Thank you so much for asking this question Jonathan and allowing me to answer it for you.
I wrote a reply to someone else earlier today asking a similar question and I am happy to further expand on that to give you some additional info, but before I do that I just wanted to say congratulations on taking action and getting started. You’re a lot farther along the road than those that have not even sought out these discussion forums to seek the knowledge and direction to take action. I commend you on that and believe you can and will do it.
Below is what I would tell my little sister if she was interested in the family real estate investing business and I believe you will find value in it:
There are basically five ways that I might suggest you get started that involve little to no risk so that you can learn the business and ultimately decide what you want to focus on in your real estate investing.
Real estate investing is a very broad topic and many investors find themselves specializing into certain types of properties and certain ways of structuring transactions on those properties. That does not mean that they ONLY do that type of transaction, but it often means they tend to seek the types of properties and situations out that they know how to solve and love to help people in those situations.
It is my belief that you are compensated for financially and spiritually for adding value to the world and real estate investing is no different… you will be rewarded for your ability to help people with their challenges. It may be helping sellers address a specific challenge they are facing with their property or financial situation. It may be helping another investor find a great investment property. It may be helping an owner occupant buyer buy their first home or start the road to financial recovery after a bankruptcy, foreclosure, short sale and divorce. In many cases, it will be a combination of those things. In all cases, you are compensated for adding value.
In the beginning you are are likely going to be trying to get some experience with a variety of real estate related activities so that you can decide what it is that you love to do and where you can see yourself being a force for good and helping and adding value to the marketplace.
The five ways are:
Bird Dogging
Many people use bird dogging and Wholesaling interchangeable. In my mind they are very different roles.
Bird dogging in my opinion is a research based or administrative position. It is not heavy on sales because you are usually not presenting offers with buyers and sellers, although being able to sell your ability to bird dog to other wholesalers certainly helps.
Bird dogging involves identifying potential properties and doing research on those properties. You then provide that research to a wholesaler, real estate entrepreneur or real estate investor that will actually go out and do the “sales”.
For ease of writing and clarity I will refer to wholesalers, real estate investors and real estate entrepreneurs from here on as real estate investors unless there is a very specific reason for referring to one group. By the way, each of them are different even if they sometimes move between different roles.
Real estate investors will be the ones calling buyers and sellers, meeting with buyers and sellers, negotiating with buyers and sellers and ultimately contracting with buyers and sellers on the property.
Usually, bird dogs negotiate a flat administrative fee that is paid by the real estate investor that works the deal when the deal closes. Sometimes they negotiate a lower flat fee regardless of whether the deal closes. While what bird dogs charge is absolutely negotiable, it is not unreasonable in my experience for a bird dog to be paid an administrative/research fee of $200 to $500 for each property that closes.
If sales are not your thing, but you’re attracted to real estate investing and can visualize yourself adding value by making the job of real estate investors easier, bird dogging might be a great fit.
Since you are not agreeing to make payments or even entering into contracts on property I consider this to be extremely low risk. You will invest time to find and research properties, but little to no money.
You can use mostly free methods to find deals that meet the criteria of your clients (that’s the real estate investors you’re doing the research for), but investing in some marketing to find sellers would be a good investment. You could, with many real estate investors you’re working with but not all, justify and pass on the marketing expense in your fee.
Use your time as a bird dog to learn the business, your market, build your dream team, raise your confidence and make some immediate money at the same time.
Wholesaling
Wholesaling is a sales position.
You are finding and researching potential properties, talking to sellers and buyers, meeting with sellers and buyers, negotiating with sellers and buyers and coming to an agreement with buyers and sellers via paperwork.
While how you “technically” wholesale can vary depending on your state laws and how your dream team (attorney, title company and lender) suggest you structure the transaction to be in full compliance with local laws, it is usually done by you controlling the property with an option or purchase agreement between you (or more likely your company) and the seller. Then you typically would assign the rights to your option or purchase agreement to your buyer for a fee. Your buyer would then typically close on the property directly with the seller. Another common way to structure it is to have you close on the property with the seller and then immediately resell the property to your buyer (often on the same day). There is obviously a lot more detail here, but this is intended to give you an overview.
