You are ready to increase your income and tired of spinning your wheels in your current industry, so you consider branching out to another seemingly lucrative area right now: real estate.
Not a bad idea.
Research shows that the real estate industry is one of the best places to invest in right now. After all, everyone has to live somewhere, right? In addition, the average annual return for residential real estate investments in late 2018 was 10.6%.
The question, though, is should you focus on rental investment properties or wholesaling single-family homes? Here is a look at which of these aspects of real estate investing is more lucrative.
Let’s first take a look at the difference between rental investing and wholesaling.
Rental property investing involves purchasing properties and then renting them out for income. Research shows that the average gross rent in the United States in 2017 was $1,082 per month.
Of course, the net amount may end up being a few hundred dollars a month once you factor in property taxes, homeowner’s insurance, and possibly a mortgage. You would need several houses to achieve a modest income as an owner of rental investment properties. For instance, at $500 a month, 10 properties would be necessary for you to attain a salary of $50,000 a year. Of course, investing in apartment communities can yield higher returns as you collect monthly rent payments from tenants in each unit and later sell the property for a profit.
Wholesaling, on the other hand, involves putting properties under contracts at discounts and assigning these contracts to cash buyers at slightly higher prices but still at discounts. The price difference in each transaction is what the wholesaler gets from the deal. Short-sales and foreclosures are a couple of types of properties that can be found at steep discounts.
With wholesaling, you could easily make a few thousand dollars per deal (specifically, between $5,000 and $10,000). That means, if you complete two deals a month, which is realistic, then you could generate $10,000 per month without the work involved in flipping a house for profit or managing a rental home.
So, is renting or wholesaling more lucrative? The answer is not black and white, as it ultimately depends on how many rental properties you rent out and how many wholesaling deals you can complete in a month’s time. However, both strategies have the potential of generating good returns, and they both have unique advantages.
Let’s take a close look at the various benefits of wholesaling homes versus choosing rental investment properties.
One of the biggest advantages of wholesaling is that you don’t need a lot of money to begin engaging in this type of real estate investing. That’s because you’re not actually buying real estate. Instead, you’re serving as a mediator who can sell real estate to end buyers — specifically, you’re selling contracts to cash buyers. As a result, your only true expenses are marketing your company and your investment property.
On the flip side, rental investment properties do require financing. That means you need to have a down payment ready to secure your mortgage.
Another advantage of wholesaling homes? Wholesaling is short-term investing, so you can generate a profit relatively quickly. On top of this, you can produce a decent amount of money at one time.
Generating cash flow with rental investment properties, however, can be more time consuming, as it is a long-term investment strategy. After all, you may not be able to rent out your properties right away. For this reason, wholesaling is a better option if you’re not the type of investor who is willing to wait for a financial return down the road.
The great thing about wholesaling a property is that if you don’t seal your deal, you don’t lose much as a result. All you might lose is the small amount of money you put into marketing your deal. That’s because you never truly owned the property. Furthermore, you won’t have to worry about paying property taxes or other expenses.
Rental properties are a higher risk when compared with wholesaling. That’s because, if you don’t manage to rent out your property quickly, your asset becomes a liability instead. You will still have to pay to maintain the property and cover property taxes even if your property is vacant. That’s why it’s best to look for homes or apartment communities that may already have quality tenants in place.
You can expect your rental properties to appreciate annually, and this is one of the biggest benefits of having rental properties. In the right markets, your properties could even double in value. There is even more potential for this if you actually work to increase the value of your apartment communities by making various improvements. However, as stated in my Three Immutable Laws of Real Estate Investing, don’t base your decision to buy on appreciation alone. This is not even possible with wholesaling. As a wholesaler, your goal is to quickly assign a property to a buyer. For this reason, wholesaling isn’t suitable for an increase in value long-term.
Rental Properties Provide Steady Income Streams
This is what draws many real estate investors to rental investment properties. As a landlord, you can expect money flowing in your bank account each month as long as your properties are occupied. The drawback of wholesaling is that it doesn’t necessarily provide a steady income stream. For this reason, if having consistent income from month to month is more important to you than acquiring lump sums of money from time to time, then rental property investing is the better way to go.
The ideal situation for real estate investors is that they can generate money while they are asleep. Owning rental properties is one of the best ways of achieving this. This is especially true if you place your purchased property into the hands of a property management company. A property manager will handle the tasks of collecting rents and arranging for repairs to be made so that you don’t have to. All you do is review the property manager’s reports and enjoy your steady flow of income.
If you are ready to strengthen your bottom line, you can’t go wrong with either wholesaling or owning rental properties on a part-time or full-time basis. With the right strategies, you can be well on your way to growing your net worth in today’s robust real estate world. Personally, I have the most success by syndicating large apartment communities. To find out how you can get started with apartment syndications, or to passively invest in my deals, get in touch with me, Joe Fairless, today to find out how we can work together.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.