Genius Types » Assigning Contracts

The Symbiotic Trinity of Real Estate Investing

Brian Lee — Tue, 09 Nov 2010 15:37:23 +0000

Wholesalers, Rehabbers, and Hard Money Lenders

In the business of real estate investing, three major players feed off of each other to spin the wheels of wealth creation.

Wholesalers, rehabbers, and hard money lenders form a symbiotic trinity in which each one is dependent on the others.

Wholesalers need rehabbers to buy deals, rehabbers need hard money lenders to finance deals, and hard money lenders need wholesalers to find deals to lend on.

If you want to become a part of the real estate investing community, it’s important to know which one you are.. and then get to know as many of the the others as possible.

Three Levels of Investing

The three players in the trinity represent three levels of investing. The higher the level, the more passive the income. The lower the level, the less money and credit is needed. The natural progression is to move up in level as your equity and life stage develops.

Young, aggressive investors without money or credit start out as wholesalers; which means they hit the pavement to find deals to sell to rehabbers. Once a wholesaler develops decent credit puts a little money away to invest… say $20,000; he’s ready to start buying and rehabbing homes to either flip or rent.

Once that investor has built up more than, say $100,000… (and is getting tired of rehabbing homes and managing tenants); he becomes a hard money lender and lives off of the interest on his loans.

Level 1: Wholesaling

Wholesaling is tremendously popular on the internet and in guru bootcamps because anyone can do it regardless of money or credit. If you’re broke… this is how you get started in real estate investing.

The catch is: you make up for lack of money and credit with sweat equity. I hesitate to call it investing because it’s more akin to owning your own business. The good news is that it can be a very profitable business.

Like any business, it requires an investment of time, money, or both to make it work. Don’t let the gurus fool you into thinking that wholesaling is free money.

The Basic Idea

The idea behind wholesaling is that investors are willing to pay up to 70% of the after-repair value (ARV) to buy and rehab a house. For example, if the ARV of a house is $100k, and it needs $20k in repair; an investor would be willing to pay $50k for that property. Got it?

Here’s where you, the wholesaler comes in… If you can get that property under contract for $45k, you can sell the contract to a rehabber for $50k; banking $5k in the process without ever taking possession of the house.

Pretty cool huh? Yeah, I didn’t believe it either until I actually did one… for $15k.

So How the Heck…

Most people don’t realize that they can do this without money or credit because they have always had to show a pre-qualification letter to buy a house listed with an agent. Good agents will only consider offers from potential buyers who have proven their creditworthiness to a bank.

BUT… Nothing is stopping you from signing a purchase contract with someone who doesn’t have an agent. For example: if your neighbor decides to sell you his house and he doesn’t care about your credit, you could sign a contract with him to purchase the house.

But… How are you supposed to come up with the money?

You’re not. You are going to find an investor who can, and sell them the contract.

But… What if you can’t find anyone?

If you’re smart, you’ll give yourself some time on the contract… say 45 days or so. If you’ve done your homework and it really is a 70% deal, you shouldn’t have a problem getting rid of it. (Send it to me!)

Okay… I get it. So, how do I find these people?

That’s where your investment of time, money, or both comes in. You’ll need to market to two separate groups: Sellers and Buyers… but not just any sellers or buyers; you want motivated sellers and investment buyers.

Motivated Sellers

The average seller with a house in good condition and no particular pressure to sell isn’t going to take 70% of the ARV on their house. Most of those homes don’t need repair; so they sell for retail, not wholesale.

The types of sellers that you are looking for are in situations where the only buyer that can help them is an investor. For example:

A homeowner who has lived in a house for 20 years and never fixed anything.

 Someone who inherited a house in disrepair and doesn’t have the time to worry about it. 

A divorce situation where the sellers want quick closure. 

Someone who is about to be foreclosed on and needs cash quickly.

All of these scenarios produce situations where the traditional retail market cannot help the sellers. Only an investor who is willing to take on the risk of a large rehab or quick cash closing can solve their problem.

Bandit Signs

The cheapest, but most labor-intensive marketing channel for motivated sellers is putting up bandit signs. Have you ever seen a sign on the side of the road that says “We Buy Houses” and a phone number? That’s a bandit sign and they work.

You can buy blank signs for about 50 cents a piece and large permanent marker for 5 bucks and you’re in business. The downside is that it takes some hustle to run around and put the signs up, navigate city ordinances, and fight off other wholesalers who will pull down your signs.

But.. that’s how many of us got started.

Farming

The next cheapest form of advertising is walking neighborhoods and placing door hangers or flyers on houses that look like they are under duress. Overgrown lawns, neglected repairs, etc.

Realize that some of these houses will have out-of-state owners. Look up their mailing addresses on the county records and send them a letter.

