Many real estate investors use the real estate arbitrage strategy to make a quick profit. What is arbitrage in real estate and how can one take advantage of this strategy? This article will explain it all.
Today, we will provide you with the definition of real estate arbitrage and explain the different types currently deployed across the US real estate market. We will also take a look at the major benefits of using this real estate investment strategy.
What Is Real Estate Arbitrage?
In general, real estate arbitrage occurs when a real estate investor purchases an investment property and sells it simultaneously at a higher price. In this case, the profit the real estate investor will realize is the difference between the purchase and selling price. In other cases, a real estate investor may not have to buy an investment property, but he/she can still take advantage of the basic concept of real estate arbitrage (more on this below).
Wholesaling real estate, flipping houses, and master leasing are three common types of real estate arbitrage. Depending on your goals and location, you can decide which type of arbitrage will bring you a good return on investment. Below is a glimpse of each of the aforementioned real estate arbitrage strategies.
The Different Types of Real Estate Arbitrage
Watch our video below to learn about 3 types of real estate arbitrage:
Wholesaling Real Estate
Wholesaling real estate is one popular real estate arbitrage investment strategy. This method occurs when a property owner contracts a wholesaler to sell a property, usually a distressed property. The wholesaler finds a buyer and sells the property at a higher price, making a slight margin for him/herself.
As opposed to traditional buying, a wholesaler does not exchange any money with the seller until a buyer has been assigned. Eventually, you can save up enough money from wholesaling real estate and further expand your real estate investing portfolio by purchasing rental properties.
House flipping occurs when a buyer buys an investment property and sells it within a short period of time from the purchase, making a margin for profit. Flipping houses typically involves making any necessary repairs to the property prior to selling. Real estate investors then list and sell the investment property for a higher price than what they had initially paid for thanks to the repairs. If you have the time on your hands and want to get more immersed in real estate investing, then house flipping might be a good option for you. Be very meticulous about the details, however! You do not want to end up paying more in repairs, and therefore, lowering your potential for profit.
In some cases, real estate investors can even flip houses without renovating them. How can they make a profit in this way? Well, some real estate investors purchase investment properties in order to sell them in a few months’ time upon foreseeing rapidly rising home values in the housing market. This is sometimes referred to as real estate speculation. To make a success story of this strategy, real estate investors must study the real estate market very carefully.
Finally, the third most common type of real estate arbitrage is master leasing. There are different structures of master leasing. In one form, the existing lessee can sublease the property to occupants with the permission of the landlord. You can even be renting out part of the property to occupants on Airbnb. Other structures involve approaching property owners who are having trouble selling their property. If the owner doesn’t wish to become a landlord but is also looking at a loss on the sale of the property for whatever reason, you can try proposing a master lease arrangement. You would be responsible for any upgrades, finding a tenant, and managing the rental property. In this case, you will pay a sum to the owner every month, but leave room for positive cash flow for you from the rental income.
Master leasing, in fact, is a great investment strategy to earn monthly positive cash flow. Particularly, master leasing is viable for real estate investors who cannot afford two mortgages, one being their current residential property and the second being a potential investment property mortgage.
The Benefits of Real Estate Arbitrage
Little Money Invested
Real estate arbitrage has become increasingly popular with real estate investors. This is because, when you are wholesaling or master leasing specifically, you are investing little money that can translate into a good profit. With wholesaling, you are just finding a buyer and making a margin on the initial contract between you and the seller. As for master leasing, you are technically subleasing an existing property or part of it.
Housing flipping is contrary. With house flipping, a real estate investor has much more work to do and will also have to invest a lot more money. You would have to make necessary repairs, find potential buyers and make a deal to secure a good margin of profit. As opposed to wholesaling, when house flipping, a real estate investor has to purchase the investment property. The investor will not only have to pay for the property but also pay for renovations and repairs if necessary. Still, because you are typically buying distressed properties, house flipping can have lower costs than just buying a new investment property.
Fewer Risks Associated
Real estate arbitrage, particularly wholesaling and master leasing, reduces your risks and liabilities. This is simply because you are not investing your money in a real estate property.
Master leasing, particularly, is less risky because you can receive a paycheck every month to meet your cash flow needs. You will not have to worry about any volatility in real estate market values or where your next buyer/seller will come from.
Flipping houses, on the other hand, does carry a lot of risks. However, you can minimize these risks by implementing this strategy in some of the best cities to flip houses. These include the Elpaso real estate market and the Oklahoma City real estate market.
Real estate arbitrage can be a profitable investment strategy. You may be able to take on little risks while investing little money. While real estate arbitrage makes a great investment choice, conducting research will help to increase the chances for success. To learn more about real estate arbitrage and the tools that could be available to you, visit Mashvisor!