The great secrets to wealth are held inside of the simple board game of Monopoly.
Buy 4 green houses and trade them up for 1 red hotel.
When I meet people who want to get started in real estate investing, they often don’t know where to start.
There are two major strategies most people can take advantage of:
- Buy and sell
- Buy and hold
Buy and sell is for generating cash to invest and buy and hold is to generate long term wealth and passive income.
Which strategy is right for you can be answered with one simple question.
Do you have at least $100,000 cash in the bank to invest right now?
If you do, you can start looking at buy and hold, if not, then you need to generate some cash before getting into buy and hold.
The reason why you need $100,000 cash in the bank is because owning property is a perilous experience with lots of things that can go wrong: furnaces break, roofs leak, tenants smash units etc. and if you don’t have a $100,000 reserve fund of cash, you can go broke in property pretty fast if things go wrong.
So lets say you start out with buy-fix sell investing.
The main strategy in buy-fix-sell is to flip houses, and the great thing about flipping houses is that there are literally houses everywhere.
My home market of Winnipeg has 180,000 and it is one of the smaller cities in Canada. There are countless investment opportunities available when it comes to flipping houses.
To make money in buy and sell real estate you need to follow the following forumula:
Buy at 40-60% of the ARV (After repair value) also known as what the property is worth after it is fixed up.
Fix to 70% of ARV
Sell at 100% of ARV
Cost to sell is 10% of ARV (3% for discounts and staging, 3% for transactional costs – taxes, insurance, heat, hydro, water, lawyers, closing costs etc for 6 months, 4% for realtor commissions)
Make 20% of ARV
Lets say you split your profits with a partner, the money partner takes 10% of ARV
Your net 10% of ARV
So using real numbers:
ARV = $200,000 so a starter home in Winnipeg (Average home is $320,000 in this city)
Purchase price = 50 cents on the dollar $100,000. This property would likely be in rough shape and purchased wholesale from a motivated seller through, death, divorce or downsizing (the 3 D’s)
Fix budget $40,000. Purchase and fix, total hard costs are $140,000.
Sell price $200,000 less $20,000 in transactional costs
$180,000 is left, less hard costs $140,000 leaves us with a $40,000 profit
$40,000 profit before financing
If you split the profits with your money partner, you each make $20,000
If you pay your money partner a flat 10% annually and only use the money for 6 months, you will pay $7,000 in interest and net $33,000
On a deal like this depending on financing, you can make between $20,000 and $40,000 per deal.
Remember our monopoly formula? Buy four green houses and trade them up for 1 red hotel.
Lets say you make $30,000 a house and you flip four of them.
You have $120,000 of cash now and can get into a big deal like an apartment block, a business or a commercial property! Congratulations! You are now ready to invest into real estate.
WARNING: Learning the ins and outs of buying, fixing and selling properties is something best learned from a qualified coach or mentor. Do not attempt to do this on your own, always have a team of professionals help you with this process. If you are interested in following the four green houses 1 red hotel process in real life, then contact my team.
Respect The Grind,