Do you consider yourself a creative real estate investor or a traditional real estate investor? What is the difference? Is one better? Which one is right for you? You’ll discover the answers to these questions and much more…
First, Let’s define what a traditional investor looks like. Typically, they…
- Buy real estate off the Multiple Listing Service (MLS)
- Find properties by enlisting the services of a real estate agent
- Buy foreclosures that are listed on the MLS
- Buy property at the foreclosure auction sale
- May even buy real estate from wholesalers
- Sometimes get into bidding wars with other traditional investors
- Use big earnest money checks to get deals under contract
- Pay down payments of 20% of the purchase price or more
- Apply for bank loans that require them to sign personally
- Makes tons of offers to get a few accepted
- Constantly review deals, on the web and in person
- Negotiate deals based on price.
On the other hand, let’s look at the behavior of a creative real estate investor. Typically, they…
- Locate properties by marketing for motivated sellers
- Get to the deals before anyone else knows about them
- Work with sellers directly without using real estate agents
- Put up tiny earnest money checks (for example, $10)
- Rarely require a down payment
- Do not apply for bank loans
- Buy real estate with owner financing
- Take over loans subject to the existing financing
- May make several offers on the same property
- Create bidding wars when selling their deals to traditional investors
- Try to turn every lead into money by assigning the bad ones to agents
- Use transactional funding, hard and private money
- Rarely physically look at deals unless to get it under contract
- Negotiate the transactions based on terms, price, or both
Which one sounds more like you?
Both have barriers to entry. Creative real estate investors must be educated, traditional real estate investors need money and/or the ability to borrow money.
The Biggest Challenge for the Creative Real Estate Investor
First, you have to get access to the right education. Usually in life, you get what you pay for. Although this website and blog is amazing and provides incredible free content, there is a reason why it also offers courses for sale. A complete education on creative real estate investing isn’t free.
Second, having the right mentor or coach is critical to helping you acquire the right education.
Third, you must find the time and take the action to actually learn from the education you have invested in. This is where many people fall short. They want the incredible results creative investing can give them, but they aren’t able to follow through with acquiring the education (even if they have invested in the right materials and are working with a dynamite mentor).
The Biggest Challenge for the Traditional Real Estate Investor
The biggest challenge for the traditional real estate investor is getting access to the money. Money for earnest money, money for a down payment, borrowing money from banks, money to conduct renovations on purchased property.
Although it is possible to get access to money through private individuals, most use the money they have accumulated over their lifetime, such as in a retirement fund, or by the sale of a business, or an inheritance, along with leveraging their good credit and strong financial position to borrow money from banks.
There is still some education required to be an effective traditional investor. The traditional formula is relatively simple. Hire a real estate agent to find potential deals, make tons of low-ball offers, get one accepted, buy the property, fix it up and resell it or rent it out. Repeat.
Creative real estate investing is not quite as simple and has many different facets, so the education required is more involved.
Which One Is Better?
To be honest, I am a bit biased toward creative real estate investing because when I got started, I was homeless.
I didn’t have much of a choice. I had to go the creative route. So I am a creative guy from the onset. But one is not better than the other. Traditional investing has its advantages, too.
For example, traditional investors can buy a whole lot of property very quickly. A recent trend in the marketplace involves Wall Street (large hedge funds and private equity firms) buying up single family homes in large volumes at a very rapid pace. They are buying foreclosures and MLS-listed properties in bulk.
Since now is a great time to buy real estate, organizations that have a whole lot of cash can take the traditional approach, which allows them to buy thousands of properties very quickly.
Also, traditional investors can buy property for long-term wealth building at a cheaper price than creatively structuring owner financing or subject to. That’s because a seller will typically give up favorable terms for you (as the investor) in exchange for a higher sales price. Or the seller will take a lower price in exchange for an all-cash quick sale.
In addition, a traditional investor can get a tremendous deal by being the high bidder (when there are few or no other bidders) at absolute auctions.
Creative Investors Don’t Need Their Own Money or Credit
Creative real estate investing has its own set of advantages. Here’s the biggest one: you can make a whole lot of money and build tremendous wealth with very little money and no credit.
Creative investors experience consistent and steady results, whereas traditional investors ebb and flow with the changes in the marketplace. When the market is booming, there are fewer traditional deals. When the market is depressed, there are tons of traditional deals. That’s because creative deals come from motivated sellers.
Motivated sellers are created as a result of extenuating circumstances that are typically external to real estate, problems such as divorce, illness, financial problems, death, job transfer, downsizing, upgrading, and so on. These are issues that humans will be dealing with in good times and bad for centuries to come.
Creative investors have far less competition than traditional investors. Ironically, creative investors benefit from more traditional investors joining the dogfight because creative investors can sell their deals to the traditional investors.
For example, while traditional investors are panicking that the sky is falling because Wall Street has entered the game, creative investors benefit from the hedge funds getting in the market because they can flip their deals to them. (Now if all the traditional investors figured out how the creative investors were doing what they were doing, then the creative investors would be in trouble!)
Now that I am in a financial position to be a traditional investor, I still prefer being a creative investor. I would rather pay a little more for a long-term hold property than put my name on a loan. Andrew Carnegie said in his autobiography written over 100 years ago that you should never personally guarantee a business loan. I consider a mortgage on an investment property a business loan, so by Carnegie’s rule, I avoid getting bank loans for the properties I purchase.
And as you learned from my discussion on Rehab vs PREhab, I would rather PREhab rather than REhab. That doesn’t mean there aren’t times when being a traditional investor isn’t effective for me. Especially when I am sitting on a bunch of cash and want to invest it in some place other than the stock market…
Which one are you (or which one do you want to be)? Which one do you think is better?