Getting into the business of real estate starts with picking the best investment strategy. As for this post, we are going to discuss two of the most lucrative investment strategies in the business: wholesaling real estate and rental properties.
Investing in real estate comes down to one rule: Smart work over hard work. Thus, your smart work starts with choosing the optimal investment strategy in the first place. Of course, your choice should be based on your life and financial circumstances. Therefore, we are going to discuss your chances at wholesaling real estate vs. investing in rental properties so you can have the basis on which you can rely when making the decision. However, before we get into that, let us tell you exactly what each real estate investment strategy means:
Real Estate Wholesaling:
In simple terms, wholesaling real estate is putting a property under a contract at a discount and then assigning that contract to a cash buyer at a slightly higher price but still at a discount. Why the difference in price? Because that difference is what a real estate wholesaler gets out of the deal.
How do you find real estate properties at a discount?
Easy! Foreclosures, short-sales, and motivated sellers are the way. In these three cases, you are able to find a property that is selling for below market value.
Investing in Rental Properties:
As the name suggests, a rental property is an income property that is meant for renting out in exchange for a rental income. In other words, you buy real estate properties to let in tenants.
Now that we’ve gotten the definitions out of the way, let’s proceed with the comparison. Our comparison will be based on the pros and cons of each real estate investment strategy.
Related: Successful Real Estate Investors: Tips on Becoming One
The Pros of Wholesaling Real Estate vs. the Cons of Investing in Rental Properties:
#1. Wholesaling real estate is a quick money-making real estate investment strategy:
The fact that real estate wholesaling is a form of short-term investments makes it one of the best ways to making money in real estate. What’s even better, real estate wholesalers are able to make a good sum of money at once. On the contrary, investing in rental properties takes time to start generating a steady cash flow. This is due to it being a form of long-term investments. You would have to buy an investment property first and then proceed with renting it out (which might not happen right away).
#2. Wholesaling real estate is a no-money-down real estate investment strategy:
The best part of becoming a real estate wholesaler is that you do not need much money to start wholesaling properties. The reason behind that is that you are not buying a real estate property, but rather mediating to sell it to an end buyer. To be more precise, you are selling the contract to a cash buyer. This, in fact, limits your expenses to marketing your business and the investment property you are working on.
On the other hand, rental properties require financing. Even if you choose to finance it with a mortgage, you would still have to put a down payment. Therefore, in order for you to be able to do so, you will have to learn all about investment property mortgage lenders.
Related: Financing a Rental Property: How to Buy a House with No Money Down
#3. Wholesaling real estate is a low-risk real estate investment strategy:
If you do not manage to seal a wholesaling real estate deal, you’ve got so little to lose. In fact, you lose as little as a few hundred dollars which you have invested in marketing the deal. After all, you have never gained ownership over it in the first place. Furthermore, it won’t cost you a penny in property expenses if you do not close the deal.
That is not the case with rental properties. Of course, this does not mean that rental properties are of high-risk. However, it still holds a higher risk compared to wholesaling real estate. First of all, you start by buying an investment property and invest a down payment as a start. Second, you will have to rent it out as soon as possible to be able to generate money. Finally, guess what happens if you don’t find a tenant? It turns into a liability rather than an income-generating asset.
This also means that regardless of it being vacant or occupied, it would still cost you money for maintenance. Therefore, if you do not manage to rent it out, you will wind up spending from your own pocket.
The Pros of Investing in Rental Properties vs. the Cons of Wholesaling Real Estate:
#1. Investing in rental properties provides a steady stream of income:
The best part about rental income properties that makes it one of the best real estate investments is the steady cash flow stream it provides. A landlord can expect a weekly/monthly/ annual rental income flowing into his/her bank account. This, of course, is only true as long as the property is occupied. On the contrary, wholesaling real estate does not provide a steady income. More so, it only provides a cash flow at the closing of each deal. This means that if you manage to close 4 deals a year, then this is as much as you get paid during that particular year.
Related: Is the Current Housing Market Favorable for Real Estate Investments?
#2. Investing in rental properties means an appreciation in value:
Another great advantage of rental property investments is the value appreciation. After buying a real estate property, a real estate investor can expect it to appreciate on an annual basis. Sure enough, it depends on the location itself, which is why you need to perform a comparative market analysis first. There is nothing better than selling a real estate property a few years later to find out that it has doubled in fair market value.
In contrast, there is no such concept in wholesaling real estate. A real estate wholesaler has only so much time to assign the property to an end buyer, thus, making real estate wholesaling not suitable for a rise in value over time.
#3. Investing in rental properties could be a source of passive income:
We all want to know how to make money in real estate while asleep. Well, I guess the answer is most certainly rental properties. In reality, we are pretty sure that investing in rental properties makes for the best passive income investments in real estate. Simply, you buy investment properties and hand the rest to a professional property management company. In return, this company will take the responsibilities from there and you can relax while receiving their reports, thus, making it a great fit for either becoming a part-time real estate investor or a full-time real estate investor.
Unlike rental properties, wholesaling real estate cannot be a passive income investment in any way. The only option you have in this case is to become a full-time real estate wholesaler. Because, once you find a good deal, the rest is your responsibility to deal with. Therefore, unless you do not mind being actively involved, we recommend that you start a real estate business with rental property investments.
Check out Mashvisor to learn all about the real estate market.