As a wholesaler, you usually profit from the difference in price between what you agree to buy it for from the seller and what you sell it for to your buyer. Although, there are additional profit centers that we can discuss as you do more wholesale transactions.
Sometimes you will be getting an option to buy the property where you have the right but not the obligation to buy it at an agreed upon price with the seller. Sometimes you might get an agreement to purchase the property where you are agreeing to buy the property except for very specific circumstances.
While it can vary quite a bit, you may be able to come to an agreement with the seller where you are using very little money (for example $10) to control the property. Some sellers may require more (in some cases to do the deal you might have to put up thousands of dollars).
You can decide to walk away from (or get creative with how you structure) the deals that require larger sums if you do not want to do that, but generally you’ll be able to complete more transactions as you expand what you’re willing and able to do if it makes sense to do so. Never do a transaction unless it is win-win for all involved. You’re only asking for trouble if you decide to ignore that advice.
As I mentioned earlier, in many cases you will not be closing on the properties and instead will be just assigning the rights you have in the property to your buyer for a fee and that buyer will be closing on the property directly with the seller.
However, with the advice of your attorney and if the laws where you decide to work strongly encourage you to close on each transaction and resell, you may decide to do that instead of assignment of your contract or option.
If you decide to close on the property instead of doing assignments, you may need to line up a short term lender to make sure you are funding your deal appropriately between when you buy it and when you sell it (often that same day). Some lenders specialize in those types of transactions.
You will likely need some money to wholesale. For example, you will need to put up some money to control deals even if it is only $10. Not having money to control deals that would require a larger deposit may mean you walk away from some potentially profitable deals. If you don’t have the money, consider passing it on to another investor in more of a bird dog capacity instead. You will likely want to do some marketing to find buyers and sellers and that will cost some time and probably some money. You may, depending on your local laws, need to close on your transactions instead of doing straight assignments and that will likely require a little money.
There is some risk of losing money in wholesaling. In my opinion, less risk than lease optioning (discussed next) but more risk than bird dogging.
Typical wholesale fees can often range from $2,000 to $5,000 net after all expenses. They can be MUCH larger, but I would’t use higher numbers when putting together your business plan.
Lease Options
Lease options are very popular right now and many folks suggest it as a great way to get started. It definitely has its pros, but it does have some things to be aware of as well that make it less attractive to me personally.
If you decide to focus on lease options (that is agreeing to lease the property with an option to buy it), it significantly expands the pool of properties you can choose over wholesaling. Why? Because if you are primarily wholesaling all cash transactions (which, as an aside are really not the only ones you can wholesale but that’s a topic for another day) you are primarily looking to wholesale properties where the mortgage balance is equal to or less than the amount of your usually low offer. Or, the seller needs to be willing and able to come to the closing table with money to pay the difference. Or, you need to get a short sale approved.
Since the properties you can work with on lease options include the majority of the ones that you could have wholesaled if you could have come to an agreement with the seller plus many of the ones that owed more than the price you could have paid to buy it as a wholesale transaction, it significantly opens up the potential number of properties you can work with. That’s good.
It is important to realize that you are agreeing to lease the property and are usually responsible for the lease payments to the seller. Unless your agreement with the seller allows you to stop making payments if you’re not receiving payments from your tenant or tenant buyer. Some sellers can afford to make that agreement and make payments on their underlying mortgage if you are not paying them and some sellers cannot (even if they agree to it).
Doing lease options allows you make money usually in two ways: the difference between your payments to the seller and what you collect monthly from your buyer and the difference between the price you are buying the property from the seller and what you sell it for.
There are other profit centers that we can talk about as you do a few, but this is just an overview.
