Real Estate Investing: Wholesaling vs. Hard Money Lending

There are lots of ways to make money in real estate. As you might expect, every method has its proponents and detractors. There really is no right or wrong way in the end, as long as you are making money. Lose money and it doesn’t really matter which strategy you think is best.

This post will examine the differences between wholesaling and purchasing with hard money. Both are distinct strategies that differ as much in methodology as outcome. One method involves never actually owning a home while the other creates ownership and generates multiple possibilities thereafter.

Investing through Wholesaling

Most of us think of acquiring real estate in terms of buying and taking ownership. But investors do not have to do things that way. They can choose the wholesaling model instead. When you wholesale properties, you never actually take ownership of them unless absolutely necessary. The point of wholesaling is quick turnover.

A wholesaler seeks to ‘purchase’ a home simply by putting it under contract. He then turns around and assigns the contract to his buyer at a slightly higher price that covers his margin. His buyer actually closes the deal and takes ownership of the property. The original wholesaler never owns the property because he never closes on it.

There are times when circumstances dictate the wholesaler go ahead and close on a property. He can still make the deal work by immediately turning around and selling the house to another buyer. The key is to do it quickly. Unfortunately, there tends to be less profit with ownership simply because you have a second sale to deal with.

Forget the Renovations

Making the wholesaling model work is the fact that you are buying houses in need of renovation. These are houses that sell well below market value due to the work they need. The thing is that the wholesaler doesn’t do the work. He leaves renovations to his eventual buyer. The wholesaler buys cheap and sells cheap. Just enough profit is built-in to meet his margin.

Investing with Hard Money

Wholesaling is not for everyone because it requires impeccable timing. Another way to make money in real estate is to invest using hard money. This involves purchasing and taking ownership of properties to either flip or rent.

Hard money is private money offered by lenders who are less concerned about credit score and more concerned about collateral. The goal of investing through hard money is to get properties purchased, renovated, and back on the market as quickly as possible.

According to Salt Lake City’s Actium Partners, hard money works well for real estate investors for a couple reasons. First, approval tends to be a lot faster than bank approval. Second, rates and terms tend to be more flexible given the real estate investor’s circumstances.

Flipping or Renting

Some hard money real estate investors prefer to flip. They buy distressed properties at reduced rates, renovate them, and put them back on the market for sale. Good timing is also imperative here, but it is not as crucial for house flippers as it is for wholesalers.

Other investors use hard money to purchase properties they plan to rent. Again, they focus on distressed properties they can get at a lower cost. They also rely on future rental payments to cover their loans. As soon as one loan is paid off, they start searching for another property to buy. Over time, a nice portfolio is built and generating regular income.

Wholesaling and hard money lending represent just two ways to invest in real estate. Both have their pros and cons worth considering.