Check out my brief explanation of why incorporating an inspection contingency is arguably the most important thing for a real estate investor: you`ve seen repair and turnaround shows and read all the popular books. When you compare reversal contracts with other strategies, you are convinced that wholesale is the real deal. You have chosen to do so. While contract reversal can work in any market, it`s important to understand your local arena and the types of real estate investors who want to turn around. The reversal of real estate contracts has become synonymous with perhaps the simplest investment strategies in the entire housing industry: wholesale trade. However, make no mistake: the nickname ”simple” is loosely applied. Similar to any form of real estate investment, even simple real estate contracts carry inherent risk. Therefore, to increase your chances of success, you need to exercise caution and follow the steps outlined below: There are three main benefits to returning contracts: Does not require cash ”You can bet as little as $10 on a contract No risk” If you do not return the deal, you will not lose anything quick money ” Money in your pocket now There is no doubt, that these advantages are the reason why so many beginners are attracted to the contract reversal. The majority of existing wholesale books and real estate rates relate to the reversal or awarding of contracts. This is undoubtedly the easiest way to start without money and experience. However, there are also some distinct drawbacks to inverting contracts.
The main disadvantages of flipping contracts are: you depend on your buyers to close. You won`t make money if you can`t return the contract. Everything you earn in assignment fees is taxable, so don`t spend everything, or you don`t have enough to pay the IRS when your tax bill comes due. They only make a small part of the profit. Here`s an example of a reversal from buying and holding: Imagine a home worth $100,000 that a wholesaler signed for $60,000. This wholesaler manages to sell the contract to an investor for $65,000 and charges an assignment fee of $5,000. Wholesalers often sell their stores to rehabilitaters (people who buy and repair houses). Remedialists typically try to buy their home at 65% to 70% of the post-repair value (market value at fixation). A wholesaler who signs a purchase agreement to buy a home for $60,000 should be able to easily award that contract to a rehabilitator like me for a $5,000 fee. This $5,000 fee is taxable, so after tax, 25% is assumed that the remaining tax-free money is $3,750. This is the maximum profit that the wholesaler can make by returning this contract.
Compare that to the investor who buys the contract for $65,000 for a $100,000 property. This investor has just added $35,000 to his net worth. If this property is held for the long term, equity should increase over time and as long as the property is not sold, no capital gains tax should be due. Even if the property is sold, when the investor makes a 1031 trade, he should be able to shift his profits into his next real estate transaction without paying capital gains tax. The profit potential is far greater for the buy-and-hold investor than for pinball. Keep in mind that with an average annual appreciation rate of 5.8% (the historical rate of real estate appreciation in the United States), which this home could be worth just five years later (answer: $132,564.84). If you owed $65,000 for this home, you would have more than $67,000 in equity after five years. And yet, you wouldn`t have paid capital gains tax.
As long as you don`t sell, you never have to pay capital gains tax. In fact, you could have claimed a tax deduction (interest) as well as another tax deduction (depreciation costs) that would have reduced your income tax bill. Take a look at the chart below to see what a $100,000 home would be worth over 30 years, assuming it appreciates at that historical average rate of 5.8%. Wholesale seems like a strange strategy at first. After all, it`s basically about finding a property that you want to sell right away. It`s important to know that the rules vary by jurisdiction, so check with a local real estate agent and real estate lawyer to see how wholesale business works in your area. Some real estate contracts explicitly stipulate that they are not transferable. In these cases, wholesale is not possible.
In addition, some jurisdictions disapprove of people who market real estate that they do not own if they do not have a real estate license. To obtain a real estate license, you must complete the formal real estate education and training required by your state. This will give you a thorough knowledge and understanding of the financial and legal aspect of real estate transactions. There is no doubt that you want to use real estate wholesale as a gateway to real investment. Returning real estate contracts is a legitimate way to make money, but it`s not for everyone. To make wholesale money, you need to take out a large number of transactions, which means that you have first spent a lot of time evaluating potential real estate transactions. Some wholesalers estimate that only 1% of wholesale listings are accepted by sellers. .