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How do Real Estate Wholesalers Make Money?

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on Friday, 23 June 2017
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Investing in real estate has long been a good strategy for long-term financial gain. Many articles have been written on the strategies used, but when it comes to wholesaling, it may be difficult to find a clear understanding of how you make money. It's important to understand the strategy of wholesaling, if you want to build an income or use it for investing.

What is Real Estate Wholesaling?

There are three basic strategies used in wholesaling, which include:

Assignments - This is by far the most popular because you may not need any money to get started. Basically, you find a motivated seller, write a purchase agreement for a specific price, find an investor and sell the contract to them for a fee.

Double-Closing - This strategy means you will actually purchase the property from the seller and immediately sell it to an investor. Usually, you will close with the investor within hours after closing with the buyer and timing is the key here.

Buying and Selling - The final strategy includes actually buying the property and turning around and selling it.

All three strategies are often used by wholesalers and you can make money with any of them.

How does a Wholesaler Make Money?

The cash you will put in your pocket as a wholesaler comes from figuring out the After Repair Value and doing a bit of math. You need to know how much it will cost to fix up the home and how much it will sell for once rehabbed. Then, you want to sell the property to an investor for more than you agreed to pay the seller, but at a low enough amount that the investor can rehab the home and sell it for a profit.

For example, if you buy a property for $25K and it will sell for $100K once rehabbed, but the rehab will cost about $40K, you need to sell the property for a low enough amount to give the investor enough room for profit, yet you need to make money, too. Some wholesalers take a flat $5K or $10K fee just to sell investors the contract, while others try to get the most they can without cutting into the profits for the investors. In the above scenario, you may be able to sell the home for around $30K or $35K and still leave some room for the investor to make a profit.

It helps to know the type of return your buyers will be looking for, which will depend on the type of buyer they are. Some will be rehab buyers, which will be looking to profit when selling the home and you can assume they will be trying to max out around 70% of the retail value after making repairs.

Others will be buy-and-hold investors, which won't be looking to make the same type of profit. These investors are looking to rent out the property and you will need to look at the average rent in the area and figure out the price to sell at in order to allow an investor to make at least 1% of the purchase price in rent each month.

Making money as a real estate wholesaler is very possible and some make a very nice living. Choose your strategy, know your buyers and make sure you do the math before you write up that purchase agreement.

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