Hi everybody. If anybody could point me to the right direction it will be greatly appreciated. I’m a 20-year-old male who is interested in REI. I have the startup money, but I’m wondering what should I do to start? I’ve studied and read books. I have some knowledge, but now I want to get into action.
I’m of the opinion that lease options and pure options are the safest and best way to break into real estate investing. Done right, they are virtually risk free and require little capital to control properties.
I suggest you either read up specifically on the subject, or work with someone who is knowledgeable and experienced about them.
Good luck!
There are two main “paths” that investors tend to follow:
- The Ugly House Path
- The Pretty House Path
The UGLY House Path goes something like this:
- You start by driving through older neighborhoods looking for abandoned junkers. Mailing people who have the 3 D’s (Death, Disease and Divorce). And sending Realtors out to hunt down bargains.
- You get really good at finding eyesores and making low-ball offers and picking up houses for cents on the dollar.
- Then you wholesale those houses to rehabbers.
- Once you’ve built up a good chunk of cash you might decide to start rehabbing some of the houses yourself and retailing them for bigger paydays.
- Finally if you really want to build wealth you rehab the choicest deals and keep them as long-term rentals.
The PRETTY House Path:
- Generally you start out by calling FSBOs and FRBOs of nice homes in good areas to see if they need to get their payments off their back. Then you start mailing pre-foreclosures and absentee owners and expired listings. You don’t usually drive neighborhoods because there’s no obvious outward signs that the owners are struggling (their houses are pretty afterall!) And you also typically don’t work with Realtors.
- Since there are so many pretty houses in most markets, you have to get really good at screening out the sellers who are just curious. You also have to eliminate those houses with payments that won’t work.
- You then either assign these deals to Tenant/Buyers or you stay in the middle and collect the difference between the payments you’re making and the payments you’re receiving.
- The path to long-term wealth building is not as clear-cut as with fixing up and keeping ugly houses. As your L/Os get cashed out you will end up with a lot of cash so you could either start buying houses cash at a discount to increase your cash flow. Or you could buy notes. Or you could buy commercial properties.
Personally, I tried wholesaling and rehabbing and I didn’t care for it. I don’t like crawling through crappy old houses. I love beautiful new homes and fully renovated homes. I like being the bank. And I especially enjoy giving people a chance to get their lives and credit cleaned up and helping them buy their own home in the process.
I like the idea of “being the bank”. The way I undertand in the Pretty House Path you mentioned one could assign the deal to T/B or stay in the middle (sandwhich lease). I suppose would profit from a small assignment fee (i.e. $5k) when assigning the contract to a T/B. When one is in the middle one would still be responsible and on the hook for monthly payments.
I guess in order to “be the bank” (1) one would have to either get funding to buy property or take over payments and then L/O or owner finance to buyer; (2) do L/O to assign deal or be in the middle (sandwich lease); (3) or get property under contract and flip to a buyer that gets a mortgage and I take back a small second mortgage to help the buyer fund the deal.
I am thinking of doing (3) to get some cash now and some residual monthly income. Any thoughts on this? Thanks.
Just one thought if you want to go with #3:
Buy them way below market value!
I put about 15 houses under contract last year that I tried to do this with. Couldn’t sell any of them because they were too expensive.
Thanks for the advice. So you had more success selling with L/O. So do you now do more of the #1 or #2 method?
I chose #3 method because I did not see a way to do the other 2 methods without having enough cash reserves on hand to handle unexpected monthly payments and maintenance.
I do #2 exclusively. If the payments work for me to stay in the middle then I’ll do a SLO (sandwich), if they don’t, or if I just don’t like the house then I’ll do a CA (cooperative assignment).
You don’t need cash reserves for assignments because once the L/O is assigned to the new T/B you don’t have any further obligation.
For SLOs I keep the T/Bs down payment in reserve for that particular property to cover repairs or vacancy, along with an additional general reserve for anything else that might come up.
A good rule to follow with SLOs is that until the T/B actually buys the house out, the only money you can spend is the cash flow. Don’t even think about touching their down payment until the deal is complete. Put it in the highest interest account you can find (it has to be liquid) so that it’s at least doing something for you.