REI Essentials: The 4 Different Profit Centers of Residential Real Estate
Okay, gang, we’re back to our ongoing blog series about the real estate fundamentals every investor should know. Previously, we covered the difference between titles and deeds, and then we talked about the 4 ways to take joint title.
I want to make sure you have a solid understanding of these concepts we’ve covered because I’m about to build on them by introducing you to two very important principles in residential real estate investing – The Principle of Control Vs Ownership and The Principle of Arbitrage. Then, we are going break down the 4 different strategies for arbitrage. So, if you need to revisit the previous blogs, I encourage you to please do so.
Otherwise, let’s get crackin’…
Principle #1: Control Vs. Ownership
Okay, so let’s talk about the principle of control versus ownership. The reason I first taught you about the bundle of rights (title) is because I wanted you to understand that you can separate the different pieces of ownership… and the way that we can do that is through a concept of equitable versus legal title.
Equitable Title is defined as the “right” to obtain ownership of real property. In other words, you have a contract to purchase a piece of property but you haven’t actually closed on it yet. As soon as you complete the terms of the contract and you close on the transaction, you’re going to gain legal title.
Legal Title means your name is now on the deed as the legit owner of the property.
I want to say it one final time just to make sure you understand…
When a contract for the sale of real property is executed, equitable title passes on to the buyer. When the conditions of the sale contract have been met, legal title passes on to the buyer. Now, some investing strategies focus on controlling real estate while others focus on actual ownership.
Principle #2: The Arbitrage Principle
Another important concept I want to share with you is this concept of arbitraging the market or The Arbitrage Principle.
Arbitrage is defined as the practice of taking advantage of the price between what a motivated seller is willing to sell for and what a motivated buyer is willing to buy for.
In its simplest form, it’s the concept of controlling real property in order to make risk-free profit. As a real estate investor, the idea of controlling real estate without actually owning it is a very important.
Now, let’s review the 4 major profit centers of residential real estate and let’s see if you can pick out which of those strategies focus on control, which focus on ownership, and which strategies best take advantage of the arbitraging principle.
The 4 Main Investing Strategies
Aka: “My 4-Square Strategy Matrix,” is:
First off, when I’m talking to newer investors, I strongly encourage them to set both short-term and long-term goals for their business right from the start. And these goals should of course take into account the type of income you’re aiming for (fast cash vs. cash flow), as well as your current available resources.
So you’ll be asking yourself:
- Am I all about chunks of cash? (Transactional Income)
- Or is cash flow more my goal? (Residual Income)
- Do I have access to cash/credit to leverage? (Can I get them?)
- Or am I basically cash/credit broke? (For now.)
Now if you hold your honest answers to these questions, you can tell pretty fast which strategy will be the best fit for you to focus on primarily, right? Be aware that I always encourage keeping an open mind, because any lead could take on a life of its own.
I’m a big proponent of outside-the-box thinking and recommend it highly.
In fact, I prefer presenting more than one offer to a motivated seller whenever possible – maybe one cash, one terms, and one is a combo of the two. Because the fact is you never know what kind of opportunity you can open up for yourself with a little creativity. (More on that in a minute)
But generaly, your short-term goals and resources will chiefly determine which of the 4 categories any given lead ends up in – or at least which category you’ll strongly favor.
Strategy #1: Wholesaling
Now, wholesaling is a great investing strategy because it requires little to no cash to accomplish and results in one of the fastest ways to get paid as a real estate investor because wholesaling focuses on – you guessed it – controlling real estate instead of owning real estate.
And, there’s very little risk to you (if any) being a real estate wholesaler.
Strategy #2: Rehabbing (Buy, Fix & Flip)
The buy, fix & flip strategy, otherwise known as rehabbing houses, is also a great investing strategy that does require a little bit of money to accomplish but can be done using other people’s money or OPM.
What’s great about rehabbing is that you can maximize your profits by buying way below market value and hiring somebody else to make the repairs for you, and then then have a local real estate agent actually sell the property for you for top dollar on the retail market.
Strategy #3: Creative Real Estate Investing
Creative real estate investing is actually a series of investing strategies including sandwich lease options, wraparound mortgages and subject-to transactions.
Typically, creative real estate investing requires little to none of your own money or credit and results in you collecting cash flow over time until you sell the assets some time down the road.
Strategy #4: Renting
Renting, (also referred to as buy, fix & hold), is similar in that it also produces cash flow over time until you cash out and sell the asset.
This investing strategy is designed to be a long-term wealth building strategy that’s going to require financing, even though it doesn’t have to be your own money (the tenants pay it).
Okay, this is where we are going to break for today because it’s a ton of information you need to let sink into your noggin’. I highly recommend you review it again, especially before the next blog post that’s going to be about which strategies work best in which markets.
Keep up gang, so you will be able to go out and confidently conquer the world of investing!
Until next time…
Tags: Arbitrage Principle, Buy, Cash Flow, Control, Equitable Title, Fix & Hold, Fix & Stay, Flip, Legal Title, Ownership, rehab, Rental, Residential Real Estate, Residual Income, Risk-Free Profit, Strategy, Transactional Income, Wholesale
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