If you’re following the AdWords Nerds blog, you know that we’ve covered a lot of topics about real estate investing. What we haven’t covered yet, though, is closing different types of real estate deals, which we’ll remedy in today’s article.
At first glance, this might seem like a topic for newcomers, but what follows is meant for seasoned real estate investors, too. How’s that possible? Well, real estate markets were tough on investors in 2021 and one of the best ways to survive a seller market is to make sure that you optimize the way you close deals, streamline in-house processes, and cut all unnecessary costs.
In the following paragraphs, we’ll break down different types of real estate deals. The idea is that by revisiting real estate investing basics, you might change your perspective on some of these types of deals (maybe start closing new types of deals) – an approach that has merit given the market circumstances.
Being able to close multiple types of real estate deals is important for real estate investors, even when meeting business goals is easy. We’ve discussed this elsewhere:
So they [investors] have the ability to flip when there’s a lot of profit to be made, they have the ability to wholesale when maybe there’s profit to be made but they don’t necessarily want to do the work, and they have the ability to work with leads that want retail price on their home.
We termed it the multiple close model and it allows you to make the leads that land in your sales funnel more valuable for your business, since you can close them using more than one investing strategy. Aside from stopping leads from falling through the cracks, it also helps you to find new revenue streams and to diversify your investment portfolio – making your business more resilient to change overall.
The multiple close model is great, but can you close real estate deals using different investment strategies? This is the biggest issue for real estate investors out there because in order to do a flip, do a wholesale deal, or sell at retail price, you need to set up your business in a certain way. You need to consider things like:
It’s a complex issue and we can’t help you with that. What we can do is run through the pros and cons of closing each type of deal – maybe you’ll realize that your real estate investing business can easily start implementing alternative exit strategies.
On that note, let’s dive into the list.
We will share basic info on each type of real estate deal, and compare the pros and cons of closing them.
In real estate, to close a wholesale deal means that you act as a middle man between a house seller and a buyer. The catch is to find a motivated house seller willing to sell their property below it’s market price, to put it under contract, so that you can sell it to the prospective buyer at a higher price and keep the difference as profit. You sell the property as is (without doing any remodeling work to increase it’s value) and sometimes you close with the seller and the buyer in the same day – this is a perfect scenario. The profit from wholesale deals works like finder fees do (and can be expressed as a percent of the deal), because you find an investment opportunity for a cash buyer, and they can rehab the property or do whatever they please with it.
Some investors do wholesale deals in a reverse order to reduce the risks associated with holding a property under contract. So, you first lock in a cash buyer for the property and then you go and negotiate a good deal with the property owner. It’s a sub-type of wholesale deals, and Corey Geary, one of the guests on our REI Marketing Nerds podcast, employed this strategy to do more deals during the pandemic.
House flipping has become synonymous with real estate investing thanks to popular TV shows. We all know how flips work: you get a distressed property, you rehab it, and you sell it for profit. It’s what real estate entrepreneurs do (it’s not really investing), because you take a resource (ugly house), you increase its value (by fixing it), and the profit comes when you find a buyer (for the finished product) – it all resembles an industrial process.
There is a sub-type of house flips that can help you address the dents from capital gains tax. It’s called a live-in flip, and, in a nutshell, you get tax breaks if you rehab a house in which you live. To qualify for Section 121 exclusion, you need to live in the house full time (to use it as a primary residence) and to stay there for at least two years before you sell it.
Live-in flips come with a trade-off: you save on taxes, but you are tied to the property. And even if you aren’t really there while the construction work is being done, you have to sort the logistics of moving in and moving out. If you need to move before these two years elapse, you will get only a partial tax break (depending on the reason: health issue, change of jobs, military deployment).
The idea behind the “buy and hold” real estate investing strategy is to profit from an increase in value over time – because in past decades sale prices of property have gone steadily up. As a property owner, you need to sell the house to cash in on the profit (relative to the price at which you bought it). Real estate investors look for ways to secure a positive cash flow in the meantime – because if you aren’t collecting some form of return, even if value appreciation goes up and is in your favor, bills for property management pile up, and you don’t see any profit until you sell the house.
So, these buy and hold properties usually end up as rental property investments. There are many ways to secure cash flow from a rental property, though.