Mailers

Good old fashioned snail mail can work wonders. Just send out some letters to homeowners explaining that you help solve real estate problems by getting people cash quickly for their house.

You can buy mailing lists from a list broker or just blanket neighborhoods by getting addresses off of county records.

It typically costs about 50 cents to a dollar per letter if you use a service… Or just recruit your kids and start licking stamps!

Internet Leads

Tech-savvy types can find seller leads on the internet by paying Google to place ads when people search for terms that indicate they might be a motivated seller, or paying a service to do this for you. Expect to pay $50 – $100 to get someone to fill out your form and only 1 in 20 will be be a deal.

Cost Per Buy

After you have found a few deals, you can calculate your cost-per-buy ratio (CPB). Bandit signs should produce the lowest CPB, but take the most effort. Paid advertising will produce CPB’s in the range of $500 – $2,500. The object is to keep your CPB below what you make on the deal… or you’ll be out of business in no time.

Finding Investors

The best way to build your buyer list is to hang out at local investor groups. Find a group near you here.

You also might try mailers, or bandit signs, or internet leads for this one as well.. Get creative.

Level 2: Rehabbing

Real estate investing, as most people know it, involves fixing up old houses to sell or rent. To do this, you need access to enough money to buy houses.. with either a loan or cash.

The average borrower will need credit in the 700 range and cash reserves of 10-$20,000 in order to get a hard money loan.

The key to rehabbing houses is to buy at the right price. Remember the 70% rule? It’s to protect your downside.

Your Profit

Of the remaining 30%, 10% will pay a realtor and title company when you sell, 10% pays for holding costs, and the remaining 10% is your profit… or protection against a down market.

Investors who hold properties to rent reduce the burden of transaction costs, but don’t get to realize their profits as quickly.

Flip or Hold?

Flipping houses is the more glamourous of the two, but rental real estate is where the long-term wealth is created. In our business, we use a combination of the two. For every house that we flip, we hold 2-5.

When you hold property for longer than a year, there is huge tax benefit when compared to flipping. Most importantly, rental income produces cashflow.. which is the only way you can “retire” without killing your golden goose.

Property Management

Most people’s biggest fear in rental property is dealing with tenants. Most tenant horror stories stem from mis-management. Take some management classes to learn how to properly screen and handle situations that might come up.

While I won’t try to convince you that land-lording is all roses… It’s a heck of a lot easier if you know what you are doing… and I’d rather be a landlord and be my own boss than work for the man any day.

Level 3: Hard Money Lending

Hard money lenders are a special kind of bank who loan exclusively to real estate investors. They understand the needs and risks associated with fixing up investment properties in a way that traditional lenders don’t.

Hard money lenders can be institutions with large pools of capital to draw from, or simply a private individual who wants to earn a strong interest rate on his or her net worth.

Private Lending

In the case where the hard money lender is a private individual, they are typically referred to as a private lender.

Private lending done correctly is the most passive form of income in real estate investing. Once your due diligence has been done to be sure that you have a borrower with a strong track record and a solid investment property, you simply sit back and collect checks.

Protect Your Downside

The key to successful private lending is protecting your downside. We do that by:

a) Never lending more than 70% of the ARV
b) Getting 1st lean on the house
c) Working with borrowers with a strong track record

These protections are in place in case your borrower stops paying you. Private lending becomes less passive when you have to take back houses that you’ve lent on… But, if you’ve stayed within the 70% rule, you can sell it and recoup your money.

The Symbiotic Trinity

Wholesalers, rehabbers, and hard money lenders all rely on each other to keep their businesses flowing. As a rehabber myself, I can tell you that we love wholesalers… and hard money lenders. As a wholesaler, I can tell you that we love rehabbers… You get the idea.

Networking is the key here. Get around as many of these people as possible and start building relationships.

The Easiest $7,500 I Ever Made

Brian Lee — Thu, 15 Apr 2010 19:28:24 +0000

Last week I did something that I never before imagined was possible. I made more money with a few phone calls than I did in my entire first year as a blogger.

$7,500 Just Like That

My real estate partner, Shauwn, and I started an investment company called Passive Equity, LLC. Last week, we were given a $7,500 check for assigning a contract on a house from one investor to another.

The crazy thing is that we didn’t spend time looking for the house, we didn’t need to look at the house (I drove by just to prove to myself it was real)… We didn’t do anything except make a few phone calls.

Entrepreneur 3.0

Ever since I found a whole new gear of making money, It amazes me how much easier and faster it has become than in my early days as an entrepreneur. I used to work my tail off for what ended up being a minimal result. Now it’s just the opposite. At each step along the way, I learned something revolutionary that made my life easier.

