I just uploaded a new podcast episode, where I talk about understanding what a wholesale deal is. I give you an easy exercise to help illustrate how to understand this better. You can listen to the podcast episode now by scrolling down to the bottom of this page and clicking on the white arrow in the black bar. Please allow a few seconds for the podcast to load.

DO YOU KNOW WHAT A WHOLESALE DEAL IS? 

Would you be able to know the difference between a house for sale and a wholesale deal?

They are not the same.

Regardless of whether you want to wholesale real estate, fix and flip houses or buy rental properties you need to be able to understand what a wholesale deal is, how to find a wholesale deal at a discount, and why someone would sell their house at a discount of 50 or 60 cents on the dollar.  If you have limiting beliefs or excuses of why you cannot buy or own a rental property then I will share with you a mind exercise that I sometimes use with my students that will help you learn this concept and how to overcome limited belief mindsets.

Here is the exercise:

Imagine your own mother inherited a million dollars and she wants you to buy single family rental properties for her. So you don’t have to worry about having the money to buy rentals because she has the money. And you don’t need to worry about having good credit since you are paying cash (with her money).

So now you need to go out and look for a rental property to buy.

But your mom gave you specific instructions. She said that It’s very important that you maximize the income that she gets because she needs that income to live and pay her bills. But she also told you that she does not want to lose any money.

The purpose of this exercise is to eliminate the excuse in your mind that says “I can’t buy rentals because I don’t have any money” .

Eliminate the excuse in your mind that says “I would like to buy rentals but I don’t have good credit.

Regardless of what most people think, money and the lack thereof, is not an obstacle to investing in real estate. You do not have to put 20% down in order to buy a property. Not having good credit is not an obstacle either.

The obstacle is being able to understand how to find a wholesale deal at a discount, and how to buy a $100,000 house for $50,000.

If mom has $1 million to spend, why can’t you just pick up the phone and call a real estate agent and buy some rentals for her?

Because she gave you specific instructions!

1. I don’t want to lose my money.
2. I want to get as much income as I can because I am using this money to pay my bills.

You can’t leave the money sitting in cash in your checking account since at 5% inflation, your million dollars would be worth just $950,000 in one year. She also told you that you cannot buy stocks, bonds, ETF’s or  mutual funds. That is too risky. She only wants rental properties and wants to live off the income from those rental properties.

You have to buy single family rental properties.

So you could buy one property for $1 million, 2 properties for $500,000 or 5 properties for $200,000.

Which one would you do? Which is safer?

Why can’t you just pick up the phone, call a real estate agent and buy some rental properties? After all you have $1 million dollars of mom’s cash! The question is can a real estate agent help you? The answer is no.

Remember mom said:

1. I don’t want to lose my money

2. I want to get as much income as possible

3. I cannot invest in anything other than rentals

Why can you not call a real estate agent? Because if you call the agent, they will simply go on the MLS and look for rental properties for sale. This is what they are programmed to do. You want to buy, they look on the MLS for who is selling. However this is NOT a good way to find a house at a discount. In fact it’s almost impossible to buy a house at a discount using this strategy. Why? Because they will be showing you retail properties for sale, for example a $200,000 house that is a rental where the landlord is selling and their is already a tenant in the house.

Why would this not work? Because you are paying full price. You are paying retail. If you purchased this property at a retail price (let’s say $200,000), and then decided for whatever reason that you wanted to sell it you would immediately lose 10 percent (closing costs plus commission). In reality you would probably lose more, because when you list it for sale there is no guarantee you will find a buyer who will pay what you paid. That is one of the biggest problems for sellers of real estate. They buy a house, then decide 6 months or a year later to sell it and are shocked that no one will offer them what they paid for the house. After adding commissions, closing costs, pre-payment penalties the seller often takes a loss of 20% or more. This is very prevalent today. Anyone that purchased a house in 2022 or 2023 has seen their property decline by at least 15% or 20% in value since then. Add the 10% commission and closing costs and these individuals could be looking at losing 25% of what they paid for the house.

So buying retail, does not work.

Let’s say that you like this particular neighborhood where this $200,000 house is located. You drive around looking at houses in the area, and you think to yourself that this is the perfect neighborhood to buy a rental property. You like the areas job growth, population growth and demographics and you think it would be a great city to buy rental properties.

UNDERSTANDING WHY SOME HOUSES SELL FOR LESS THAN OTHERS

In that neighborhood, and on that street let’s assume that all the houses are identical and were all built in the same year by the same builder. They are all 3 bedroom, 2 bathroom houses. They are all 1,200 square feet. And they were all built in 1989. Would all of these houses sell for $200,000? No, they would not. Why? because a house that is upgraded and remodeled would sell for a lot more than an outdated house.

