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…
Traditional real estate investors can buy a lot of property very quickly.
- 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…
Creative real estate investors can buy property with no money or credit.
- Â 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?
I believe depending on the real estate programs. Most self proclaims “Real Estate Guru” will sell you books and CDs even has mentor lines. They hold seminars at major hotels in major cities. But for someone who learn by doing like myself,it is difficult and almost impossible to begin. I’ve spent $25,000.00 on seminars with mentor that I can call. But when I did found the properties that matches from what I’d learned and tried to follow the mentor by phone when the mentors are in somewhere in Utah. Local seasoned investors has the cash to purchase the property,and I was left to start over again. But after spending $25,000.00 I found a muchless program that only costs me $2000. The mentor takes me by the hand and shows me exactly what to do,where to go for funding was there in person watching over me closing the deals. Sometimes its not how much you spend on education,its who is teaching. Not everyone learn by watching,reading and listening to CDs.
I agree not everyone learns the same way. And you can only read,view or attend so many seminars before you take action. I feel if I could pay a local mentor to take and show me one time, just one time and leave out no secrets or vital information then I would pay for it . I’ll know what I am getting out of it.And it would be well worth it.
I agree with Kheam’s comment.
Have been to different seminars with the gurus, but they wont teach you everything.
You have to pay for every step until you really have spent $20,000 on their course.
Some of them disappear after they took your money.
Kheam, If you can refer me with your mentor, I would appreciate it.
Here’s an article I wrote on this exact subject:
CHOOSING THE RIGHT MENTOR
Here are 3 questions to ask yourself when choosing the right mentor as well as some other helpful hints and pitfalls:
# 1 – Do You Want to be a Creative or Traditional Investor?
Deciding on which type of investor you want to be is critical because it will determine which type of mentor is right for you.
Traditional = Local
If you plan on being a traditional investor, a local mentor is probably your best bet. The best traditional investors are those that are very good at continually finding very inexpensive, very reliable contractors. They have the ability to move on good deals at the drop of a hat (because most traditional deals require instant action or else you lose out to someone else.) They know the local area like the back of their hand, which areas are good, which areas are bad, the direction the city is growing in, etc. Successful traditional investors spot local trends and adjust accordingly. Traditional investing is very localized so the best type of mentor will probably be a local one.
Oftentimes, a really good investor friendly real estate agent can be a great traditional investing mentor. He/she can introduce you to mortgage brokers, title companies, contractors and so many other team members that will be crucial to your traditional investing success.
Creative = Nationwide
If your goal is to be a creative real estate investor, you may be surprised to hear that a nationwide mentor may be your best bet. Creative investing techniques and formulas tend to work in every area because it is based on the concept of motivated sellers and motivated sellers are not location specific; they are everywhere. People who need to get rid of their house quickly are compelled to do so for reasons that typically have nothing to do with the local area, such as divorce, financial problems, death, mortgage problems, etc. So a very successful creative investor could actually relocate to a totally different area and be just as successful. Certainly there are local laws and characteristics that favor one creative technique over another, but for the most part, successful creative investing is not based on your local knowledge. Since creative investing requires significant creativity, getting outside the local box of thinking and seeing the entire nation and what different investors are doing all across the country, fosters more ideas and more ways to creatively invest. Plus, sometimes creative investing requires very specialized team members and if you are only drawing off of your local area for those people, you are limiting yourself. Some of the best mortgage brokers for no title seasoning loans and title companies for back to back closings we use provide nationwide or regional services. Whereas if I could only draw from local title companies or mortgage brokers, I couldn’t get the deal done.
Most importantly though, the number of motivated sellers willing to sell their property creatively is limited based on the size of the market. The cliche that, “there are enough deals to go around for everybody,” is hogwash when it comes to creative investing. The more legitimate creative investing competition there is in a given area, the harder it can be to find motivated sellers. Usually, the best creative investors in a local area avoid sharing their top secrets to avoid competition. Personally, although I mentor investors all across the US, Canada and the Caribbean, I don’t mentor anyone in my hometown because I don’t want to create a direct competitor.
