How to Make Money Investing in Real Estate
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If you are curious about the profit potential of real estate or are simply tired of hearing about the promising ways to make money from your property, it does not hurt to learn how real estate can be used to create wealth.
The most common way to make money from real estate is through appreciation, which increases the value of your property that is realized whenever you sell. Several factors are crucial here. Inflation is one factor that plays a role in increasing the value of the property with time, but you will only make money when you sell it. However, there are many other ways to make money from residential and commercial property besides rental real estate. This article shows you different ways to make money by investing in real estate.
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How to make money investing in real estate
Buy and Lease
One of the most traditional ways to make money from real estate is by buying a property and holding it. You can make money by purchasing a single-family home and renting it out or buying a multifamily home, living in one of the units, and renting the other units to cover the mortgage payment and your housing expenses.
Alternatively, you can buy a multifamily home and rent all the units while managing the investment property yourself or hiring a management company to handle the tasks like rent collection, managing repairs, etc. The mortgage payment is usually fixed, while the rent prices will rise with time, giving you money to pocket.
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House hacking
House hacking is when you purchase a multi-unit building property and live in one of the units while you rent out the others. It will help reduce the living expenses while generating income for you that covers the mortgage payment, insurance, and property taxes. It is similar to renting your house, but the only difference is that you reside in a part of the building while you rent out the other parts. You could also consider a condo conversion where you buy a multifamily building and rent out the units. Later, you can turn the units into condos and sell them individually. Seek help from a property management company to help you with the maintenance tasks.
Flipping
Many house flippers specialize in adding high return fixes to the house in a short period and then selling the home. Flipping houses is lucrative if you know how to identify properties to fix up and have the necessary skills and experience to handle the renovations yourself. Alternatively, you can hire a crew to carry out the renovations, but you need to have an idea of the underlying costs and the house's potential value.
TV shows have made the process look easy but one of the most costly and time-consuming ways to invest in real estate. On the other hand, it can also produce big gains. You need to be ready for unexpected problems, time-inducing mistakes, budget increases, or a longer renovation timeline as a house flipper. You must also have the cash flow to troubleshoot.
You need to be able to identify the right property here because if it does not sell after you make the renovation, you will end up with a massive dent in your wallet.
Airbnb and rentals
There is a huge demand for a home away from home, and it has taken off in recent years. The pandemic has also led to a huge demand for vacation rentals where travelers can stay for long instead of staying in a hotel. If you own a property, you can create an income stream by renting it out or renting out a small room on a short-term basis.
If the property is located in a well-known area, you will be able to generate significant rental income. You must check the local laws before listing the rental property on a website like HomeAway, Airbnb, or VRBO. That said, it helps to consider the costs associated with renting, like deep cleaning, hiring staff to serve the guests, and sanitizing between guests.
Real Estate Investment Trusts
In a real estate investment trust (REIT), you get a chance to own multiple residential and commercial real estate properties and make money from them. REITs are the companies that own, operate, and finance properties. It works just like mutual funds where you do not own one but many properties put in a basket. You simply buy the shares of the REIT and earn a percentage of the income produced by the underlying asset.
The REIT will invest in different apartment buildings and office buildings and distribute the rental income to the investors. If you do not have a lot of money or are unwilling to invest in a single property, you can consider REITs. It will give you exposure without the time and cost commitment required to purchase your property.
Equity REITs are the most common today and they give you a chance to pool your money to fund the purchase and manage the properties. Every REIT will focus on a specific asset type like hospitals, malls, hotels, or apartment complexes, and 90 percent of the annual earnings will be distributed as dividends to the investors.
They also trade on public stock exchanges, and if you want to keep the investment liquid, you must stick to publicly-traded REITs, and you can buy them from brokerages like Fundrise. REITs offer regular income through rent, leases, and high dividends. They work as pass-through entities, which means they do not have to pay corporate tax, which means higher returns.
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Real Estate Investment Groups
A real estate investment group (REIG) is ideal for those who want to own rental real estate but do not want the trouble of running it. However, the investment will need a lot of positive cash flow and financing. It is like a small mutual fund that invests in rental properties, and you join the group through your investment. The property management company operating the investment group will manage all the units, and you can own one or multiple units of the living space.