E 1.0 was back in the 90′s when I was in high school and college. I started a lawn mowing businesses, a t-shirt design company, an online poster website, and on and on…

I thought that working for myself was the way to go, no matter how hard I worked. It turned out that owning your own job was harder, more stress, and sometimes less profitable than working for someone else!

E 2.0 started when I read Rich Dad, Poor Dad. I got smart about passive income and learned how to create businesses that didn’t require me to be there. I got into bulk candy vending, blogging, an automated eBay business, etc.

That was pretty cool, but it soon dawned on me that passive income was great, but only after my bills were taken care of. I was trying to live on passive income alone and it wasn’t enough.

The problem was speed. I wasn’t building it fast enough.

E 3.0 Over the last year, I started seeking out people who had made lots of money at the rate that I wanted to make it for myself. I let go of trying to reinvent the wheel and just listened to the guys who knew how to do it.

The $7,500

As I was networking, I ran into a guy who assigned contracts for a living. Commonly known as a wholesaler, he specialized in finding property a deep discounts and assigning the contracts to investors for an assignment fee.

He was expanding his business to include Central Texas, so he asked if I could help him find buyers for his contracts in exchange for half of the assignment fee.

No problem, I said, but it really seemed to good to be true.

The Call

A week later, he called me with a property that he had under contract. It was a large home with a pool on the outskirts of San Antonio.

Comparable homes in the neighborhood had been selling for $220k – $250k. He had it under contract for $105k.

I first thought about buying the house to flip. I talked it over with Shauwn and we agreed that it was a little bit too “outside the box” for our comfort because it was out of town in a slow-moving real estate market.

But, at that price, I was sure someone would want it!

The Plan

My plan was to get an estimate on the repairs and then start working my real estate investor contacts. I sent over my rehab guy and he discovered that it was pretty clean except for some plumbing issues and a little updating. His estimate was around $20k, mainly because it was a big house in an upper-end neighborhood.

To my surprise, he told me that he wanted to buy it!

Sweet, I thought. That meant I didn’t even have to touch my contact list!

We went into price negotiations and settled on $120k.

That’s $15k more than we had it under contract for.

An Amazing Way to Make Money

The closing date was set for a few weeks after the deal was signed… and to be honest, I wasn’t going to believe it until we got a check.

Would you know… We got the check!

At closing, the investor bought the property for $120k with a $7,500 assignment fee for us and a $7,500 assignment fee for my wholesaling friend.

Unbelievable…

It was truly a win-win deal. The investor got a great deal that he will rehab and make a ton of money on. We made some quick cash for showing him a deal that he couldn’t find elsewhere. The owner got rid of a plumbing headache and moved on with her life.

When I look back on how hard I’ve worked over the years for varying degrees of pay, making money like this simply blows my mind. All I did, literally, was make a few phone calls. I drove by the thing just so I could see that it was real, but I didn’t have to. My wholesaling friend never even saw the thing.

Well, you better believe that Shauwn and I will be doing a lot more of this kind of thing in the future. I’ll be sure to keep you updated.

How to Invest in Real Estate With No Money or Unlimited Money

Brian Lee — Mon, 08 Feb 2010 11:00:46 +0000

One of the greatest things about real estate investing is that anyone can do it. People think they need money or credit to become a real estate investor, but that is simply not the case.

No matter where you are financially: broke or bulging pocketbook, there is a place in the real estate investing world for you.

The Ladder

I like to think of it like a ladder. We are all want to make it out of the rat race, and each of us is on a rung on the ladder. Whether you have a lot of money and are near the top of the ladder, or are just taking your first step; it is as simple as a series of steps.

It’s obviously easier at the top of the ladder because you have the most options. Cash is king and buying real estate with cash will get you the best deals and terms.

Because you have the most options at the top, it’s logical to choose the highest returns with the least amount of work. The top rung should be on the passive side of the passive income continuum.

At the bottom of the ladder, your options are limited, but not as much as you might think. You will need to find ways to invest in real estate with little or no money. You will have to give up some long-term gains for some short-term money to get you on the next rung of the ladder.

Let’s start at the top of the ladder and work our way down to the bottom.

5th Rung: High Net Worth, Wants Low-Risk Cashflow

People on the 5th rung have enough money to retire and are looking for low-risk, cashflowing assets that will give them a steady stream of passive income in their retirement without digging into their principle.

At this level, you could theoretically just dump your money in Treasury Bonds and live off the 1-2% return, but you can do better than that in real estate while keeping your risk to a minimum.

Multi-Family Yield Play

As real estate investors, we are all heading in the direction of the multi-family yield play. That’s where you buy an apartment complex that is in good condition and already stabilized; and enjoy a steady 10-20% return on your investment through monthly cashflow.