The difference in the price you are buying the property for and the price you are selling it for can also bring in some immediate chunks of cash too if you collect a bigger up-front fee from your tenant buyer (likely as a non-refundable purchase deposit or an option fee) when they occupy the property.
This usually applies toward your tenant buyers purchase.
Many sellers will want you to put up money when you take control of the property as well (just like you’d like to get a fee from your tenant buyer). Your ability to minimize your down payment to the seller and maximize your down payment from your buyer can significantly impact your cash flow while you’re waiting for a property to be purchased by your tenant buyer in a year, or two, or three, or four or five. Yes, it can sometimes take that long or longer.
Typical lease option profits can be $15,000 to $30,000 or more net after all expenses with some of the money up front when you start the transaction, some of it monthly but most of it at the end of the transaction years later.
Since you are often “on the hook” for payments when you lease option, I would say that lease options have a little more financial risk of loss than wholesaling and quite a bit more than bird dogging. You will notice though that the amount of profit you can make on each transaction is going up (and arguably proportionately) as risk of loss increases. Some others might also argue that there are lots of things you can do to help mitigate risks and I absolutely agree. Mitigate being the emphasized word and note I did not use eliminate.
Real Estate Agent/Broker
Getting your real estate license can be a very low risk way to get involved in the real estate investing business, learn the market and build up some profit.
Getting a license and operating as a real estate agent/broker allows you to find buyers for properties that someone else has already gotten under contract (via a listing agreement) usually with a pre-agreed upon fee paid to you for finding the buyer.
Or, if you prefer working with and helping sellers and controlling properties you can focus on getting your own listings so that you can sell them and either you or other agents can find buyers.
In many ways (if you squint really hard), getting a real estate license and thinking like an investor is like being able to do half the wholesaling business (either find buyers for properties that are already under contract and for sale or find sellers and control properties with listing agreements).
Yes, there are some upfront education and licensing fees with getting a license. Worth it in my opinion. There are some on-going expenses too. Again, worth it.
Some people argue that a real estate license will limit what you can and cannot do; but as a law abiding business professional it really does not. If you plan on disclosing and following the law, you’ll find being licensed helpful. If you plan on trying to stay under the radar and do things that are questionable, this probably isn’t the business for you anyway.
If you’re dealing with $200,000 properties, a typical net commission to you might be between $2,500 and $5,000 if you find a brokerage that charges reasonable splits (by the way 50/50 is not reasonable in our current market).
By the way, many of the reasons that wholesalers have to structure their deals creatively to get paid is because they have opted not to get a real estate license. Getting a license makes it much easier since you do NOT have to be a principal to the transaction to be paid a fee when someone buys and sells and you put the two together. If you are not licensed you are NOT collecting a commission. You are being paid as a principal (someone that is involved as a buyer or seller in the transaction).
Building A Real Estate Investing Business
If you’re great at leading and managing people, you might be best served hiring a bird dog or two and a wholesaler or two and run the business.
Your bird dogs and wholesalers would be either independent contractors or employees (talk to your attorney and CPA for the pros and cons of each).
With this model, you do not need to be the one that is talking to buyers and sellers, meeting with buyers and sellers, negotiating contracts, raising private money or any of that.
You can write a check (often from the profits after or as the deal closes) and have a professional to do it for you.
You can also set it up so that the professionals you hire are paid based on performance. For example, you could hire a licensed real estate agent that understands our business to do acquisitions for you where they are only paid when they find a deal. What I am suggesting is different from just working with an agent to find deals.
As others do the activities for you, you will end up netting less per transaction, but once you get systems in place you can do significantly more than you could ever do on your own. This idea is what allowed me to be wholesaling in 280 markets at the same time… I had a TON of hired, pay-for-performance help.
So, those are 5 ways to get started in the business off the top of my head presented as I would to my little sister.
I really hope that helps. I will get off my soap box now (temporarily I am sure). Please let me know which direction you decide to go or if I can help in any way.