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Q: I'm just getting started in real estate. If I have
about 10 hours a week to spend on my real estate business, but less than
$1,000 in spare cash, how much money can I reasonably expect to make in my
first year?
A: Many new investors ask me some version of this question. Unfortunately,
knowing how much time and money you're starting with does not tell me much
of anything about how successful you're likely to be. In my experience, it’s
factors other than cash and time that determine your ultimate success in
real estate investing. Ask yourself these questions: How educated are you?
Do you understand the mechanics of low-cash strategies like flipping and
creative financing? Are you good at negotiating? Are you willing to spend
the time and money to learn these things? How patient are you? Do you have
the "sticktuitiveness" to continue to make offers, even when you're only
getting rejection after rejection? Are you self-disciplined enough to really
use your 10 available hours wisely each week? Do you have a support network
in place, including a real estate agent, title company, attorney, home
inspector, appraiser, and lawyer? Do you have the support of your family or
significant other? Do you know several ways that you can use to find good
deals? Do you have the financial self-discipline to plow some or all of your
profits back into marketing and buying properties? These are the things that
will really determine your level of success.
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Once you’ve decided to make laying this groundwork a priority, the next
thing that you need to understand is that there are different kinds of
profit in real estate investing. There’s cash, which you get one time when
you sell or refinance a property. There’s cash flow, which is an ongoing
income that results from bringing in more in rents or other regular payments
than you’re spending in expenses. And there’s equity, which is the
difference between what you owe on a property and what it’s worth. Equity
makes you wealthy, but is awfully hard to spend.
The exit strategy that you choose will determine which of these types of
profit you’ll make. For instance, wholesaling (quick-turning) properties
provides cash, but no cash flow and no equity. Buying properties to hold for
rental can provide cash flow and equity, but rarely produces any up-front
cash. How much of each kind of profit you’ll make will depend on the type of
property you’re dealing with, the price range, and how successful you are at
getting properties at below-market prices or with favorable financing.
In your cash position, I suspect that your best exit strategies will be
wholesaling junker properties and purchasing properties to hold with
low-money down financing. Wholesaling will generally produce a profit of
$4,000-$7,000 per deal, and an effective wholesaler with a good marketing
system can find and flip one property for every 20-30 hours of concentrated
work. It follows that in a year of 10 hour weeks, you could gross as much as
$68,000 before expenses. At first, of course, you’ll be “learning the
ropes”, and your profits will reflect this. But with practice and education,
a six-figure income in wholesaling is not unheard-of.
Because wholesaling does not produce long-term wealth by itself, I’d
recommend that you also work on purchasing some properties to hold for
long-term income and appreciation. Because you have limited cash, this will
probably mean finding properties where the owner is willing to carry some or
all of the financing. By purchasing "bread and butter" properties - that is,
properties in decent areas that are affordable to tenants - with low
money-down financing, you will add both net worth and cash flow to your
financial statement. Assuming that you carefully arrange your deals so that
there is a net profit every month, these properties will become the true
source of your wealth. For instance, imagine that you find a duplex with a
motivated seller who is willing to carry back a mortgage for the full
purchase price. The property is worth $50,000; you negotiate a price of
$40,000. The day you close, you are worth $10,000 more than you were the day
before. Purchase 5 deals per year under these terms, and your net worth will
grow by $50,000 each year.
