Welcome to our 12-Step Guide to Investing with Fund That Flip! Whether you're a seasoned investor or just getting started on building your real estate portfolio, we've compiled vital information to help you every step of the way.
In 2012 Congress passed, and the President signed, new legislation called the JOBS Act. The overall goal of the law was to reduce red-tape for companies who need to raise capital to grow their business, including for real estate developers. In this article, we'll explore how real estate crowdfunding changed the game for passive investors looking to make returns by consolidating deal flow, lowering minimum investment entry points, and by adding new levels of transparency. Read on to learn more!
What is the difference between passive and active real estate investing?
Passive real estate investing is defined as an investment, or the acquisition of something with the expectation of generating income, in real estate that requires no investment of your time to operate or manage the real estate asset. Passive real estate investors invest a sum of money into an income generating asset that is backed by a note and a first position lien on a property.
Passive investors can be contrasted to active investors, such as developers and rehabbers, who are investing both equity and time into a real estate investment in order to generate a return. Passive real estate investing is different from active real estate investing in that it does not require the investor's time to operate or manage the asset. Instead, it is the active real estate investors who are responsible for doing some combination of finding properties to acquire, overseeing construction, sourcing financing, and/or managing tenants.
Passive real estate investing is different from active real estate investing in that it does not require the investor's time to operate or manage the asset.
Types of Active Real Estate Investors
Among active real estate investors, there are multiple different classifications that passive investors should be aware of. For simplicity's sake, we'll look at four broadly: the newbie, the part-timer, the full-timer, and the high-volume investor.
New investors with little to no industry-related experience, but want to get into real estate investing, we call "newbies." Typically, these active real estate investors are riskier when it comes to executing the projects they undertake simply because they have less experience. Some investors can be considered "part-timers," who use flipping as a side hustle, meaning it is not their main source of income. Part-timers often are people who have been contractors or have worked in real estate for their whole career, and who do a deal of their own here and there when they happen upon a good investment.
Many active real estate investors are considered "full-timers," as they use real estate investing as their main source of income. They have a legitimate business set up with full-time employees and a network of contractors with multiple teams that they typically use, and they typically execute similar types of projects. Finally, "high-volume" flippers are the highest tier of real estate investors. They work on a larger scale than full-timers and have repeatable systems and processes, allowing them to work at a higher velocity. More deals, more employees, more contractor teams, and more sources of capital lead to high-volume of business.
Types of Active Real Estate Investing
Regardless of what type of investor they are, there are multiple types of projects they may complete. One example is wholesaling. Sometimes the borrower never takes ownership of the asset, but instead they simply assign the contract to someone else. There are other cases where a borrower may close on a property with the intention of doing little or no work to it (clean up) and then sell it to another investor at a higher price point than they paid.
The next type, and possibly the most popular, is a fix-and-flip. A fix-and-flip is when a developer acquires a piece of real estate with an existing dwelling on it with the intention of rehabilitating the home, and therefore, increasing the market value before they eventually sell it for a profit. A fix-and-flip can be a smaller, cosmetic rehab or a larger, full-gut rehab.
A fix-and-flip is when a developer acquires a piece of real estate with an existing dwelling on it with the intention of rehabilitating the home, and therefore,
increasing the market value before they eventually sell it for a profit.
In order to get fix-and-flips complete, investors need funding via fix-and-flip loans. Fix-and-flip loans are typically short-term loans (3 to 18 months) that include acquisition and construction components to them ($200,000 total loan amount. $100,000 sent out at loan closing and $100,000 held back for construction reimbursement). Some loans may even have interest escrow wrapped into the loan amount.
The third type of project is a fix-to-rent. This method is similar to fix-and-flip, but rather, the investor rents the property to tenants upon completion rather than selling it. Some borrowers will buy a property with the intentions of renting it and refinancing into a long-term debt product so they can grow their portfolio of cash flowing assets. Other investors may rent a property to then sell the cash flowing asset to another investor who is trying to grow their portfolio. Sometimes the borrowers set up property management companies and when they sell the tenanted asset to investors, they agree to remain on as the property manager for a monthly/annual fee. This also applies to the build to rent method.
The build-to-rent method is when a developer acquires a piece of real estate with the intention of constructing a new home on it, and therefore, increasing the market value (and market rent) before tenanting the property to hold long term for monthly cash flow. This is also applicable to vacant lots and lots with existing dwellings (knock-down-rebuild).
Lastly, the build-to-sell method is when a developer acquires a piece of real estate with the intention of constructing a new home on it, and therefore, increasing the market value before eventually selling it for a profit. Just like in the build-to-rent method, this is also applicable to vacant lots and lots with existing dwellings (knock-down-rebuild).
Now that you have a better understanding of how active real estate investing works, learn how the projects from active real estate investors become investment opportunities for passive real estate investors. Click below to read more!
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