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.
The biggest thing is this (market value) One thing about real estate investing is that you can roll the dice (play the game) any-way you like it (There is no certain path to creative real estate) You just got to be effective in shaping the end result towards your favor! Again market value (Know when to roll the dice and when not to roll the dice) This is where most investers go bankrupt You got to know the buyers (credit report) before going into any type of deal (never go into any deal being blinded) (When you are talking about using other peoples money to make money from real estate) It’s best to get involved with (real) investers, those that you can depend on, and those that will know that if you fail (they also fail) The problem is for some folk they really dont know where to look for investers (They will follow these “no money down concepts”) But never ever know anything about putting forth effort towords putting together a team, and playing only within this team! They go out of their way to try to manage this, and manage that, but in reality creative real estate is about using other people efforts while everyone involved wins. (Never use or try to flip an investment go over the 40-50% “above your cash flow loans from some bank to try to even things out, or even to try to get ahead) This is where this guy above was talking about using (hard cash loans) Because your never ever want to end up on the high debt to income level where you can not afford to pay your other bills! Be patient, never get nervious that you’re gonna lose some money… Be confident, and work within your means, and your team!
Hi Brian, and hello from Italy! Enjoyed the blog (visited before but this is the first time I’m leaving a comment).
Quick question:
“They are looking for opportunities to make a 50-100% gain on a deal in a 1-5 year period…”
Is almost doubling your investment within one to five years really feasible in the States in 2011-12? Fair play if it is; because it sure ain’t on this side of the Atlantic. 🙁
You need To find buyer and seller to do wholesale also business license like llc
at first i wonder how you can invest with something without any money, and this post explains it.
– Jack Leak
Hi Brian,
I enjoyed reading your informative blog. Keep it coming!! 🙂
I wish I can say that I’m living off my passive income. Gee… 🙁
Very informative blog Brian! Gave me a good direction on what I must do. I was wondering if you could go into more detail on wholesaling?
Really enjoyed the blog!
Good suggestion. Maybe I’ll do a future blog post on wholesaling.
Great piece, thanks for sharing! I’m just starting out too, so this article came in useful to me.
Also, if you have no net worth or credit in addition to wholesaling you can utilize lease options and owner financing creative real estate investing techniques.
That is true, although the laws have been changing in some areas so make sure you are aware and doing them legally.
Not that I don’t have any credit, but is there any chance of a 1st rung deal in Canada? I also am not sure exactly what wholesaling is or where to start?
P.S. Loving your blog!
Hey Chris,
I’m not quite sure what the laws are like in Canada, but I assume they are similar. If you can find a property for a low enough price, someone else will be willing to buy it for a markup.
your enthusiasm is great, but buyer beware. The Theorys do not make up for due diligence, accurate number crunching, factoring in unforseen expenses, and possibly dealing with unscrupulous sellers/lenders/investors. It’s not all “follow my plan and you’ll make millions” , loolk at Stetson’s post( thanks for sharing).
That said excellent real estate investments can be made( we’ve done a few) but they are not without hard work, high stress and some risk.
Caveat emptor.
Hi Bryan
Your ways are compelling and hard to follow. Can’t blindly follow the exact rules but can take a little idea of yours.
Well I belong to the third rung. So lets take your opinion for a while.
Regards
M. Thompson
I like that… “Compelling but hard to follow.”
That must mean I’m challenging people…. unless it means that I’m writing gibberish.
hmm… I’ll keep telling myself the 1st!
Thanks for the info Brian. I’m a little ways out from making my first real estate investment, but I definitely appreciate the article.
Brian this is worth reading and learning. Thanks for this. Any Idea for realty leveraged online?
Yes, I agree with everything that is being said here, with one exception.
I had exactly one million dollars to invest from my uncle when he passed away.
With that, I was able to leverage eleven million dollars in property. That was in 2006.
The properties are now worth six million, and the bank is about to foreclose on two of them.
I owe a total of two million on improvements the government forced after I purchased the buildings.
So, in all, I have managed to take a one million dollar inheritance and turn it into a two million dollar debt in just over four years.
If I sell the properties now, I will owe the banks about three million more. So in all my record would be of world class significance. A total of five million in debt starting with a one million dollar inheritance free and clear after taxes.
To destroy my life in real estate so quickly starting with one million dollars to the good takes some doing, but, then I always have been an overachiever.
Stetson
My favorite hobby shop:
ToysPeriod is a leading online shop specializing in lego sets and model railroad equipment.
Nice! Thanks for this post. I am on the 2nd rung right now and felt a little lost.
P.S. your twitter link to this post is not working.
Brian,
Thanks for the clarification.
I presume that you are referring to 70% of the sale price rather than 70% of the purchase price.
We’re trying to do some dabbling (well, that makes us sound not-serious, which is far from the case) in real estate — specifically looking for a duplex, townhome or even apartment building (small number of units). So this is a very interesting post! We do have equity in a building, so we THINK we’ll be considered a good credit risk. As I said, we’re just starting to look — and I found a great book on how to invest in real estate, which others might like: “The Best Real Estate Investing Method Ever” by N. Xavier Arnold. Very interesting reading. The “Real World, Real Time, Real Estate Investing” method in the book allows real estate investors to actually learn real estate investing by doing a real deal from start to finish. The training is Internet-based, so you can get individual attention and learn from the comfort of your own home.
It’s 70% of the After Repair Value (ARV), which is what the thing will be worth once you fix it up. To do this sort of loan, you usually have to find a hard money lender who specializes in this sort of thing because conventional banks tend to deal with current value or purchase price.
Sean, rule #1 is actually “Don’t Lose Money” (and rule #2 is “Don’t Forget Rule #1. see Warren Buffet).
You don’t have to come up with any money at 70% LTV if you are “all in” (buying and rehabbing the house) for less than 70%.
Since you are into the property at 70% of it’s value, you won’t lose money unless the market tanks by 30%, which just doesn’t happen in the south and midwest.
Coolio, the way to assign or “flip” a contract is to write an offer to the seller in “your name and/or assigns”. Once you have a contract with that seller, you “assign” the contract to someone else for more than the original contract price.
You do need some money i.e. 70% loan to value from your “solid lead!”.
Investing long and borrowing short is a recipe for disaster.
Rule number 1 – Make Money!
I’m confused on the 1st rung…how can you “sell” something that you do not have? With the other rungs I see how the person purchases the property, but I never saw where you “purchased” the property on the 1st rung…