BRRRR is more of a method or an investing strategy than it is a type of deal. It stands for Buy-Remodel-Rent-Refinance-Repeat. In terms of real estate deals, BRRRR is a house flip deal, but instead of selling the property at the end of the rehab project, you keep it and rent it out.
Getting a property to rent it out to tenants is a wealth-building strategy, but when you close the deal it’s important to consider whether the property under contract can be rented. There are dozens of ways to rent a property, and we will review those that are most popular with real estate investors.
Let’s turn to specific hacks for investing in rental property.
To those who aren’t into real estate or accounting, “1031 exchange” sounds like something that doesn’t really make sense, but actually, it’s a tax deferring strategy allowed under IRS Code Section 1031. In a nutshell, you exchange one rental property with another property of equal or greater value and you can deffer capital gains tax. It’s a way to build your investment portfolio without having obligation to pay tax on sales (although sometimes partial taxes still apply).
If you learn the rules of 1031 exchanges, you will have a tax shelter method under your belt, which is a great way to cut costs of doing real estate deals.
This is a property that already has tenants (or is ready to be rented to tenants). Turnkey rentals are usually managed through platforms that remove the hassle of property management, screening tenants, and analysis of real estate market data. While these peer to peer platforms for turnkey rentals make investing easy, they also charge fees, which will create dents in your returns.
It’s a method to mitigate risks when you run multiple rental properties. Rental debt snowball means that you put together the cash flow from all of your rentals (and other capital as well) into repaying the mortgage on one of those properties. For example, if you have four rental properties, you collect all the cash flow to pay off the mortgage on one of them – you get rid of the debt four times faster and you end up owning one of these properties free and clear. The rental debt snowball method can be a source of stability and help you to increase your investment portfolio.
There is another strategy that is similar to rental debt snowball – it’s called the all-cash rental plan, and it entails saving up cash to buy property without going into debt.
House hack is one of the oldest real estate investing strategies: you buy a duplex, you move into one unit, and you rent the second unit to tenants. It’s a hack because the tenants are paying your mortgage. Also you can get a better loan terms because small multifamily units are considered residential loans, as opposed to investment loans (similar to tax breaks for live-in flips).
Since you live in the same place as your tenants, it’s much easier to complete all landlord duties as well, because they are your neighbors.
You can also rent to people who need a short term stay, as opposed to finding a tenant that will stay for months on end. Usually these are vacation rental units for corporate travelers and tourists, like the properties on AirBnB.
To be clear, we refer to buying someone else’s debt because as a lender you can collect interest payments, or, in rare instances, initiate foreclosure on a property and end up expanding your investment portfolio. Let’s check a couple of examples.
The idea is to buy mortgage notes (real estate debt) at a discounted rate to the actual value of the house. It works similar to seller financing contracts – as long as the house owner pays their mortgage you collect interest, and if they fail to keep payments current you can either sell the mortgage note to someone else or to foreclose on the house.
You are probably more familiar with this form of investing in debt: it concerns the entries on tax delinquent properties lists you use to get leads. When a homeowner doesn’t pay property taxes for several consecutive years, the county sells their debt (the tax lien) through a public auction. We’ve covered tax lien investing elsewhere, here we will review their pros and cons.
The path of each investor is unique. There is no foolproof plan on making it as a real estate investor, especially in the current market. Some investors start with wholesale deals, and once they learn the ropes, they do house flips or they close on a unit that will become a rental property. Others are mom and pop investors who do a house hack, followed by a BRRRR strategy, etc.
You will have to navigate your way forward closing the type of deals that make sense for you at the moment. Everyone has a limiting factor, whether that’s access to capital, little to no previous experience, dependence on others (contractors, attorneys, mentors, cash buyers), or a market that’s not favorable to them.
We did our best to provide a comprehensive list of different types of real estate investing deals. The list is not exhaustive, though. There are many other strategies for investors, but what ended up included in our list can help change your perspective on closing a specific type of deal.
Reputation is everything in real estate. It takes hard work to build a good reputation, and even the slightest blunder can ruin it. And, today, with social media (and the internet in general), it’s really easy to check the track record of a specific company, your real estate investing business included. To help you create
Artificial intelligence (AI) brings disruptive innovation across industries, but will it ever transform real estate deals as we know them? Opinions vary, and since real estate investing is five to ten years behind the curve on trends in digital marketing (and adoption of software in general), we will have to wait for a conclusive answer