The Real Estate Investing Business Model: Opportunities To Get To The Next Level

Aaron Hoos

It seems like I can’t go a day without seeing someone in a Facebook post or group saying, “I really want to get into real estate investing. Can someone tell me the best way?”

Most often, this popularity comes from television where regular people seemingly make big money in only half an hour of work. (Of course you and I know that those shows are heavily edited to get them into the right duration but people still think that real estate is easy money.)

Those new-to-investing entrepreneurs are usually looking at flipping/rehabbing as their investing model of choice, since it makes for good TV.

But beyond rehabbing, there are many other types of real estate investing models; a quick list of these choices includes…

  • Flipping/Rehabbling
  • Foreclosure investing
  • Probate investing
  • Commercial investing
  • Preconstruction
  • Landlording
  • Wholesaling

… just to name a few.

And even within these types of investing strategies there are sub-categories (landlording single-family homes; landlording multi-family homes; wholesaling versus turnkey wholesaling; and the list goes on and on.)

I’ve worked with investors who do all of these things (and more) and each one swears by their model.

So which one is best? And, with so many real estate investors out there, how do you grow your real estate investing business in a way that helps you stand out from the crowd (and maybe be more profitable)?

To start, consider this almost-always-true rule of thumb I’ve observed over the years of investing and working with investors:

  1. The newbies who struggle are those who jump in based on the perceived ability to make easy money in their spare time.
  2. The newbies who end up doing well, approach it like a business (they create a plan, the execute the plan, they spend their day focused on investing as a business).
  3. The experienced investors who end up doing really well are those who find what works for them and who scale.
  4. The experienced investors who do REALLY well are those who innovate the business model, adding an angle or tweak to a well-known process.

The first group just try to fit an investing model into their life without making any other changes to their life; they will invariably struggle because investing takes capital and time and energy and creativity, and a ton of resources and assets that the “fast-buck newbies” are completely unprepared for.

The second group will do better because they’re approaching investing with more available assets and appreciate that investing should be approached like a business.

The third and fourth group are the ones who do well because they have learned to innovate the model—the third group innovates intrinsically by moving beyond the one-person style of investing to build an organization where they can do real estate deals at a faster rate; while the fourth group innovates by changing the approach or by adding some level of systems or technology to one or more of the steps.

If you are in the first or second group and want to get to the third or fourth group (where the real money is being made) then start here: identify the model and find ways to innovate inside that model.

The Starting Point: The Investing Model

Nearly all real estate investing can be summed up in a very simple model…

  1. Control the property
  2. Add value
  3. Profit from the property

Many different kinds of real estate investing fit into this model.

Controlling the property: The term “property” can be defined as any empty lot, residential structure, multi-family dwelling, commercial building, industrial building, recreational building, storage units, etc.

And the property can be controlled by either purchasing the property or by tying up the property with a contract or by acquiring empty land with a plan to build. This might be part of a foreclosure or probate scenario, an all-cash discount to a distressed homebuyer, or just purchasing the property on the open market. The point here is to position yourself as the one person who will be in control of the property to ultimately profit from it.

Adding value: There are many ways that you can add value to the property. You can add value by building the property (as in new development or preconstruction investing), by fixing up the property (as in rehabbing); you can add value by owning the property and making it available for a renter (as in landlording); you can add value by negotiating with the seller for a low price so you can sell the contract to another investor (as in wholesaling).

Profiting from the property: And again, there are many ways that you can profit from the property. You can sell the property itself (perhaps after a rehab) and make money on the capital gains. Or you can rent the property and earn rental income. Or you can sell the contract to an investor and make money from your fee.

Real estate investing takes many forms but it really has one business model, which I’ve broadly described above. The actual activities you take at each step of that model will depend on the subtleties of each type of investing.

For Those Who Want To Start Investing, Here’s The Question You Should Be Asking

While many people get into investing by asking “How can I make fast money?”, the question they should be asking is: “What strengths do I have and how can I use those inside the investing model?”

For example, maybe you’ve thought of flipping but simply don’t have the credit score to acquire a house or the cash to upgrade the property. In that case, a different kind of real estate investing – one that doesn’t require a credit score or cash – might be better for you.

Or another example, maybe you need money this month instead of waiting 6-12 months for a payout. In that case, maybe wholesaling to generate a small(er) fee is a better choice than flipping, which can take a while.

Or maybe you have some other role to play. You don’t have to actually run through the entire model yourself in order to profit from real estate investing: birddogging, for example, makes money by helping other real estate investors do their deal. Or maybe you build apps and can create an app for investors. Or maybe you’re a general contractor who can help investors add value.

Once You Start, Find Ways To Innovate

As you gain experience in the investing model, then you’ll start to find ways to innovate in that model. By examining each step, you can create new ways to do business:

  • Mix and match steps. Ask yourself what happens if a building is acquired like in one type of real estate investing, value added to it like another type of real estate investing, and then profited like in a third type of real estate investing.
  • Choose a technology and brainstorm how it can be used in the business model. A simple example might be: Trying to figure out how Twitter can be used in step 1 or step 3 of the model.
  • Describe how most real estate investors are doing one of the steps and then change up the elements within that step by adding/removing/increasing/decreasing elements.
  • Within the broader business model, there are sub-steps that are unique to each type of real estate investing. List out those sub-steps in detail and see what you can do differently (with technology or outsourcing) to change up or even eliminate that step.
  • Use strategic tools like the sales funnel, Blue Ocean Strategy, or the Business Model Canvas to gain a deeper understanding of your real estate investing business model.

I’m keeping it high level here but of course it goes deeper. There are opportunities in each stage of the business model to innovate.

I think some of the biggest opportunities right now are in sourcing deals, funding deals, marketing deals, and networking—both for brand new investors as well as doing that at scale for more experienced investors. Nailing down how to one of these really well, with new technologies or approaches, can turn a small-time investor into a big-time investor quickly.

Summary

When I encounter the newbies who are jumping into investing for its perceived “get-rich-quick” opportunity, I worry. That approach hurts them and their families and the people they do deals with and the industry as a whole.

But the investors who figure it out, and then grow to scale and innovate are the ones who interest me most—they’re entering a higher level of investing where there is still a massive greenfield of untapped opportunity just waiting for someone to innovate.

Published by Aaron Hoos

Aaron Hoos is a writer, strategist, and investor who builds and optimizes profitable sales funnels. He is the author of The Sales Funnel Bible and other books.