The company conducts all the tasks and takes a percentage of the monthly rent. It is more hands-off than owning rentals and will provide income and appreciation, but vacancy risks are high. As long as the vacancy rate for the units does not go too high, you will earn enough to cover the costs.
Performing mortgage notes
You can generate passive income through performing mortgage notes. It is an advanced investing method and is less popular compared to others. The mortgages and notes are separate contracts lenders will use to loan a borrower money to purchase real estate. The debt repayment will be outlined in the note where the mortgage will offer security by using the property as collateral in case the buyer defaults. The buyer will pay interest each month, and the principal will be paid in a single payment.
In the note, the lender will have no participation other than collecting the monthly payment and maintaining records of the same throughout the repayment period. You can buy an existing mortgage note from another investor at a discount or form a new mortgage note on a property you already own through owner financing. However, the interest earned will be considered interest income and taxed as ordinary income.
Real estate limited partnerships
With a limited real estate partnership, you get a diversified portfolio of real estate investment opportunities, allowing you to merge the funds with other real estate investors to purchase, develop, lease, and sell the properties that are hard to manage single-handedly.
Through a RELP, you can own different properties, and it is a form of private equity. It has a specific term that can range from 7 years to 12 years, and during this period, the RELP will work as a small company. It is suitable for accredited investors since many RELPs have a minimum investment requirement.
Raw land income
Based on your rights on the land, some companies will be willing to pay you for any structures they add. It includes pipelines, cell towers, gravel pits, and pump jacks. If you own raw land, you can also rent it for agricultural production and generate passive income.
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Real estate crowdfunding
Real estate crowdfunding is an investment strategy that allows an enterprise to raise capital with other individuals. It can be done through online platforms that offer a common ground for real estate developers and interested investors. In exchange for the money, the investors will get equity or debt for the development of the project, and when the project is successful, they receive monthly or quarterly distributions.
However, all real estate crowdfunding platforms are not available to everyone. Some are reserved only for accredited investors, but platforms like RealtyMogul and Fundraise allow newbies to start their investment journey with a small amount. Crowdfunding offering will come with a considerable risk since it is not liquid, and the funds could be tied up over the long term.
Invest in your own home
For most young individuals, it is a dream to own a home, and it should be at the top of your personal finance goals. Residential real estate may have its ups and downs, but it usually appreciates in the long term. Many people do not like to buy a home outright and consider a mortgage. You can work to pay it off while owning the home. It is a long-term investment and will protect you against inflation and the volatility of the real estate market. This is one step that precedes investing in all the other types of real estate and will enhance your net worth.
Short sales
Short sales are about buying a home from a lender whenever the mortgagee is behind on payments and then selling it at a higher price. However, it can be a time-consuming and complex process. There is a difference between short sales and foreclosure. A short sale will happen if the homeowner sells the home for less than they owe in the mortgage, whereas a foreclosure is a legal action taken by the lender to seize the property when they have fallen far behind in mortgage payments. Only expert real estate developers engage in short sales.
FAQs
Is it worth it to add real estate to my investing portfolio?
Real estate is a unique asset class and should be a part of all portfolios. Since it is not directly associated with the market, it will not have the same ups and downs. It will offer safety from the stock market volatility and can produce income in mortgage payments and rent.
How can I invest in real estate?
You can invest directly by owning and managing real estate properties or choose an indirect investment where you invest in pooled vehicles that own and manage the properties like REITs.
What are the risks of real estate investment?
Real estate investing is less risky compared to other forms of investment. This is because the value of your investment will eventually grow. The real estate industry is volatile, and it is affected by inflation and recession, but in the long term, the property value will grow, and you will be able to sell it at a higher rate than the purchase price.
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The bottom line
These are some proven strategies that help make money in real estate. However, there is no one-size-fits-all when it comes to real estate. You must identify your investment criteria, budget, and risk appetite and proceed. Understanding the investment and risks will help decide if the process is worth it.
Appreciation, income, and demand will make a huge difference in your decision. Real estate is a lucrative investment that can offer income in the form of rent and appreciation, and it is also a great way to diversify the investment portfolio. No matter what you choose to invest in, be financially prepared because real estate is an expensive investment, understand the local market and identify the top locations and follow a simple strategy.
Real estate is illiquid, and the projects can take a lot of time to execute and pay off. If you are thinking of real estate investment, consider it a long-term investment. The return on investment is significantly higher than that on other investment options.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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