buyers, repairs left by tenant buyers, angry sellers, evictions, lawsuits, monthly payments with no tenant buyer…… the list goes on and on.
The negatives are you do not make any money at all unless you successfully find a qualified buyer within the time allotted in your Option to buy. The seller benefits because they pay no Real Estate commission, and they have the privilege of living in the house while you are trying to sell it.
3. Sell Wholesale
A third way to make money in Real Estate actually can require the investor to have cash, although it is not required.
This technique is by far the best and easiest way for new, inexperienced investors to make “quick” money in Real Estate. In fact, this is by far the best and easiest way for veteran and seasoned investors to make “quick” money in Real Estate.
Wholesaling is the art, and I use that word on purpose, of being able to accurately appraise the potential value of a property and buy it so low, you can quickly sell it for cash to another rehabber or end user who will make it their dream home, without EVER fixing a thing, regardless of how good or poor the condition of the property.
Now, you may say, I do not need cash for this strategy. I can simply Option the property for a wholesale price and then sell it to a rehabber or end user. You are absolutely correct, but getting an owner to accept a wholesale price is rare.
You will make 100 wholesale offers to owners before one is accepted.
Where you will have much better luck is buying foreclosures from banks.
While a majority of your initial offers will still be rejected by banks, they are much more likely to accept a wholesale offer. They also will never allow you to Option the property. They only accept cash and will even require you to have Proof of Funds before they even look at your offer.
If you can stomach hearing no several times a day and maintain a constant follow up file with all wholesale offers made, you will make more money in Real Estate than most “house flippers” you see on TV.
Money can be made in Real Estate several different ways. I will never claim a particular technique is not worthy of your time. They all work, some just better than others.
The smartest and best investors do not focus their time solely on rentals or rehabs, and they never swing a hammer or do rehab work themselves.
The best and most successful Real Estate investors are the ones who focus on being transaction engineers and becoming masters of negotiation, relationships with other investors and accepting the fact that the real money is made in pushing paper, not hammering nails.
As you grow in your Real Estate investing career, you will always want a constant portfolio of different types of transactions going on at the same time. Some investors focus on one particular strategy and make a lot of money.
However, I would rather have the knowledge to take any deal that came my way and turn it into cash. I constantly have a steady stream of wholesales, lease options, rehabs, new construction and anything else I can get my hands on.
As previously stated; all of these strategies (and many more I have not mentioned in this article) have their place and can make money fast. However, for the new investor, dead set to make the millions of dollars promised by the “Gurus,” focus on Options and Wholesale deals.
Having cash is not necessary to make money in Real Estate investing, but it does make the process easier.
As you advance in your career, you will want to find a way to acquire some cash, whether it be from private money lenders or banks.
The transactions are cleaner and with experience, your confidence to properly manage a deal and the money at risk will increase. But for now, make a mess with as little risk as possible and keep the faith that there is a check at the end of the tunnel.
For me, the first check I earned was small, but it gave me the confidence to keep going. It was nice to see the bigger checks to follow suit. I promise, they were not easy to come by, but with the proper training, hard work and a little luck, it can easily be your name on these checks.
Let me show you how to get there.