What some local “mentors” will do is act like they are going to teach a newbie the ropes, but what they really do is simply teach them just enough to be able to find deals for themselves. Here’s why. Every creative investor is always looking for more motivated seller leads as inexpensively as possible. Certain lead generation techniques require time and energy, such as driving neighborhoods looking for vacant houses or FSBO signs. Since the mentor doesn’t have the time to do it himself, and rather than hire an employee, they get a local newbie to do all that running around for them in exchange for “showing them the ropes.” I did that when I first got started. It was a huge waste of time because that guy ended up not paying me on some of the deals I brought him, stole money from me on a deal we did “together” and stole $150,000 from a friend of mine, The guy turned out to be a total crook. He had no intention of teaching me anything with substance except how to run around and do work for him for free. Well, he did teach me something valuable, what to look for when someone is about to take advantage of me! But although my experience was a bit extreme, local “mentors” are notorious for training people to their birddogs, not successful, independent investors. The fact is motivated sellers are a limited resource and competition is not helpful to existing, successful creative investors.
Therefore, you’re best bet if you are looking to be a creative investor is a nationwide mentor. They will open up their vault on all their hidden secrets because they don’t have to be concerned about competition and they can draw on more ideas, techniques and team members due to their much larger geographical perspective.
# 2 – Are They Passionate About Teaching AND Successful at Investing?
Being a successful investor and being a good real estate mentor are two very different things. Some people are fantastic performers but lack the drive and patience to teach others. I have a friend who is a very successful investor and agent who refuses to mentor people anymore because she got so frustrated by students not following her instructions. She didn’t have the patience to deal with the fact that no matter what you say, sometimes students have to learn their lessons the hard way. Plus, she wasn’t passionate about teaching. She saw it as a good sideline business to make some extra money in between deal closings.
If you want to be a creative investor, you need to also make sure the mentor is successful nationwide, not just locally but wanting to become a national mentor. You want someone with a track record for mentoring students to success on a nationwide basis. A tall tell sign that they are a good local mentor but a wanna bee nationwide mentor is that the deal examples, case studies and success stories they give are all from the same geographic area.
On the other hand, you have people who are extremely passionate about teaching but they are not successful investors. That’s where the old saying, “Those who can’t do, teach,” comes from. They are very zealous real estate investing teachers who aren’t successful investors themselves. They are perhaps more dangerous because they teach well, but what they teach is wrong. So make sure that the mentor you choose is far more successful at investing than you are.
For those traditional investors looking for a local mentor, be aware that you will have a much more limited pool of prospects than the creative investors going for a nationwide mentor. Try to avoid lowering your standards just to get a local one. Be patient and persistent. You may have to go outside your specific area but perhaps you can find someone that is regionally close to you. Or maybe you can reach out to a nationwide mentor and they may have some mentors they know that are closer to you geographically. But keep in mind that you need someone who is passionate about teaching AND is successful at investing.
# 3 – What’s the Mentor’s Motivation to Help You?
This is a HUGE mistake many, many people make when choosing a mentor, They do not think through the REAL motivation of why the mentor would help you. You need to have a clear and realistic understanding as to why the mentor wants to help you. Some beginners unrealistically assume they are going to find an extremely successful mentor who, out of the goodness of his/her heart, is going to lead them to the promise land. But mentoring someone to real estate investing success is a long term, ongoing, patient and persistent process. The mentor must have substantial motivation to work with you; and the thought that they want to help you because they like you is downright naive. It doesn’t work that way in the real world.
Here are some examples of when the incentives, or the mentor’s motivation, is not aligned with your success and therefore can cause issues if you don’t recognize the mentor’s REAL motivation.
