Wholesaling, if you consider wholesaling to be a form of real estate investment.
A wholesaler puts a property under contract for a minimal (often $100) earnest money deposit. The wholesaler then assigns (sells) the contract to a rehabber. The process takes around 30 days, often less.
So: Work the numbers. You put up a $100 earnest money deposit. You assign the contract for $5,000, $10,000, $20,000, or more. (I know investors who average $25,000 per wholesale deal.) The process takes, 30 days or less. What’s the profit margin on a $100 investment that returns $10,000 in 30 days?
But that’s really a trick question. If your assignment contract is written properly, the wholesaler receives his $100 back. So what’s your profit margin on $0 investment that returns $10,000 in 30 days?
Rehabbing: Rehabbing can also be quite profitable, but not as profitable as wholesaling, and it’s riskier. Still, here’s an example: A rehabber buys a property for $325,000. He puts $75,000 into the rehab. He sells the property in 4 months for $550,000. The rehabber has borrowed the $400,000 from a hard money lender, or from private lenders. The cost of the money is $40,000 ($16,000 in points and $24,000 in interest).
The real estate commission on the sale (commissions are negotiable, this is just hypothetical) is $24,000. So the investor’s costs are $64,000. He made $150,000 on the deal ($550,000-$400,000) minus the $64,000, for a net of $86,000. He can do that 3 times a year—more if he can handle more than 1 rehab simultaneously.
Hard money lenders now require an investor to put some of his/her own money in the project—maybe 10% of the amount borrowed, or $40,000—but that comes back to the investor upon the sale. So the investor has put up $40,000 and in 4 months receives his/her $40,000 back plus another $86,000. Not too shabby.
Related: 10 Best Places to Invest in property Worldwide
Earnings matter. This is as true in energy, industrials and consumer staples as it is in real estate. After all, people invest in real estate to make money.
As a result, MPF Research thought it would be interesting to view real estate performance in terms of net profit margin similar to the way corporate profitability is measured.
We define net profit margin as reported net income / rental revenue. More specifically, this analysis is based on publicly traded REITs with a minimum of $100 million in annual revenue and at least 10 years of operating performance.
There were two exceptions: Monmouth Real Estate Investment Corporation, an industrial REIT which fell below the revenue threshold, and Douglas Emmett, Inc., an office REIT which went public in 2006, falling short of the time requirement.
The findings are interesting. First, real estate is a profitable industry. Based on research by Dr. Ed Yardeni, the reported net profit margin for the S&P 500 was 7.7% in 2014.
For comparison, all four major property types were well in excess, ranging from 15.2% in the office sector to 61.7% in retail during the same time period.
Second, since reporting a disastrous 2010, industrial has shown incredible momentum as longer-term lease expirations are being marked to market.
Third, in terms of net profit margins, retail and apartment performance stand out. Over the past 10 years of operating results, the average profit margin is as follows:
Here are some other type of investments in real estate if you want to read further.