Updated: Aug 28, 2021
Real estate wholesaling is very profitable when done correctly, it takes a lot of work, and it is not a get-rich scheme; the upside is that you can start with a meager budget and build from there.
If you are starting with a low budget, you can do a few things to get started.
First and foremost, you need to educate yourself about it as much as possible and learn as you go, in other words, take imperfect action.
So, right off the bat, I will direct to one of my favorite free yet highly comprehensive and valuable source to learn to get started in the wholesaling business.
I have posted the link below for your convenience, subscribe to it, and learn the material at your own pace. (Hint: it is fascinating!).
How to Fund Your Real Estate Wholesaling Business
Now, there are various ways to fund your real estate wholesaling business when you need it.
You can start by borrowing money from family and friends, but if not possible, there is always the option to apply for a loan at the bank. However, keep in mind that banks have strict requirements for real estate loans, and it is a long, arduous process. The upside of it if you do qualify, is that the interest rates may be much lower than what other private or hard money lenders provide, but in all honesty, paying higher interest rates if you are in the wholesaling real estate business is very negligent, I will explain why in a just a few moments.
Another way to fund your wholesaling real estate business is by selling your own property and use the net proceeds as capital investment for your real estate business, or you could just take out a home equity loan.
Many wholesalers in real estate do not need loans; in fact, many of them have started with basically no money except with a meager budget to get started for marketing purposes.
However, why would you, a real estate wholesaler who is making good money doing it, need a real estate loan?
Honestly, there could be many reasons, many real estate reasons, or cash flow issues. However, once a wholesaler gets the hang of it, and by it, I mean the wholesaling aspect of it. He will start making lots of money. To make around $100,000 per year, all it takes is one or two deals per month, with an average profit of about $10K per deal, no doubt it will take hard work, dedication, purpose, discipline, and a strong drive to succeed, but it is all up to you, my friend.
The main reason a wholesaler would need a real estate loan would be to be able to make higher margins on a wholesale deal. For example, you find a motivated seller who needs to get rid of a property as soon as possible for whatever reason. The seller is willing to sell at a discounted price, the seller has high equity on his property, and he would like to close within two weeks.
Assuming the seller is willing to get rid of his property for $100K, and you find out the market is willing to pay $180K for it, you could agree with the seller to buy at $90K and assign it to a cash buyer who is willing to pay you $120K, who would buy it right away because the cash buyer can still make lots of money with it if they sell it for $160K or $180K whatever the case may be.
But if you want to make the most money possible on each deal, and not leave profits on the table, you would most likely want to sell it at $180K and potentially make very high profit margins.
There is one minor issue; you don’t currently have $90K in the bank to invest in a property to flip it for $180K. But if you do have plenty of cash in the bank for a down payment to finance the property yourself, you can ask yourself: “do I assign the contract to a cash buyer for $120K and make $30 grand? That’s an easy $30 grand, right? Or do I buy the property and sell it for $180K and make about $70K in profits on this deal? Why not $90K, you may ask.
So as not to mislead you, whenever you take out a real estate loan, there are expenses, such as loan fees, closing costs for the loans: property taxes, home insurance, utility bills, and mortgage payments.
Hence you need to deduct all the expenses from the sale price of the property.
Which would include the mortgage loan, taxes, insurance, utility bills, mortgage payments, and closing costs. To be conservative $90K loan + $20K in overall expenses would leave you with about $70K in net profits.
In this scenario, not taking out a loan is perfect if you are new to the wholesaling real estate business, because now you have $30 grand that you can work with and invest it in your business to grow it, but if you already have some experience doing it, and have enough money to invest, then you know it will make sense to double or triple your profits if you can.
Another reason you would not want to make half or less than half of the profits on a deal like this is because you have worked so hard to get you to this moment, you did not run into this deal because you were very lucky, you ran into this deal because you have been working so hard for a long time and now your hard work has paid off, so naturally, you want to maximize your profits.
You can achieve this by utilizing one of our interest-only real estate loans, and if you flip your investment property within six months, you stand to make about $70K in net profits instead of only $30k.
As you can see, even if you don’t have the cash to buy the property, you can use one of these loans to significantly increase your profit margins.
Granted, you may not find these types of deals every day, but they do happen, and when they do, you will have options on how to approach them.
How do our interest-only real estate loans work?
In general, this type of loan is excellent for wholesalers who only need a short-term loan with plenty of time to flip their investment property. They are great for many reasons, they have no prepayment penalty, so we give you 24-months to pay it back, but if you sell your property within six months after you are funded, the better for you. You can pay off the loan sooner without any prepayment penalties, and you are able to keep more of your net profits. In this way, the higher interest rate that I spoke about earlier is negligent because you will only have the property on a mortgage loan for a very short time, so overall is not an expensive business transaction that cuts into your profit margins, it is merely part of the overall expense that you would invest in flipping the property.
If you are not convinced, let us do the math. The old cliché liars figure, but figures don’t lie always rings true.
Through the bank:
$90K at 4%= 3,600 / 12 months = $300 Mortgage payment a month.
If approved the bank is going to take forever to fund it, so getting it funded in two weeks will not be possible. This type of loan is a better fit for a long-term 15 or 30-year mortgage loan.
Through a private hard money lender:
$90K at 8% = $7,200 / 12 months = $600 Mortgage payment a month
If approved we can fund the loan as soon as 2 weeks assuming the borrower provides all the required documentation on a timely manner.
Again, the higher interest rate is negligent, 1) because the loan is funded very fast, and second because you will flip your property within a short time.
The only catch, which is not much of a catch really, is that this type of loan is restricted to properties 1 - 4 as in SFR or single-family residence, condos, and 2-4 units which would include duplexes, triplexes, and fourplexes or 4-unit small apartment properties. Not much of a restriction, is it?
There you have it; whenever you are in the market for a real estate loan, feel free to get in touch with me. We have other real estate loans that we can fund but will have different requirements. Usually, we need to know the type of property, the address, purchase price, rehab cost if any, ARV or as repaired value, the purpose of the loan, whether you will be buying it to fix it and flip it, or to fix it and rent it, and whether it is residential or commercial, and last but not least we need to know your credit score, although most of our real estate loans are asset-based, we still need the borrower to meet specific credit requirements, it does not have to perfect, but it needs to a decent credit score because our loans do require a guarantor.