How much would that same house sell for if it was vacant for 5 years, outdated, and had not been remodeled since 1989? Obviously for much less than the remodeled house.

What about if in addition to being vacant, the house had bad urine odors from cats, rats running around and cockroaches and was a hoarder house? What would it sell for then?

What if the roof was damaged, the house needed updated electrical and plumbing. What would it sell for then?

I just ran you through an exact real life example of a motivated seller on a house that was worth $200,000 and was purchased for $100,000. Why would that seller sell that house for 50 percent of fair market value? Because he inherited the house, had to go through probate, had not seen the house, and lived on the other side of the country in Seattle. He was motivated to sell as is for cash. He received one of my postcards in the mail (because I mail to inherited properties). When he asked me how much he can get for the house I said let me go take a look at it. And when I called him back I told him it was in really bad shape, texted him some pictures showing him the condition and told him I was not really that interested in buying the house and could offer him $100,000. He accepted my $100,000 cash offer.

He was willing to sell the house that he had inherited for $100,000 when identical houses on the same street had sold for $200,000. Why? Because he was motivated to sell fast for cash. Don’t overthink this part. He was a motivated seller.

Now If I purchased that house for $100,000 and spent $30,000 putting in new flooring, new paint, new appliances, new kitchen and new bathroom, and then I listed it for $195,000, I would get multiple offers on this property and sell it for $210,000. After paying the commissions and all repair costs and interest, fees, and points, I would make $60,000 profit on this house (from mailing a postcard).

Let’s assume that instead of me mailing a postcard, you mailed a postcard. You found the house. You spoke to the seller, and you got the seller to sell it to you for $100,000

If you called a lender like me and said “I am buying this house for $100,000 and I can put down $10,000 can you lend me the $90,000. The answer would be yes. Why, because earning 12% in interest is better for me than earning zero in my checking account. 12% for me is better than 5% in treasury bills. It’s a good return and I would be very happy to lend $90,000 on a $200,000 house. So with this example we have just established that lack of capital is not what is stopping you. Lack of credit is not what is stopping you. What is stopping you is not knowing how to find a wholesale deal like this probate property at a discount. 

By buying at a discount, you are buying with a margin of safety. If instead of flipping the house you rented it to a tenant, then after the house is rented, you would call a mortgage broker and refinance your loan. You would pay off the loan to me and you would get a conventional mortgage. This is called the Buy, Repair, Rent & Refinance Method (BRRR for short). If the house appraises for $200,000 and the bank is willing to lend you 75% of that amount ($150,000) you would net $140,000 after refinance fees. After you paid me back the $90,000, and paid yourself back the $30,000 for the repairs on the property you would still have $20,000 left over. Assume that when you purchased the property your down payment, closing costs, points fees was $20,000.  You would have effectively purchased the property for no money down. You would have a cash flowing rental property that was appraised at $200,000 with a mortgage of $150,000 leaving you with equity of $50,000. You just added $50,000 to your net worth. And now every year that goes by you get to raise rents, and your mortgage balance goes down and the value of the property goes up. This is how you get wealthy.

This Buy, Repair, Rent and Refinance strategy works because there are motivated sellers everywhere. Every day, people have fires, floods, hurricanes, tornadoes, storm damage or water damage. Every day people die, lose their jobs, get sick, or get disabled. Everyday people inherit properties that need to go through probate.

If you are buying using this method at 50 or 60 cents on the dollar, then you will have a margin of safety. And if you are buying right then you will also have positive cash flow. When people told you the first rule of real estate is location, location, location they lied to you. As a landlord the only rule that matters is cash flow. If you don’t have cash flow then you don’t survive to hold real estate long term.

You could spend your entire life coming up with excuses of why you can’t buy rental properties. That’s the easy way out. Keep doing what you have been doing and stay in your comfort zone.

But if you want to create wealth and financial freedom you will need to get out of your comfort zone.  

If you buy one rental property per year at a discount, renovate it, rent it out hold it you will become a millionaire. It’s just a question of time. Many of my students have done this. I show examples of these students at my boot camps! 

I recommend that you learn how to do this as soon as possible by attending my upcoming boot camp on buying rental properties. If you attend this event, you will get to meet and talk to my current students that are buying and holding rental properties. You will get to see the wealth creation of buying and holding rental properties and I will be showing many examples and case studies at the  Buying Rentals & Building Wealth Boot Camp.

You can click on the button below to learn more about the Buying Rentals and Building Wealth Boot Camp:

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