Content of the material
- How Does Real Estate Make Money?
- 7. Refinance Your Mortgage
- Rental Income as a Margin of Safety
- 3. Long-Term Rentals
- Management fees
- The bottom line
- Whats the Best Way to Make Money in Real Estate?
- Alternative Real Estate Income Sources
- MBSs, MICs, and REIGs
- The Bottom Line: There’s No Single Path To Profit With Real Estate
- 2. Lease options
- 3. Real estate limited partnerships
- Rental as a Real Estate Investment
- The Role of Inflation in Property Values
- 5. Short sales
- What Do You Need To Make Money In Real Estate?
- 5. House flipping
- Why does the value of a home appreciate?
- Fixed Supply
- Population Growth
- How to Get Started in Real Estate Investing
- 1. Online Real Estate Investing Sites
- How It Works
- What You Gain
- What You Risk
- How much money can you make investing in real estate?
How Does Real Estate Make Money?
There are generally four different ways to make money in real estate:
Increase a property’s value
Generate regular income through a property
Buy and hold residential real estate
Participate in investments that don’t require you to buy property
Before you get started, consider a few different things:
Your Risk Tolerance: All investments carry some degree of risk. In the real estate world, you’ll find investments that carry less risk and investments that carry lots of risk. How much risk are you willing to take on?
Your Local Housing Market: Some investments may require that you live in or nearby a housing market with ample real estate opportunities. If you don’t live by one of these dynamic markets, you may have to seek investments that don’t require you to buy property.
Liquidity: Most real estate investments are not “liquid.” In other words, if your personal finances take a plunge and you desperately need money, you may not be able to sell a property quickly or for a reasonable price. Certain real estate investments (mainly those that require you to buy property) may not be suitable for investors who don’t have stable finances.
Capital: How much money do you have to invest? Some investments require a huge amount of capital, while others do not.
Know-How: How knowledgeable are you about the real estate market? Have you received real estate training or not? With more education, you’ll be able to take on more types of investments.
Time-Commitment: How much time are you willing to put into your investments? Are you trying to create a passive income or launch a real estate career? You’ll find that some investments can be made part-time, while others require your constant attention.
By answering the questions above, you’ll have a better idea of which types of real estate investments are suitable for you.
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7. Refinance Your Mortgage
If you have a mortgage on your investment property, you may be eligible to refinance it. Whether you refinance to take advantage of lower interest rates and save money, or you tap into the home’s equity and use the cash to invest in more real estate, you can use refinancing to your advantage.
If you lower your payment, you open up your budget, allowing you to invest more in the home, possibly making renovations to inject equity into your home. You can do the same if you tap into the home’s equity, using the cash to reinvest in the home, increasing its value.
Rental Income as a Margin of Safety
Rental income can be a margin of safety that protects you during economic downturns or collapses. Certain types of real estate investments may be better suited for this purpose. Leases and rents can be relatively safe income.
To go back to our earlier discussion—about the challenges of making money from real estate—office buildings can provide one illustration. Typically these properties involve long, multi-year leases. Buy one at the right price, at the right time, and with the right tenant and lease maturity, and you could sail through a real estate collapse. You would collect above-average rental checks that the companies leasing from you have to provide still—due to the lease agreement they signed—even when lower rates are available elsewhere. Get it wrong, though, and you could be locked in at sub-par returns long after the market has recovered.
3. Long-Term Rentals
More traditionally, long-term rentals are a common form of investment for homeowners. A long-term rental is typically 6 months or more – most commonly one year – and typically requires less upkeep on your day-to-day. Low inventory, excessive student loan debt, and the ever-growing millennial cohort create strong indicators for a strong and growing US rental market.
Your tenant signs a lease and is committed to paying monthly throughout the duration of the contract. This means you receive a stable flow of income for a set period of time, without having to worry much about the house unless it requires major repairs that the tenant is not responsible for per the terms of the contract.
Unlike vacancy and repairs, this is a discretionary expense. You are not required to hire a property manager, however – somebody will have to manage every property you own (even if it’s YOU), so it’s wise to acknowledge this very real cost.
I like to manage my own properties, so I’m not paying this money out to a third-party property management company – but I have a lot of experience, and I do pay the price in my time.
You must decide for yourself if you want to go it alone or hire a manager. Many property management companies will charge about 10% of the gross rent ($18,000 x 10%) = $1,800.
