Real estate investing is an exciting way to build wealth and diversify your portfolio. Novice investors and seasoned financial pros are both capitalizing on the industry, breaking into markets of all sizes. When researching your real estate investing options, you’ll likely come across wholesale real estate and house flipping as potential avenues.
But how do you know which investment path is right for you?
While wholesale real estate and house flipping may seem similar at first glance, there are key differences that will define your investing experience. This guide will help you decipher your investing options so you can make the best decision for your financial future.
Choosing a real estate investment path means committing to a process that fits your goals. Wholesale real estate and house flipping each ideally result in profit, but the general timelines look different. Know which process you’re prepared to invest in before taking the leap.
What is wholesale real estate?
When entering wholesale real estate as an investment tactic, investors look for homesellers with distressed properties. The wholesaler then offers to enter a contract with the seller to find a buyer for them. Seller and wholesaler settle on an amount to include in the contract, but money doesn’t actually change hands until an interested buyer appears.
After securing the contract, the wholesaler markets the property and finds a buyer. In the wholesale real estate market, these buyers are often other investors or aspiring homeowners looking for fixer-uppers. The wholesaler sells the property to the buyer for a higher amount and makes a profit from the difference.
Wholesale real estate is a prime opportunity to earn money in a short amount of time. However, you have to be ready to approach home sellers, market the property, and find buyers.
What is house flipping?
The house-flipping process is often more involved than the wholesale real estate timeline. And since house flippers actually have to buy the property in question, it’s more of a financial commitment as well.
Once an investor decides to flip a house, they search the market for a property in need of repairs. The investor then calculates the cost of renovations compared to the potential earnings from selling the revamped home. Many investors will consult professionals like contractors and real estate agents when considering a purchase.
If the property is a likely fit, the investor buys the house. The investor then completes renovations on the property, which could involve hiring contractors, electricians, plumbers, and landscapers. However, some handy flippers will put in the elbow grease themselves to maximize profit. Once the remodeling process is complete, the investor sells the home for a higher price.
Since the house-flipping process is more extensive, the timeline is longer. Interested flippers need to commit to owning the home and sticking to a renovation budget. This is why flipping is often a better investment option for those with more real estate experience.
Making a commitment
Wholesale real estate and house flipping offer benefits that appeal to different types of investors. Consider these draws:
The benefits of wholesale real estate
While no real estate investment path is risk-free, wholesale real estate is relatively low risk. Wholesalers enter a contract, but they don’t have the liability of owning the property. Their main goal is to find a buyer in a timely manner. The process can move quickly, meaning faster earnings for the wholesaler.
Wholesale real estate is also open to investors of all levels. You don’t necessarily need a high credit score and a large amount of capital to enter the market. Rather, wholesale real estate is often a suitable option for new investors looking for experience. Once you cut your teeth in the industry, you can start refining your sales process to turn more profit.
The benefits of house flipping
House flipping may be the higher-risk option, but it often means higher reward. This method can be a logical next step for investors looking to increase their profits. If you’re savvy with money and know the market well, you can often make a larger profit with house flipping. This is especially true if you do most of the renovations yourself.
Investors who opt to flip a house also have the luxury of control. You’re in charge of the timeline and can make the project work around your life. If you’re keen on being your own boss and want to sharpen your business skills, house flipping might be the right path for you.
Weighing your options
As with any investment option, real estate investing comes with risk. Both wholesale real estate and house flipping present potential pitfalls. Consider these drawbacks:
The risks of wholesale real estate
The main challenge of wholesale real estate is the pressure to move the sale along. When choosing this investment option, you’ll need to connect with a buyer in order to make a profit. This can be tricky if the market is slow and buyers are scarce. If you struggle to find a buyer, you might end up selling for too low a price, which can lower — or even eliminate — your profit.
Aspiring wholesalers should also know that this investment approach doesn’t guarantee regular income, especially when starting out. Your income stream will often hinge on the state of the market as much as your own diligence.
The risks of house flipping
While HGTV often glamorizes the fixer-upper, the reality is that house flipping can be risky business in any market. Inexperienced house flippers run the risk of buying a property that needs more work than their budget allows.
It’s also common for investors to overestimate their remodeling skills and fail to plan for unexpected repairs. And, of course, flippers might be forced to sell a home for a lower price than anticipated. This could mean losing money in a big way.
Making your decision
New real estate investors often lump wholesale real estate and house flipping into the same category. These investment paths are not the same, though, and they come with their respective perks and challenges.
Wholesale real estate is a readily available investment option that offers less risk and quick (albeit potentially smaller) rewards. However, investment novices need to be ready to put in the legwork. House flipping is a highly involved investment process that can lead to major profits, but even handy homeowners should know the risks before buying.
Ultimately, your personal investment goals and knowledge of the real estate industry will drive your decision. Both wholesale real estate and flipping can be profitable investment options, as long as you’re ready to make the commitment.
Larry Alton is the CEO of Alton Enterprises in Olympia, Washington. Follow him on Twitter, or connect with him on LinkedIn.