Making money in real estate without financial risk
Real estate investing is one of the money-making ventures that many think about doing but never quite understand how to get started. After all, there's so much risk involved, especially when using your own money, not to mention factors outside of your control -- tenant's inability to pay the rent, market conditions, property management issues and so on.
3 creative strategies for making money in real estate
Traditional real estate investing does, to some degree, involve using your own money: earnest money to secure contract, down payment, lender/closing fees, etc. We all know the saying, "You have to spend money to make money." But after the last market downturn, my business partner is ambivalent about locking up cash and credit in several buy-and-hold package deals. This is understandable.
Because of this, we decided to investigate the possibility of investing in real estate without using our own money. Quite almost literally. The following are tactics used to make money without tying up credit and cash:
- Bird-dogging. I am personally experienced with bird-dogging since I did a lot of this back in grad school for local investors here in the D.C. area when the market was booming. Bird dogs help local investors find properties to buy and rehab, hold, etc. The bird dog locates a property, turns the information over to the investor, who then attempts to get into the property (buy, lease option) and relieve the homeowner, who is typically in financial distress. Their distress (job loss, divorce) greases the path to a below market purchase price that opens doors to higher profits at a later date. Once the property closes, then the bird dog stands to make around $500-$3,000 depending on the agreement.
- Assignment contracts. This method allows you to get a property under contract and reserve the right to assign the contract to another buyer for a higher price. For example, if I locate a property with a low asking price of $50,000, I'd get it under contract and then reserve the right with the seller to assign it to another buyer for $60,000. I walk away at closing with $10,000. The risk here is of the second buyer finding out how much you're making on the deal prior to closing, which can complicate matters and cause the deal to fall apart.
- Double closing. This is a preferred method. Given the example above, I'd purchase the property on the same day for $50,000 that I sell it to the second buyer for $60,000, often just a few hours later. The second buyer doesn't find out how much I make on the deal until the transaction is completed, and it is made public record. In the assignment contract the second buyer would find out on the HUD form prior to closing.
As you can see, none or very little of your own funds are used and your hands are clean throughout the process, as once the deal closes you collect a check and move on to the next one.