If you are reading this article it is a fair assumption that you, like the majority of real estate investors want to know how to grow your wealth (or in other words grow your investment portfolio) as fast as possible. One way to expedite the process is by buying wholesale properties (also known as off-market properties, cash deals, etc). That’s what we are going to focus on in this article. Read on to skyrocket your wealth.
What is a wholesale property?
If you are not already familiar with wholesale properties you are probably asking, “what is the definition of a wholesale property?”
Off-market / wholesale properties, in the simplest terms, are properties that are being sold off-market instead of being sold by a realtor on the MLS at market value. Although not a perfect definition Investopedia defines off-market properties as those “that are for sale, but aren’t listed on the multiple listing services.”
Both residential and commercial properties can both be wholesale properties, as well as basically any asset class of property.
Off market (wholesale) properties are sometimes sold off market because the condition of the property is such that it won’t qualify for a traditional mortgage. Also, it could just be because the seller needs to sell it fast and can’t afford to wait for the lengthy on-market sales process.
Read our Ultimate Guide to Selling a House article to learn understand why sellers sell their homes off-market vs. on the MLS with a realtor.
Back to that strategy for building wealth faster…
There is no doubt that real estate is a solid investment if (and only if) you know what you are doing.
However, what do most investors do when investing in real estate? They exhaust all of their savings to buy one investment property on the MLS. This strategy does not accomplish much in terms of your financial goals or growth.
So again, don’t make the same mistake that many investors make, which is using all of your money to buy a single real estate investment at full retail price on the MLS.
Why not? What’s wrong with buying houses on the MLS, you ask? “People have been doing that forever” you might be saying.
It’s a fair question. People have been doing dumb things for thousands of years. It doesn’t mean it is the right or best way to do it.
Look, if you are happy with dumping your savings into market priced and/or overpriced assets to earn smaller than expected cash flow that’s fine. Everyone is entitled to their own way of doing things. You are under no obligation to read on.
Whether you’re a first time investor or a seasoned investor there are strategies you can use to maximize your precious money.
First, pump the breaks on the “No Money Down!” stuff…
First of all, let’s address the gurus and people saying you can buy properties with no money down.
Some people (some gurus amongst others) will tell you that you can buy real estate with zero dollars of your own money. While obtainable for certain individuals of a certain stature and experience level or with certain connections, please don’t be fooled.
For the most part you always need some money in order to buy any property. Let’s explore.
For any loan type, whether it’s conventional, personal money, hard money, or owner financing you will need to cover things like a % of money down (to show skin in the game), closing costs, settlement fees, legal fees, etc.
Assuming everyone will ask you to show “skin in the game” as a % of the purchase price the more you pay for each one, the less properties you can buy with the cash in your possession.
For instance, a hard money lender will most likely require you to pay 20-30% down, points, plus fees and closing costs. Hence, if you buy a house on the MLS for $100,000 you will need $20,000 – 30,000 plus points, plus the cost of the closing costs and fees.
Unless you have the very unlikely situation of someone giving you a 100% loan (with everything rolled in), or you are syndicating a deal with no personal investment involved, which is something different altogether, you DO need some money for each property.
So the crux of it is, in most cases you will need cash for every single property you are buying.
The problem with buying houses on the MLS for market value
So getting back to the mistake I alluded to before the problem with buying properties on the MLS for full-blown market value (or maybe getting them for 5-10% below value) is that you are blowing through your money. Regardless of if you are buying them for cash or getting private money to fund them you will be spending more than you need to unless you fall into one of the few exceptions we discussed above.
The problem that this mistake causes is that as you use up all of your cash you are forced to wait years to save up enough money to buy another property. This is, of course, unless you are a millionaire with some serious cash to spend. Your dreams of retiring early will be hard to realize and the generation of any substantial income (which requires the acquisition of a lot of properties) will take years and years to accomplish through this slow process.
So getting back to the smarter way to invest…
What’s the best way to maximize your limited money, equity and returns?
Smart investors buy wholesale properties off market at deeply discounted prices vs. buying so called “deals” on the MLS. You can find wholesale properties off market well below market value.
Regardless of the reason why a property is off market, wholesale properties can be purchased for cash (yes, only cash or hard money/private loans) at a hefty discount off of market value.
This means that buying off market (wholesale) property helps you save some serious cash while building instant equity and maximizing your returns!
When buying wholesale properties is useful.
Buying wholesale properties is good for any kind of investor trying to build their portfolio as fast as possible, and/or maximize their limited funds, equity and returns.
Wholesale properties for the BRRRR investor
Off market properties are a great fit for the BRRRR method if you are buying and holding properties for cash flow.
It works like this: buy a wholesale property with cash or hard/private money at a discount. Rehab it. Rent it at market rent. Then cash-out refinance to pull your cash back out or refinance it to build a high level of equity.
You can build some serious equity because of the discounted price you acquire the wholesale property for. If you are a BRRR investor you know that in order to successfully implement the BRRRR strategy you have to get a property at a BIG discount. Buying wholesale properties is the best way to do this. It is the best way to maximize your returns and your equity.
Wholesale for the Fix/Flip investor
Buying wholesale properties is also a perfect fit for fix and flips. To maximize your profits for a flip you again want to buy each property at as much of a discount as possible. Buying wholesale properties allows you to accomplish this.
Buying on the multiple listing services usually limits the profits you can make, IF it even makes sense to buy a flip property on the MLS given the price point.
Buying wholesale properties allows you to have a cheaper “cost of goods sold” in a sense. A cheaper (or lower) input in your fancy analysis worksheet.
Obviously, the cheaper you acquire a property for a flip (given that the ARV is strong and the economics make sense) the more you have the potential to make.
A bonus strategy for making money with wholesale properties
Sometimes you can get a wholesale deal at such a discount that you can turn around and resell it to another buyer for a profit without doing much of anything.
Where do you find wholesale properties?
Producing your own off market (wholesale) deals takes a lot of work. If you are planning on finding your own wholesale properties you should understand it is a full-time effort for you or a team member. This is why most cash buyers don’t do the activity in house. They outsource it to the pros.
Instead, it is usually best to let a wholesaling firm that specializes specifically in this work do it for you to save time, money and efforts while focusing on what you do best.
If you are curious where and how to find off market properties check out more details in our previous posts on How to Buy Houses Below Market Value, Where to Find Off Market Real Estate Deals, and Where to Find Houses to Flip, amongst many other articles on our site to learn more.
If you want to learn more about off market / wholesale properties or are interested in wholesale properties for sale in Cleveland, OH check us out on the Sesa Properties’ real estate investing site.