The Three Categories of Making Money In Real Estate
There are dozens of different money generating strategies in real estate. To determine which is best for you depends on your interests, time commitment, financial situation and of course your personal goals.
However, in my opinion, all real estate strategies fall into 1 of 3 categories. Evaluating these three different categories will help you as you climb the ladder of real estate success and who knows, you may even realize you’ve been climbing the wrong later altogether!
1. Lump Sum Deals
This is perhaps the most highly sought after category of real estate investing. Lump sum deals are defined as short-term deals where you buy and sell (or control) deals with the intent of getting in and out as quickly as possible while making “lump sums” of cash in the process. This includes wholesaling, fix and flips, new construction and any other strategy where the goal is to realize a profit in less then a year.
Most new investors and would-be investors focus on this category because they are looking to earn additional income as quickly as possible for any of the following reasons:
- Save for retirement
- Supplement their retirement
- Replace their current job or income
- Pay off bills
- Get out of debt
- Have more fun money (vacation, cars, boats, etc)
- Pay for their kid’s college
- And a hundred other reasons
I fist started in real estate because my construction job just wasn’t enough to support my growing family. For many years my real estate goals were to make as much money as I could as fast as I could (doing short term deals earning lump sum cash).
The problem with this category is most people treat it no differently then a w-2 paycheck at that job they wanted to get away from so badly. They spend the money they make as fast (or faster) as they earn it! Making more money doesn’t solve the problem either. The more money they make, the more money they spend and consequently, never get ahead in life.
Those that actually succeed at earning a high income doing lump sum deals, often run into a major problem called “capital gains” tax. Nothing like making a lot of money doing short term deals and then giving half of it to Uncle Sam (don’t get me started on that topic), which leads me to the second category…
2. Long Term Deals
I define this category as owning long-term assets typically 2 years or longer that appreciate over time, provide depreciation to offset taxes and hopefully provide a reasonable annual rate of return (cash flow). These types of deals aren’t nearly as appealing to most investors because they don’t solve most people’s immediate fixation on having everything right now (lump sum deals).
While my primary focus is flipping (lump sum) deals, I also am always trying to acquire more long-term assets. Recently, one of my partners and I acquired an overnight rental property. The average monthly gross revenue is $5,000 and the average total expenses is approximately $2000. Not only is it earning $3000/month cash flow (which by the way is taxed less then capital gains), but over time it will appreciate in value and I get to write off depreciation each year.
The mistake most people make is buying into the myth that these types of deals are “passive,” meaning they don’t require your time or attention. That couldn’t be further from the truth. While certainly some of these deals can be very hands off, especially with the right management in place, all the stars have to align for this to be the case. While these deals should require much less effort then lump sum deals, especially after the initial work is done, make no mistake, you better be intimately involved in the day to day operations to ensure things stay on track.
All in all, long-term deals require a long-term perspective and patience but is a solid path to wealth in real estate.
3. Private Money Investor Deals:
The 3rd category for making money in real estate is by being a private money investor. I define a money investor as someone who uses their investment capital to lend money on deals so their money is earning money without them having to actively manage deals.
A money investor is at an entirely different level then the other 2 categories. This is what I would consider truly passive income. Real wealth is built here because your money earns money 24/7 around the clock, compounding and growing.
While I currently lend my investment money on deals and work with numerous private money investors who lend me money for my deals, at some point in the future, if and when I’m ready to stop actively doing deals, I plan on growing my wealth exclusively by lending my money on deals. Being a private money lender on deals is very attractive to investors because if done correctly, your investment capital is secured (lien position) against the property at a strong loan-to-value (typically 70%). I have done several trainings on how to be a private money investor. Leave a comment below if you have investment capital and are interested in learning more.
Private money investors typically earn between 8-12% annually, depending on the amount of capital invested, type of deal, etc. This is exciting if you think about the rule of 72.
Rule of 72:
The rule of 72 tells you how long it will take to double your money. Here’s how it works… Just divide 72 by the interest rate. So for example, if the interest rate is 10%, it will take a little over 7 years to double your money (72 ÷ 10 = 7.2 years). So if you lend $100,000 as a private money investor on the best deals in the market (my deals) at 10% annual interest, it will take just over 7 years to double you money to $200,000. I hope you see the power of compound interest and becoming a private money investor.
Leave a comment below and let me know which category you are currently focusing on and what your goals are this year...
Until next time, happy investing,