Are you a motivated and goal-driven person who’s always had the dream of working in real estate and being your own boss? Real estate wholesaling, flipping properties, landlording; there are so many avenues to entrepreneurship—and most of them don’t require any fancy degrees to turn a substantial profit.
If you’ve been looking to break into the world of real estate investing, specifically wholesaling properties, you’re in the right place. Profit margins, workloads, tax liabilities, and more, in this comprehensive real estate wholesaling guide, I’m going to discuss it all.
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What Is Real Estate Wholesaling?
Real estate wholesaling is a method of investing where a wholesaler acquires a contract on a home or property with the property’s seller, who then turns around and sells the contract to a real estate investor for a 5% to 10% finder’s fee. It’s a popular investment strategy because it eliminates all the costs associated with finding, fixing, and flipping properties.
Wholesalers generally begin looking for an undervalued or distressed property that’s listed well below market value. With that being said, wholesalers don’t necessarily wait for a property to be on the market before they attempt to obtain the contract. Often, they will rely on other techniques like door knocking to make a sale, literally walking up to someone’s property, knocking on their door, and asking them if they have any interest in selling.
For a more in-depth look at a career in wholesaling, check out my recent piece on how to become a real estate wholesaler.
Wholesaling Real Estate In-Action
Here’s a scenario: Michelle lives in an attractive community, but her home has a damaged roof and an outdated interior. Both issues cause her home’s value to fall well below market value. Unfortunately, Michelle doesn’t have the money or resources to fix her home but chooses to keep it anyway because she doesn’t think selling is even an option—especially in its current condition.
One day, a real estate wholesaler knocks on Michelle’s door and asks her if she’s interested in selling and makes her a reasonable offer for $120,000. Michelle agrees and the wholesaler puts a contract on the house that gives them the legal right to buy it. However, rather than buying the property, the wholesaler then sells the contract to a real estate investor or property flipper for a fee of 10%, netting them a profit of $12,000 without putting any money into the property itself.
Now that the wholesaler is out of the equation, fast forward to the investor who spends $40,000 on repairs and renovations. Because the home is in a nice community, they’re able to sell it for $290,000, giving them a profit of $130,000. While the investor’s profit is far bigger than the wholesaler’s, the latter spends much less time and energy and still makes a significant chunk of change.
Real Estate Wholesaling Basics
There are a few facets of real estate wholesaling, it’s not just about finding viable contracts and negotiating with property sellers and investors. To be successful in this industry, you need to have a comfortable understanding of how the process works. Profit margins, tax liabilities, and workloads are all important components.
So, how much money can you make as a real estate wholesaler? Profit margins depend on a few things.
The typical assignment fee is 5% to 10%, so ideally wholesalers make $2,000 to $40,000 per transaction—a number that varies based on the property value, its condition, the sale price, and your local real estate market.
Profit Margin Example
Let’s say you’re a real estate wholesaler who finds a median-priced property of $300K to $400K that’s listed 15% to 20% under market value. Let’s also say that you have an investor who would be interested in fixing and living in it for 90% of the market value.
With a finder’s fee of 5% to 10% that transaction would net you a profit of approximately $15,000 to $40,000.
This is where our real estate networking tips come in handy. Keep in mind that if you don’t have a potential buyer, depending on the temperature of the housing market, it can take days, weeks, or even months to find one. The second option is hiring a realtor to assist, which for a small fee could certainly help speed things along.
There is a decent amount of work associated with real estate wholesaling, so practice due diligence and familiarize yourself with the details. From start to finish there is a fairly straight-forward process, which operates in six steps:
- Conduct local market research
- Find a distressed property that’s under market value
- Make an offer to the seller
- Acquire the contract
- Locate an investor or cash buyer
- Pass along the contract for an assignment fee
The most strenuous steps are generally finding a property worth wholesaling, followed by locating a buyer for it. The good news is that if you stick with it, you’re sure to come up with a network of investors and an overall system that works best for you.
In the eyes of the Internal Revenue Service (IRS), wholesaling is a business, and thus you should expect to be taxed on your income. This is typically done through the assignment fee you get when you sell the rights to purchase to an investor.
The questions you should be asking yourself as a real estate wholesaler are:
- Do I have to pay taxes?
- When do I pay them?
- How much do I pay in taxes?
- Are there any federal real estate wholesale taxes?
- Are there state and local real estate wholesale taxes?
Wholesalers, realtors, and property flippers are required to pay a federal 15.3% self-employment tax on any income—passive or otherwise. If you’re a full-time property wholesaler, you’re liable for higher taxes on every dollar your business is making. So, before you start wholesaling real estate, you must have a sound understanding of the full spectrum of tax implications involved.
Not only are you required to pay federal taxes on your wholesale properties, but you may also have to pay local, state, or other wholesale real estate taxes.
If you don’t know where to begin, it’s always best to speak with a business tax professional. The last thing you need is a lawsuit with the potential of putting your real estate business out of commission for good.
Get Help From A Real Estate Wholesaling Expert
There are many pros to wholesaling real estate and if you’ve been wanting to dip your toe into the pond of real estate investing, there’s no better way to do it!
Start with your best foot forward and register for my online training course: Learn The Hardcore Facts About Wholesaling Properties. You’ll be on your way to success in no time at all.
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