1. If you are traditional investing and you have an investor friendly real estate agent mentoring you, that agent’s REAL motivation is for you to buy real estate. That’s how they get their commission, when you buy. But sometimes the best decision of all is to not buy the property. If you don’t buy the property though, your agent doesn’t get paid. When in doubt, that agent is going to tell you to buy because that is how they feed themselves.
2. If you are traditional investing and you find a local mentor that says he/she will teach you by doing a deal together and all you have to do is bring the money, beware! That’s what got me and my friend in trouble when I first got started. Well, my friend brought money, but I was broke so I was bringing my good credit credit, which is basically the same thing. If a local mentor is truly successful, he/she doesn’t need your money or your credit to sign on a loan.
3. Whether local or national, sometimes a mentor will charge you an upfront fee to be your mentor. Although this arrange can work well, be aware that ultimately, the motivation they have to help you was provided in full at the beginning of the relationship. What motivation do they have down the road to help you when you get stuck? They have already been paid all of their money and given all of their motivation. It would be like paying a painter their entire bill before they took one stroke of the paint brush. Most people would never agree to those terms with a paint contractor. Instead, they may pay the painter some money upfront for materials and to get the work started, then they may pay some progress checks as work is completed, and then, they would hold off to pay the final bill until the paint job was complete.
The best way to ensure your mentor’s motivation is aligned with yours, is to align your incentives with the mentor. Such as doing a profit sharing arrangement whereby when you make money, the mentor makes money. That way, when the mentor wins, you win and perhaps just as important, if a deal is falling apart, the mentor stands to miss out on those profit just like you.
In addition, if you have already paid for real estate coaching services or are trying to make a decision right now on a mentor, consider how you found that person or company. For example, did you find them by researching online, reading articles or a book they wrote or by a referral from a trusted advisor? Or did they find you, as in coming to a local hotel in your area? In most cases, the best people to work with are the ones that you found, as opposed to the people that found you.
Hopefully now you are more equipped to be able to choose the right mentor.
very informative
I think the best outcome is to be able to do both.
If you are jsut getting strted and don’t have the resources then you have to be creative. However once you have some experience and some reserves built up looking into other options is prudent.
While there should always be creative deals to be had there is no reason to NOT go after good REO, Short Sale or Auction deals once you have some means to get them.
It goes without saying that those that have the ability to fnd deals in the most ways will find the most high quality properties!
Kheam,
I’m sorry to hear your first experience in purchasing the right real estate investing education didn’t work out the way you planned. Looks like the second time around was a charm though. I’m glad you didn’t give up and stuck with it. And perhaps the most encouraging news of all is that creative real estate investing can be very forgiving because even if you spent a little more than you expected upfront for the right education, given enough time and dedication, you can make back 100 times more than your initial educational investment.
Question: What type of investing were you taught?
Traditional or Creative?
Were you told to find a real estate agent, make a ton of offers on listed properties, hope one gets accepted, then stress out about where your going to find the money to buy the property? (aka Traditional)
Or were you directed to locate motivated sellers and structure creative deals directly with those sellers so that you can either use transactional or hard money, or you use no money at all? (aka Creative)
It’s a very big difference, especially for beginners. Sometimes, those that are first getting started buy traditional real estate investing education and then get frustrated because it doesn’t work for them. The real problem may not be the quality of the education at all, but the type of education (traditional vs creative). Hopefully this article sheds some light on the differences so you can spot it when you are evaluating real estate investing advice. Ask yourself, is this traditional or creative investing advice?
Sincerely,
Phil
I am a rookie. I am not going to be one for long. I am going to be a Creative Investor, and get this show on the road. You know when you first start out investing, or try to start out, you dont really know where to start. I like your outlook, creative, no matter what is going on
You can be as creative as you want only to find that the sellers, lenders, listing agents, attorney, title company, and local laws will not entertain your ‘creative’ offers. Assumption of loan payments and ‘subject to’ is illegal in some if not most states.