Let’s deduct another $1,800 from the GSR.
$18,000 – $1,500 – $2,000 – $1,800 = $12,700
Real estate crowdfunding is a relatively new form of real estate investing, but there is certainly money to be made. When a developer or professional investor identifies an opportunity to build or buy a commercial real estate asset, they may choose to raise some of the project's capital from individual investors. For example, a crowdfunding deal might aim to purchase a hotel, spend a few years gradually renovating the rooms, and ultimately sell it at a profit. There are several reputable crowdfunding marketplaces, but it's important to point out that most of the best deals are limited to accredited investors only.
The bottom line
There are many different ways to make money in real estate. From an investment perspective, the choices range from extremely passive and liquid options, such as buying an exchange-traded fund that invests in REITs, to skilled and time-consuming investment strategies like flipping houses and wholesaling.
The best way for you to invest in real estate and make money depends on a few things such as your risk tolerance, skill and knowledge levels, liquidity requirements, and amount of time you want to spend.
Whats the Best Way to Make Money in Real Estate?
If you can stomach hearing no several times a day and maintain a constant follow-up file with all wholesale offers made, you will make more money in Real Estate than most “house flippers” you see on TV.
Money can be made in Real Estate in several different ways. I will never claim a particular technique is not worthy of your time. They all work, some just better than others.
The smartest and best investors do not focus their time solely on rentals or rehabs, and they never swing a hammer or do rehab work themselves.
The best and most successful Real Estate investors are the ones who focus on being transaction engineers and becoming masters of negotiation, relationships with other investors and accepting the fact that the real money is made in pushing paper, not hammering nails.
As you grow in your Real Estate investing career, you will always want a constant portfolio of different types of transactions going on at the same time. Some investors focus on one particular strategy and make a lot of money.
However, I would rather have the knowledge to take any deal that came my way and turn it into cash. I constantly have a steady stream of wholesales, lease options, rehabs, new construction, and anything else I can get my hands on.
As previously stated; all of these strategies (and many more I have not mentioned in this article) have their place and can make money fast. However, for the new investor, dead set to make the millions of dollars promised by the “Gurus,” focus on Options and Wholesale deals.
Alternative Real Estate Income Sources
Real estate investment trusts (REITs)s, mortgage-backed securities (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs) are investment alternatives within the real estate sector. They are generally considered vehicles for deriving real estate income but they have varying processes for doing so and varying processes for entry.
With a REIT, the owner of multiple commercial properties sells shares (often publicly traded) to investors (usually to fund the purchase of more properties) and then passes on the rental income in the form of a distribution. The REIT is the landlord for the tenants (who pay rent) but the owners of the REIT record income once the expenses of operating the buildings and the REIT are taken out. There’s a special method to assessing a REIT.
MBSs, MICs, and REIGs
These are even a further step removed, as they invest in private mortgages rather than the underlying properties. MICs are different from MBSs in that they hold entire mortgages and pass on the interest from payments to investors, rather than securitizing portions of principal and/or interest. Still, both are not so much real estate investments as they are debt investments. REIGs are usually private investments with their own unique structuring, offering investors equity investments or partnership servicing.
Several credible real estate alternatives are available for making money in the sector but they come with varying caveats and entry points.
The Bottom Line: There’s No Single Path To Profit With Real Estate
Investors have many ways to invest in real estate today – there isn’t a one-size-fits-all solution. Learning how to make money in real estate is one of the best ways to diversify your portfolio.
If you have a lot of capital, you can buy an undervalued property, fix and flip it. If you would rather leverage your investment by using a mortgage to invest in a tenant-ready property, consider buying a long-term rental property or second home where you vacation and rent out to others when it’s not in use.
If managing real estate yourself isn’t your cup of tea, there are many other ways to invest in real estate through the market or by crowdfunding your money and/or working with other investors.
If you’re ready to explore your options for real estate investments and want to buy a property to realize the cash flow, get started with Rocket Mortgage® today.
2. Lease options
Lease options can be a great way to get involved in real estate without having to put up a significant amount of capital or even have great credit at the outset. You’re leasing with an option to buy. This tends to work well when the real estate market is climbing because you’re creating a pre-set price at which you can later purchase the property.
