What’s the difference between risk-free real estate investing and regular real estate investing?
The answer lies in how much money you could potentially lose if you don’t know what you are doing. It is easier to explain the difference with some examples:
Let’s say a motivated seller contacts you with a $100,000 house and they are willing to take $60,000 for a fast sale. It only needs cosmetic repairs you think. Sounds like a great opportunity, right? Well not so fast. You’ll either need to come up with $60,000 cash or borrow it from a bank or private lender. That money needs to be paid back no matter what. Hopefully, you can cover the repair costs which you estimate at $6,000. But after you buy the house, you discover that it has termite damage and foundation problems which will make your repair costs closer to $20,000. Plus, you’ll need to add in the expense of holding costs like taxes, insurance, utilities and debt service if you borrowed the money to buy the house. Let’s say it takes you 3 months to get the house ready to sell. If you sell it yourself, you could save the 6%+ real estate commission. But it takes 2 months to sell. Remember, you’ll still have closing costs when you sell too. That’s a lot of cash to have tied up in a house for 5 months. To sell it quickly, you accept an offer for $95,000 but you’ll need to pay some of the buyer’s closing costs. So, after buying the house, doing the repairs, and waiting to get it sold, you might net a $10,000 if you are lucky. Don’t forget that Uncle Sam wants his “fair share” on all your profits too.
What if your repair costs exceeded $20,000? What if the house only sold for $90,000 after 3 months of marketing? Or what if you had to pay a real estate commission of 6% and take a discount too.
What I just described is the risky way to make money with real estate. Too many things can go wrong. You could end up losing money.
There’s a better way…
The risk-free way to do the exact same deal would be to write a contract to buy the house for $60,000. But in your contract, you’d add a contingency clause that says the purchase is subject to approval of your associates. Then you’d contact all the people on your buyer’s list and tell them you will sell the house for $65,000 cash, close in 5 days. They jump at the opportunity! You don’t have a penny invested, and you make $5,000 in 5 days. This is called a wholesale flip.
Or, another risk-free way…
Same deal. But you’d tell the seller about the many advantages of selling the house with a Highest Bidder Sale. You tell the seller that you’ll need to get a contract to buy the house for $60,000, you’ll do all the marketing to get a lot of people to the house during a two-day open house and you’ll accept bids. The house will be sold to the highest bidder at the end of the open house. You tell the seller, that if you can sell the house for $61,000 you will make $1,000 profit. If you can sell the house for $67,000, you’ll make $7,000 profit. The seller says I don’t care how much profit you make so long as I get the house sold and closed in two weeks. Speed is important! During the Highest Bidder Sale, the high bid is $69,000. You close 5 days later and make $9,000. The seller is thrilled. The buyer is thrilled. And you can’t wait to do another Highest Bidder Sale.
Notice how fast a wholesale flip and a Highest Bidder Sale are! You can do several of these risk-free deals in the time it takes to do one rehab. In 4 months, if you just did one wholesale flip or one Highest Bidder Sale per month with an average profit of $9,000, you’d make $36,000. Many CashFlowDepot members are doing two or three risk-free deals per month. Do the math!
See the difference between risky and risk-free real estate investing?
The reason we focus on teaching you Risk-Free strategies at CashFlowDepot is to help you make money as fast as possible while also avoiding any chance of losing money.
In both the risk-free strategies I described above, the worst that could happen if you don’t sell the house is that you lose a little time but you’d never lose money if you structure the offer correctly and have good contracts. (We teach you how at CashFlowDepot)
There are also risky and risk-free ways to generate cash flow. I’ll talk about that next time…
You can make a substantial profit with real estate without actually buying houses or taking on risk!
Best of Success.. and Freedom,
P.S. Once you have a lot of experience with determining market values, estimating repair costs, negotiating, and selling real estate, then (and only then) should you consider actually buying houses and rehabbing them. Until then, I think it is better to stick with risk-free real estate strategies.
P.S. Check out the CashFlowDepot Community Forum – it’s free.