As real estate investors we’re constantly encountering dual opportunities. We have to weigh the opportunity cost of pursuing one option as opposed to the other. As an investor our goal is to uncover undervalued real estate and help people. (The best is when you get to help someone in need and make a profit). The work is not easy, but it’s certainly rewarding. Most of the time there are countless hours spent driving for dollars, cold calling/texting, sending mailers and even posting on social media. You probably feel like quitting, but you persist. As we all know, the next lead could be the one that you monetize.
Whatever your strategy is, it’s really just an elaborate dance we perform to uncover a motivated seller that really needs our help. The challenge comes when you actually make contact with an owner that you can serve.
The Hunt
You work so hard just to connect with a property owner that might want to do business together and then you’re tasked with choosing a route for the deal. Ultimately, the homeowner’s needs should supersede ours as investors; but if you do it right, it really should be a collaboration to find a win-win outcome. The more people involved in the deal should only benefit the community and provide win-win outcomes for all stakeholders.
As you discuss the owner’s needs and goals with them, you have to determine what makes the most sense for the owner as well as yourself as the investor. Of course you have to make money in order to continue investing in your community. Sometimes it might seem like there isn’t an opportunity to come to common ground, but it’s usually our fault as investors. Every seller that raises his or her hand and reaches out is an opportunity. As the investor you are the professional – not the homeowner. It’s our job to provide multiple viable options that serve the owner and allow them to make an informed decision that best serves them and still provides a good outcome for you as the investor. Multiple option offers is a great strategy to frame the conversation and provide the homeowner different paths.
Fork In The Road
Once you’ve made your offers and the homeowner agrees to one of your recommendations the real challenge begins. What will you do with the property as the investor? There are many options that we have as investors. The two most common would be selling the property or holding as a rental in your portfolio. This is where you can determine what kind of business you’re actually running, but you have to consider your end goal. There are certainly pros and cons to both approaches; but your goals will help you parse out what matters most.
$elling The Deal
First, let’s look at the pros and cons of selling a property. When you sell a property, you essentially contract it a price with the owner and the resell it for more. You may invest more money into the property and renovate it in order to resell it or “whole-tale” it. On the other hand you might just assign the opportunity to purchase property to another buyer and provide yourself a handsome margin otherwise known as a wholesale fee. Whatever route you take, you’ll make your money typically within 6 months to a year (depending on the renovation timeline). Either way, you’re essentially creating an opportunity for arbitrage. Buy low and sell high. That’s pretty much the first rule of investing (besides Warren Buffet’s investing rules: 1. Don’t Lose Money 2. Don’t Lose Money 3. See Rule #1 & #2). Either way, when you buy a property and quickly resell it, if done correctly, you garnish yourself a profit. This is great because you can get a quick payday and then take your cash down the road to do whatever you want with it. You don’t have to worry about tenants, termites or market fluctuations. We have done many quick deals (slinging real estate) this way. However, this route does have its downside.
The downside to selling a property for a profit that you’ve owned for a short amount of time is that the investment will only garnish the amount you created between the owner and end buyer. Essentially, once the transaction closes, your done. It’s great because you don’t have any more ties to the property, but you’re revenue stream from that deal is done. Additionally, you’ll pay taxes from the transaction no matter how you structure the deal. You can assign your rights and just take an assignment fee at closing or double close. Either route will still require taxes to be paid at the end of the year. Typically, you can avoid or decrease your tax liabilities by holding on to a property.
Controlling The Property
Let’s discuss the positive and negative facts of owning property. First, we’ll look at the cons. Most people want to sell their property for cash because it’s easy. You can get a quick buck and move down the road without any issues. Conversely, when you hold on to a property, you’re responsible for the asset.
When you keep a property, you have to tend to it and take care of it. The property is only worth the value that it is maintained. This requires time, energy or money to pay someone else to do this work. You also are liable for the property. Now you have to watch out for those that might try to take advantage of you in this litigious society. If you rent out the property you have to manage the tenants or the property management company that manages the tenants. Either way, your work is not done if you hold on to the property.
On the other hand, when you hold on to a property, you now have an asset on your balance sheet (personal or business). This provides so many opportunities! Real estate is so great because it is a forgiving asset class overtime. If you buy properly you can get a discount. Even if you don’t get a discount, but you buy in a good area, and maintain your property, it’s more than likely that it will appreciate. This means that your property goes up in value without much effort on your part. As the market appreciates and values rise, you get to take advantage of that, even if you haven’t invested much into your property. As your property is appreciating, you can legally depreciate the asset (contact your accountant). You can write off the value of the building over time, which can be used to offset income earned from tenants that rent your property.
Depreciation is a phantom expense, meaning its real on paper, but you don’t actually see it. You can thank the politicians for voting this one into effect! If you’re renting out your property, you get cash flow from the monthly rent (even with financing in place – provided your renting it for high enough). On top of the monthly cash flow your tenant can pay down your loan while the land appreciates and you depreciate the structure. You can even wait for the property to appreciate and refinance the loan in order to take out equity in the form of cash or credit to purchase a new property (or really whatever you want). It’s truly great! Checkout out this example for more on this topic: Compounding Momentum. When you hold on to a property there are added hassles to deal with, but the rewards are almost endless provided you buy at a decent price and manage the property effectively.
In The Beginning, Consider The End
When you’re weighing your options it can be tough. The very fact that you’re an investor means you’re savvy. You are one of the few select people in this world that strives for more than the status quo and hasn’t given up on financial freedom. (We’re personally rooting for you! We’re not there yet, but if you don’t quit, you can’t lose!). As you consider what route you’re going to take on each deal you have to consider what matters most. If you’re looking for fast cash, selling the property makes sense. You don’t have to get your hands dirty doing renovations or managing tenants. On the other hand, that revenue stream was more of a single hit and it will end with the sale. If you rent the property you can create a lifetime of cash flow. It’s the difference between milking a cow (renting) vs. slaughtering the cow (selling it). You can get cash upfront from a transaction, but if you hold on to a property you can make much more money over the lifetime that you hold or control the asset. There will be deals that you encounter that don’t make sense to hold on to. There might be a better investor suited for the flip or it’s not in an area you like. Whatever the reason is, you might not want to hold the property. On the other hand, if it’s in a desirable area and you’re up for the challenge of being an owner, you can keep it. Just consider what your end goal is. If you need cash today, a transaction will help accomplish this. If you’re looking for a stream of revenue, it’s best to hold on to desirable properties and rent them out. Think of your end goal and work backwards. No journey is the same. There are many avenues to find success. Just work your plan and consider what option best serves your goals.
PS. You really can’t mess up this whole “investing” thing if you don’t quit. You’ll learn, grow, evolve and find new ways to serve more people. Sharpen your skills and help people. We’re rooting for you wherever you are!
Happy Inve$ting!
Written by: Luke Smith of We Buy Property In Kentucky