Real estate investing is an exciting and lucrative field that anyone can learn given the proper guidance and resources. But there is more to the business than simply buying investment properties, and if you want to be successful, you’ll have to decide what strategy makes the most sense for you. Wholesaling and flipping are two of the most popular techniques utilized by investors everywhere. Here is a look at the differences between the two strategies, so you can decide which makes the most sense for your goals.
What is the Difference Between Wholesaling and Flipping?
Flipping refers to the act of buying a distressed or outdated property, renovating it, and bringing it to market to sell for a profit. Wholesaling refers to the act of securing the contract for a distressed or outdated property, then turning around and selling that contract to another investor for a fee. They are similar techniques and involve the same kind of analysis to determine whether or not a property will be worth the investment. The main difference is that a flipper will do the renovations themselves and market the property to end-users (or hire the professionals to do it for them), whereas a wholesaler simply scouts the deal, then passes it on to another party who will take care of the necessary work.
Advantages of Wholesaling
The biggest advantage of wholesaling is that you can make a decent profit without having to buy the property or do any of the renovation work yourself. This means you can make money wholesaling without any savings or credit because you’re not actually purchasing the home, you’re simply securing it at a discount then selling that contract to someone else. This makes it a lower risk strategy than doing the flip yourself and you will get paid faster than if you took the time to renovate the property and market it to buyers.
- You can make a profit without spending money on renovations
- You don't need to take out a loan, because you are actually buying and selling a contract to buy a house
- It involves far less risk than house flipping
Disadvantages of Wholesaling
Although wholesaling is a smart way to make money without doing much hands-on work, it requires patience and finesse. Before you begin looking for potential properties, you’ll have to have a pool of investors lined up to ensure you have a buyer. Otherwise, you might get stuck with the contract yourself. Plus, you’ll have to find a property that is being offered at a rock bottom price to make money wholesaling, because you’ll have to offer it to a seller at a price that works for their budget, while still taking a cut for yourself. To do so, you’ll have to learn to analyze deals and face tons of rejection before being able to locate a property that makes sense to wholesale.
- You need to have easy access to buyers, so you don't get stuck with the house yourself
- It can be difficult to find properties that leave enough margin for the wholesaler to make money
- The amount of money that you can make in each deal is limited
Who Should Consider Wholesaling?
Wholesaling is great for those who are interested in getting involved in real estate investing but aren’t quite ready to take on the added responsibilities of a flip. It doesn’t require a high credit score or money in the bank if done correctly and it’s one of the few ways you can earn a five-figure check or better in under a month. It’s great for those who want to learn how to analyze deals and make some quick cash by scouting properties, but don’t want to deal with the renovation and marketing process.
Advantages of House Flipping
House flipping is another lucrative strategy that you may consider if you’re interested in real estate investing. The major benefit of flipping is the high returns in a relatively short period. The average net profit from a flip is over $30,000, while the average duration of a project is only about 6 months. This means you can make just as much, if not more, than your annual salary just by doing one or two flips per year.
Another major benefit is that it’s a passive income strategy, meaning that if you analyze the deal correctly and put a solid team in place to help you with the workload, you can make these kinds of profits while only doing about 5 to 10 hours of work per week. It requires careful planning, knowledge, and determination to be successful, but anyone can get these kinds of returns if they are willing to put in the work.
- You can make over $30,000 with each sucessful flip that you complete
- It is possible to flip multiple homes per year, especially if you have experience under your belt
- You can use other people's money (usually hard money loans) to fund your flipping projects
- It is one of the fastest real estate investing strategies
Disadvantages of House Flipping
The disadvantage of house flipping is the risk. There is always the likelihood that you’ll discover problems with the home while you are in the middle of the project, which will require more investment that will eat into your profits. This is especially true if you’re buying foreclosed properties, which is a common way for flippers to find deals. Plus, there are always carrying costs associated with the property – such as a mortgage, taxes, and utilities – and an unexpected delay can cause you to go into the red.
As a general rule, you should always expect the unexpected in real estate investing and either put away some cash for emergencies or add an extra 5 to 10% to your renovation costs for unforeseen circumstances. This will help you reduce the risk and avoid going over your set budget.
- House flipping is risky. It is entirely possible for you to lose money during a project
- The renovations coul be more expensive than expected. This will eat into your net profit.
- You might struggle to sell the house after the renovations are complete
- If it takes a long time to sell the house, the carrying costs could skyrocket and reduce the ROI
Who Should Consider House Flipping?
House flipping is a perfect strategy for those who have done their homework and are looking to make a serious profit. It’s also best suited for those who have some capital to invest or a good credit score to secure financing. Unlike wholesaling, as a flipper, you are taking on the risks associated with owning the property while you’re renovating it. This means you’ll need funding to purchase the property while you work on it.
Flipping is a great strategy for those looking to earn passive income while working another job or for those who are looking to start a business that doesn’t require years of schooling or specialized expertise. It does require diligence and hard work, but with proper training and the right attitude, anyone can become a house flipper.
Which Option is Best for You?
If you’re debating wholesaling vs flipping, you’ll have to take stock of your financial situation, level of experience, and goals as an investor. If you’re more interested in analyzing deals and want a quick, low-risk way to make some money securing deals for other investors, wholesaling is the way to go. But, if you’re not interested in knocking on doors or cold calling property owners and you’d rather make higher returns by doing the work yourself, you should consider flipping.
Both strategies can be extremely lucrative. But there’s no such thing as free money and you’ll have to work hard and set realistic goals if you want to succeed as a real estate investor, no matter which technique you use.