A struggling owner will do what his lender tells him; short sell or foreclose. Both options are very traditional. Your ‘we buy houses’ pitch will not go over with most people. As far as finding buyers for your deals, good luck. The brokers and agents will not do business with you. Wholesalers are not out to build your net worth either. They want to get the best deals. And they are mostly ‘traditional’ investors. They can pay cash. They can’t get loans because the FHA caters to first time home buyers and investors with perfect credit and 25% down payments. That leaves first time homebuyers as the best buyers right now. And they are traditional and represented by the FHA. The FHA sets the terms of the deal, you do not.
Keep in mind that the tax collector takes 35% of any creative investment (held less than a year) and 15% of any traditional investment (held for more than a year).
You can pay a fortune to learn how to think like a creative investor. Only to learn that the odds favor the traditional system. If you have ever bought your own house, than you have all the expensive training you need.
Argos Properties’ comment brings back memories. I remember when I first connected with the mentor that eventually changed my real estate life. I was really down and out at the time and when he started talking about Subject Tos, I went on a similar rant to what Argos did above; how creative investing doesn’t work, goes against the grain, is illegal in some cases and on and on I went. When I finished my uneducated, ignorant tirade, he simply replied, “Spoken like a true broke person.”
I really was caught off guard by his statement. What do he mean by that? (Plus I was little mad too because I felt like he was insulting me)
Our first deal together included taking over a 1st mtg Subject To, getting rid a 2nd mtg for 10% of the loan amount through a short sale, getting a Tenant Buyer to put up a $20,000 option payment, collecting $600/mo positive cashflow for 3 months and then getting them a loan to buy the place, we netted a total of $56,324 altogether. Half of that amount went to me.
At the end of that year, my accountant was looking over everything and said to me, “Wow, you made more than me this year and paid less in taxes! This is brilliant. Keep doing this!” It was then that I realized what my mentor meant.by his statement.
After reading that information i believe that being a creative real estate investor gives you more flexibility and options. whereas the traditional investor may have certain limits, a creative investor sees opportunity. I think that’s what separates the ordinary from the extraordinary.. just doing that little extra, which i why would choose to be a creative real estate investor.
I learned everything I needed to know about creative investing right here for free at CREOnline.com and by investing $50 in Lonnie Scruggs’ excellent two books, “Deals on Wheels” and “Making Money With Mobile Homes.” After this self-education, I bought two mobile home parks and was able to semi-retire well on the 95% passive income from the properties. Lonnie and this website became my “mentors” without even knowing it.
There is no reason to spend tens of thousands of dollars on mentors or courses. And I disagree with Phil — in the real world, people who succeed DO provide free advice from the goodness of their own hearts. It’s a bigger kick to help others succeed from the goodness of your heart than to charge them gobs of money for your advice. I trust those types of people far more than I trust people charging tens of thousands of dollars.
Yes, everyone has different skills. Everyone learns differently. But like college, 90% of the people who enroll never effectively utilize or monetize what they learn — which was their reason for going. They wasted tens of thousands of dollars. A better way to succeed is to self-teach yourself using a library card (free books), the Internet (free information) and asking people who already succeeded how they did it (free information). When you need specific, targeted information, you really can get it by buying inexpensive books, print or audio courses or asking someone successful for advice.
It only took me $50 and many hours of self-education via this website to learn how to buy enough real estate to generate enough monthly income to “retire.” I can now duplicate those successes the rest of my life. If I can do it, you can do it. And when you do, you too, will happily share that advice out of the goodness of your heart. Pay it forward.
You’re one in a million, It sounds like you could be successful at absolutely anything with very little help or guidance. Almost everyone can’t simply read a few books, search the internet, and ask a few questions and then go out and buy several mobile home parks that cash flow positive without cash or credit. More power to you and ANYONE who can accomplish what you have for $50 in education.