If you have a high net worth and are close to or in retirement, you want an investment that will give you a high rate of return without much hassle. Those that want the least amount of hassle should look for an opportunity to be a passive investor in a multi-family deal put together by an experienced lead investor.

Many lead investors will accept passives with as little as $100,000 to bring to the table. Your commitment might be as little as the optional quarterly meeting to vote on distributions. If you have placed your money with a solid lead, all you have to do is go to the mailbox and deposit your check.

Before entering in any deal with a lead investor, make sure they have a solid track record of safe, steady returns.

If you are willing to put more time and energy into a deal, and have the skill-sets to manage large projects, you might consider learning to be a multi-family lead investor. As a lead, you would earn extra compensation for putting the deal together and managing the asset.

Private Lending

Finding a great multi-family value play might take a little time, so in the mean time you can make a steady 6-10% return by lending money to real estate investors to buy property. Your investment would be secured by the piece of real estate at no higher than a 70% loan to value (LTV).

If you hold a 1st lean position on a piece of real estate at 70% LTV, the worst thing that could happen is you would have to foreclose on the borrower and take over a property with a 30% equity position.

You could sell the property and probably walk away with more money than you would have made if you had not foreclosed. Some people consider this the BEST case scenario.

(For more information on private lending, please visit PassiveEquity.com)

4th Rung: Medium-High Net Worth, Wants Big Gains

People on the 4th rung are either still building their nest egg, or are wanting to get more aggressive with their investments. They are looking for opportunities to make a 50-100% gain on a deal in a 1-5 year period.

Multi-Family Value Play

A Multi-Family value play is where you buy an apartment complex that is beat up with low occupancy, and rehab the asset until it is in good condition and performing at a high level.

There is more risk involved with such an undertaking, but the rewards can be massive. Think about it: If you by a apartment complex that was selling for $30k a door five years ago for $10k a door in foreclosure; imagine the possibilities if you could run that asset properly.

Before you embark on such an undertaking, get as much information from experts in this sort of deal. Find a local investor group with multi-family investors to learn from. Go to NationalREIA.com to find a local investor group.

3rd Rung: Medium Net Worth, Wants to Move Up

People on the 3rd rung have a good foundation, but not enough to get into multi-family investing. Their main concern is building their nest egg as quickly as possible while adding to their passive monthly cashflow.

Single-Family Buy & Refi

If you have $20-$100k to invest, you should be mainly concerned with preserving your liquidity. The object is to buy as much real estate with as little out of pocket as possible.

One way to do that is to buy rental real estate and then refinance your money back out in order to buy the next piece.

The first step is to buy the property with either cash or a hard money loan. In order to make this work, you will need to find a property that you can buy and rehab for 75% or less of it’s after repair value (ARV).

Once you have rehabbed the property, most commercial lenders will give you up to 75% of the value of the house in a refinance mortgage. Take your money back out of the property and do it again.

Rinse and repeat.

When you have built up enough equity to move into multi-family, sell your properties to liquidate your equity and move up.

2nd Rung: Low Net Worth, Good Credit

If you have somewhere between $5k and $20k with good credit, you are still in good shape! Your real estate investing plan should be to buy as many properties as you can with hard money loans.

Hard money lenders are non-traditional banks that will usually lend up to 70% of the after repair value of a property. This differs from traditional lenders who lend based on the current value.

If you can find a house that will be worth $100k when it is fixed up for $50k with $10k in rehab and $10k in closing costs, you will be all in at the end of the day for $70k. Since 70% of the ARV is $70k, the hard money lender will lend you everything you need to buy and rehab the property. In this case, you will have nothing in the deal.

If you are all in for $75k, you would only need to come out of pocket $5k.

Hard money allows you to stretch your minimal capital as far as possible.

1st Rung: No Net Worth, No Credit

If you have no money and no credit, you can still be in the game. Since you won’t be able to qualify for a loan, your strategy will be to find deals for other investors and make a short-term gain.

Wholesaling

Wholesalers are sometimes known as “bird-doggers” because they spend their time hitting the pavement to find deals for other investors. If you don’t have money or credit, you will have to bring value to the deal with sweat-equity.

You will set up a marketing campaign to find motivated sellers by putting up signs, sending out mailers, walking the streets, plastering your car with ads, networking, etc. If you can find a $100k for $45k that needs $10k in rehab, you could easily sell it to an investor for $50k, giving you a quick windfall of $5k.

(Remember that most investors are looking to be “All-in” for around 70% of ARV.)

Conclusion

I know people who make a living at every one of these rungs of the ladder. The reality is that it can be done no matter where you are financially.

After hanging out with a bunch of millionaire real estate investors for the last few years, it’s amazing to me how much most people DONT know about creating wealth. The average reaction to this article will probably be skepticism because most people have never even imagined creating wealth this quickly.

The investors who run in my circle are doing this every day.