Think Buy and Hold real estate is your ticket to early retirement?
For the odd person with luck and good timing on their side, it can be. For most people, unless you’re talking early retirement in 15 – 20 years, it’s not.
Buy and hold rental property is a critical component to every real estate portfolio. I think it is THE greatest wealth creator over time, but if you want to live off your real estate without waiting to pay off the mortgages or working your butt off to buy 100 houses, then you’ll need to find a way to bring in some cash today.
Besides holding down a job to pay your bills which is a great strategy if you like what you’re doing (it will be MUCH easier to get financing for your deals if you have a job!) most real estate investors create their cash today using one of the following five strategies:
- Wholesaling or assignments
- Becoming a realtor
- Creating a property management business
- Adding a strategy like rent to own that will increase your cash flow on a monthly basis. (this is what we did when I quit my job four years ago).
So what are each of these strategies?
Wholesaling to Make More Cash with Real Estate
Wholesaling is basically where you do all the leg work to find under market deals and get them under contract. Then you assign them to someone else for a fee.
Traditional wholesale models are where an investor just wants to be assigned a profit producing property. You put in the effort to market, filter and negotiate the great deals and build a network of investors that will buy the deals off of you, and then when you have a good deal you assign it to an investor.
This model is a great way to add thousands of dollars to your pocket ever deal you do. Of course, the challenge with wholesaling is you always have to work your funnel of deals and build your investor network so you have supply and demand for the product. It is a lot of work – but it does help fill your bank account once you get your systems in place.
Flipping to Make More Cash with Real Estate
Most people think they know what it takes to flip a house thanks to all the tv shows on the subject.
Ian Szabo, a guy who knows what it takes to make $50,000 – $150,000 on a flip (he does 2 or 3 like that a year), author of From Renos to Riches, and creator of FlipSchool.ca says he flips houses in two ways:
- Buys a derelict house in a great area, fixes it up, and sells it for a juicy profit.
- Buys a house that needs work, adds a legal suite, refinances to pull out all his money and some profit, and then rents it out to make cash flow.
Flipping is a high-risk strategy, however, and even Ian doesn’t recommend anyone approach it without a back up strategy in place.
With the right strategy, the right house and the right plan, most flippers starting out can make about $30,000 on a flip, according to Szabo. And that’s about right! One of our VIP Coaching Clients just finished her first flip & made pretty close to that too.
With that kind of profit potential, you’d only need to do one or two a year to really fill in your ‘cash today’ needs.
Becoming a Realtor to Make More Cash with Real Estate
We don’t have an official survey or anything but I’d venture to say this is one of the most common ways real estate investors make their cash today. When you’re an active buyer of real estate, it doesn’t take too many deals where you see your agent make $10,000 in commission for doing minimal work, to begin to see the value in working as a realtor on your own deals. When you also consider that you can help a few of your investor friends and make a bit of commission on their deals too, it can be very appealing for you to become a realtor to satisfy your needs for cash today. Plus you’ll get access to all the MLS data for your area.
That said, it IS a distraction. No matter how little you do as a realtor it takes time and money to have your license. We’ve considered it but ruled it out because we think that it will distract us from our primary business which is buying real estate. There are some other challenges with being a realtor and an investor such as ensuring you follow disclosure and other licensed realtor rules. Further, there can be considerable ongoing brokerage and marketing costs to stay licensed as a realtor.
For many investors though it’s been the ticket to freedom. If you can stay focused on your investment business and build a successful side business as a realtor, this seems like a very popular way many real estate investors make cash today.
Creating a Property Management Business to Make More Cash with Real Estate
At one point, with property all over Canada, we were working with 6 different property management firms. When we quit our jobs and began to spend more time evaluating our cash flow, we began to spot a lot of cash leaks.
To plug some of the holes, we began bringing our property management efforts in house. With the money we saved on property management expenses each month we could afford to hire someone to help us. By doing most of our own property management, we find that we make more money every month and spend less to do it.
Many other investors come to this conclusion as well. And if they do their own property management well, their investor friends take notice and ask for help managing their properties.
But it takes a lot of work and it’s not exactly fast cash. You also should take note that some provinces require a Property Management license to manage properties that are not your own.
Rent to Own to Make More Cash with Real Estate
Rent to own is when a tenant rents your property with the option to purchase it. You set their purchase price at the beginning, they pay a fee for the option to purchase it in the future, and a portion of their rent is a credit which builds up over time towards their purchase.
It generates more cash flow because the tenants are paying a higher than market rent for their property in exchange for credits that build up towards their purchase and they are responsible for basic maintenance. You also don’t typically need property management because of the quality of tenants that move in and because they are responsible for taking care of repairs up to a certain dollar amount ($300 in our case but many other investors have their tenants handle up to $500 or even $1,000).
When I quit my job, we evaluated all of the options for cash today. Wholesaling requires constant marketing and funnel management. If you’re not constantly finding sellers and buyers you aren’t making money. Flipping is stressful and higher risk. It also requires you consistently be working on a flip or you won’t be filling your cash needs.
We felt being a realtor would reduce the focus from our own deals and since we were planning to do a deal every month or so, we knew we’d need a lot of focus for that. And property management is not something we really enjoy, so we didn’t want to create a business around it.
That left us with rent to own as the best solution for us.
By changing a few of our existing rentals to rent to own, and adding just a handful of rent to own properties to our portfolio we were able to boost our cash position with the option fees and the increased cash flow to a point where we felt comfortable financially from our real estate holdings. We also like the fact that rent to own helps good people get into home ownership. Our rent to own tenants give us big warm hugs, invite us for dinner, make us handmade thank you cards and invest in fixing up the homes.
We do have to continue to add properties in order to keep the cash flowing because rent to own deals do turn over every 12 – 24 months after purchasing them. That has largely been the reason we so aggressively added property to our portfolio in the last three years adding 10 – 12 new properties a year. But we like rent to own because if we want to take a month off from working on our deals, we still make money. We can’t say that about any of the other strategies.
And for us, our real estate business has been created so we can live the life we want. For us we wanted to maximize our freedom and minimize the amount of ongoing work that has to be done in order to generate the income we need.
Regardless of how you do it, if you want to become a full time real estate investor, you’ll need to find a cash today strategy that works for you so you don’t have to wait 10 years before you can call it quits.
Image Credit: © Sorin Alb | Dreamstime.com