If, for example, the property market climbs substantially, you can buy that property at a discount. You could also potentially turn around and sell your rights for that purchase to someone else. The clear bet here is on the bull market in real estate. As long as this is an option you can exercise and not something set in stone that says you have to purchase at the end of the lease regardless, then you could very well turn a profit.
3. Real estate limited partnerships
A real estate limited partnership (RELP) provides investors with a diversified portfolio of real estate investment opportunities, allowing you to merge your funds with other investors’ to buy, lease, develop, and sell properties that would be hard to manage or afford independently.
Like REITs, RELPs usually own a pool of properties, but they differ in their structure and organization. Primarily: RELPs are a form of private equity — that is, they are not traded on public exchanges
Instead, they exist for a set term, which typically lasts between seven and 12 years. During this term, RELPs function like small companies, forming a business plan and identifying properties to purchase and/or develop, manage, and finally sell off, with profits distributed along the way. After the holdings are all dispatched, the partnership dissolves.
They’re generally more suitable for high-net-worth investors: Most RELPs have an investment minimum of generally $2,000 or above, and often substantially more — some set minimum “buy-ins” anywhere from $100,000 to a few million, depending on the number and size of the property purchases.
Rental as a Real Estate Investment
Making money from collecting rent is so simple that every 6-year-old who has ever played a game of Monopoly understands on a visceral level how the basics work. If you own a house, apartment building, office building, hotel, or any other real estate investment, you can charge people rent to allow them to use the property or facility.
Of course, simple and easy are not the same thing. If you own apartment buildings or rental houses, you might find yourself dealing with everything from broken toilets to tenants operating meth labs. If you own strip malls or office buildings, you might have to deal with a business that leased from you going bankrupt. If you own industrial warehouses, you might find yourself facing environmental investigations for the actions of the tenants who used your property. If you own storage units, theft could be a concern. Rental real estate investments are not the type you can phone in and expect everything to go well.
The Role of Inflation in Property Values
When considering appreciation, you have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your dollar can only buy about 90% of the same goods the following year, and that includes property. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it would still be worth many times more today. Because of runaway inflation throughout the 1970s and a steady pace since, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was fair market value at the time.
Thus, inflation alone can lead to appreciation in real estate, but it is a bit of a Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods cost five times as much to buy too, so purchasing power in your current environment is still a factor.
5. Short sales
Short sales occur when the current owner of their home is behind on their mortgage but the property hasn’t yet entered into foreclosure. In order for this to happen, all parties have to agree to the transaction since the property is being sold off for less than is owed on the existing mortgages. This can be a great opportunity to make a quick profit without investing into lengthy renovations.
However, succeeding with short sales or any other default-type auctions is often tricky. You usually need to pay for the homes outright in cash, and sometimes that has to happen site-unseen. Short sales are better than auctions because you get a chance to check out the home and enter into a negotiation process. Unless you’re a seasoned investor, jumping in without an inspection and complete review could be risky.
Short sales take time, but they can be well worth the wait. The potential return on a short sale can be instantaneous. Tens of thousands to hundreds of thousands of dollars can materialize as soon as the property purchase goes through because the bank is engulfed in a bad investment. But don’t expect to get the property for a steal — you’ll still have to negotiate a relatively fair price. Depending on how badly the bank wants to unload that property, it could sit around and wait for another buyer, so don’t try to low-ball too far.
What Do You Need To Make Money In Real Estate?
There is a common phrase in the investing world that it takes money to make money, but that isn’t always the case in real estate. Many real estate investors can start in wholesaling, even with low cash reserves or bad credit. Wholesaling, and many other beginner-friendly strategies, allow aspiring investors to break into the industry without many resources.
That being said, you do need a strong work ethic and time to make money in real estate, especially in the beginning. If you want to wholesale, buy, or flip a property, you need to make sure it has potential. Further, suppose you’re going to work with a business partner or other type of private lender. In that case, you will typically need to do the heavy lifting in terms of market research, deal analysis, and, in some cases, property management.
There are a lot of misconceptions about what you need in the real estate industry. In most cases, it all comes down to how well you can understand the market, identify creative financing, and execute deals. As you gain experience, these factors become much easier, but try not to get discouraged early on.
5. House flipping
Some people take it a step further, buying homes to renovate and resell. Though those TV shows often make it look easy, “flipping” remains one of the most time-consuming and costly ways to invest in real estate. But it also has the potential to produce the biggest gains.
To be a successful flipper, you should always be prepared for unexpected problems, budget increases, time-inducing mistakes, a longer renovation timeline, and issues selling on the market.
It’s especially important to build a team of experts — contractors, interior designers, attorneys, and accountants — you can trust. And make sure you have the cash reserves to troubleshoot. Even experienced flippers find a project inevitably takes longer and costs more than they think.
Why does the value of a home appreciate?
Home appreciation isn’t always a guaranteed thing – so it helps to start with an understanding of why appreciation happens in the first place.
There is a fixed supply of land to put houses on in the United States. The increase in population gradually increases the demand – and with a fixed supply of land, this will naturally drive up the price.
The United States has seen a steady increase in population over time. More people means more roofs are required to house them.
In July 2015, Wake County was listed as one of the fastest-growing counties in the country. According to the Wake County Demographics Study, Raleigh is growing at a rate of 14% per year. This surge in the population increases the demand for housing which increases the price. Do your research on local appreciation rates in your city and state. Many counties like Wake County NC, will publish demographics data that they share with the public. Zillow.com is another good resource for average appreciation rates in local areas.
Amortization and appreciation contribute to profit by virtue of another concept called equity. Equity is defined as the difference between the value of an asset and any debt on it.
When we combine appreciation with the gradual paying down of the principal balance of the loan (amortization), we are left with the equity.
Look at the chart below.
As you can see, the amount of equity in the property 5 years after purchase, assuming a 30-year amortization schedule and 1% per year appreciation, is $47,898. As an owner of rental property, your net worth would now be almost $48,000 higher due to your investment decision.
Real estate offers some of the most generous tax advantages of the asset classes. Rental properties can be depreciated each year to offset any cash flow, and all maintenance and expenses can be deducted against any profits received.
Remember the $5,700 in mortgage interest that you paid the first year? All of it is tax-deductible. So, any cash flow you made at the end of the first year, whether it be $500+ (managed by a professional company), or $2,000+ (if managed yourself) would be offset by the mortgage interest that you paid. You also have the option to deduct that mortgage interest against any personal income you made that year.
There is another benefit called depreciation. Basically, you can depreciate the fixtures of the house to offset any income that you have. Even though you don’t literally have to pay out of your cash reserves to pay for this expense, the IRS will allow you to count this as an expense all the same, because they recognize that all physical assets will eventually wear out.
How to Get Started in Real Estate Investing
- Decide whether or not you want to buy and sell, buy and rent, or choose another type of involvement (management, staging, etc.) in real estate.
- Choose which type of property, commercial or residential.
- Get preapproved for private lending.
- Learn the punch lists for inspections and appraisals, so you’ll know what to look for in a property.
- Network. For example, to set realistic rehab goals, enlist a local contractor for estimates. Establish relationships with key players such as inspectors, appraisers, agents and lenders.
1. Online Real Estate Investing Sites
Online investing sites have changed the game in recent years. With these sites, you can own fractional shares of real estate projects. What this means is that you can get exposure to real estate, but you don’t need to come up with huge sums of capital or deal with tenants. This is a strictly passive income strategy.
For other sites, you must certify that you have a net worth over a certain amount or make a certain amount of money per year.
How It Works
With Fundrise, you can start with as little as $500. You open an account and select from a number of portfolio options. Fundrise charges a management fee of around 1% per year, which is fairly low compared with other options, and its 2021 annualized return was 22.99%! You can see how my Fundrise account has performed here.
What You Gain
Investing this way, you gain a ton of freedom and you gain exposure to the real estate asset class with very little money or effort.
What You Risk
You don’t get to really use any local expertise you may have, and you don’t necessarily get the pride that comes from visiting a real estate project that you wholly own, improve, and can see easily. For some people, that’s a big draw to investing the old-fashioned way!
Get Started With Fundrise
How much money can you make investing in real estate?
The average investor makes between $70,000 to $121,000 annually, according to statistics. Here’s how the types of investing compare:
Flippers make about $63,000 per flip
Rentals (residential) make from $35,120 to $61,097.
Wholesaling properties garners from $21,500 to $98,500.
Commercial rentals bring in from $27,500 to $121,000 annually.
Five states lead the way in making money for real estate investors: New York, Massachusetts, Hawaii, Connecticut and New Hampshire.
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