Whoever invests in real estate does so to make more money than they initially put into the investment. A good real estate investment can change your future. The profit you make from any investments, however, should be sufficient enough to cover any risks you took and should also be able to help you pay taxes.
Utility, maintenance, and insurance costs, including repaying any loans you took, should also not be out of your pocket. Therefore, investing in something that helps you make a profit and does not cause you to go bankrupt is essential. That is even better if you can generate income by renting a property and investing in more real estate.
Real estate investments are quite simple once you gain an in-depth understanding of risks, investment, economics, and certain basic factors. However, simple does not mean easy; making errors and mistakes due to negligence is possible. This can cause huge losses and major issues.
Real estate can be a lucrative investment both as a means of income and through rent. If you are a dedicated investor or agent, then investments can also help you diversify your portfolio. Investments take time, money, and loads of patience. If you think it is the right choice for you, then you are in the right spot.
What is Real estate?
Any property or land with permanent natural or manufactured attachments is known as real estate. These attachments include trees, minerals, bridges, buildings, homes, fences, and water bodies. Real estate property is different from personal property. Personal property may include farm equipment, tools, machines, boats, jewelry, cars, furniture, etc.
What Is A Real Estate Investment?
Investments include purchasing or selling real estate property or land to make a profit. Some may also give their property up for rent for a fixed monthly amount.
People who continually invest in the real estate market are known as real estate entrepreneurs or investors.
Investors also develop, renovate and improvise properties to sell them at a higher profit margin.
How To Make Money Through Real Estate Investments?
There are four major ways of making money or profit through real estate investments. These include:
- Waiting for the property to increase in value to sell at a higher profit margin.
- Renting out a property to generate regular income.
- Residential property profit techniques.
- Invest in properties without buying the property as a whole.
Breakdown Of Methods To Generate Income Through Real Estate Investments
Let us now breakdown and take a deeper look at real estate income generation methods:
Waiting For Property Value To Increase
This is the most common and basic way to make money through real estate investments. Appreciation allows you to make huge profits when the property grows in value.
For example, you may purchase a property for $500,000, which appreciates to nearly $600,000 in a few years. This way, you will make a profit of $100,000 on the investment.
Most real estate properties appreciate, making real estate investments so popular. There is always a high chance that your property will eventually sell off for a higher price, allowing you to gain substantial profit.
Any real estate that is just land with no structures upon it can appreciate for the following reasons:
- Land appreciates when you construct an estate, such as a commercial building, house, or park over it. You may also renovate structures that are already built upon the land.
- The discovery of natural resources such as oil or gold can cause the price of your land to scale massively. Mineral resource discovery allows you to sell land rights to harvesting companies. This way, you can earn a profit margin on any resources they collect.
On the other hand, residential/commercial properties appreciate because:
- Real estate near commercial centers, popular tourist spots, scenic areas, schools, or hospitals tends to grow in value due to increased demand.
- Real estate also appreciates when the neighborhood or surrounding property is being developed or renovated. Property can also decrease in value if the opposite occurs.
- Commercial building renovation and further developments cause a property to rise in value. This is the logic behind fix-and-flip investing.
You must also account for inflation as commodities and other things rise over time. This means you may profit less on a property than the price you sell it for. For example, a property may appreciate over $150,000, but if a regular house price has grown by $60,000 during the same duration, you will likely make less profit.
You will earn a one-time profit when you sell an appreciated property. But many real estate investors use their investment properties to generate a steady cash flow through renting. You can generate regular income through residential properties, commercial properties, and raw land.
Aiming For Regular Income
You simply do not have to wait for the property value to appreciate to make a profit. You can also rent out your property to tenants for monthly rent. Make sure you charge the rent amount accurately. This will ensure you can pay for property rates, utilities, and mortgage payments and still make some profit.
Similar to housing properties, commercial properties can be rented out too. Commercial ones make more profit if you offer your tenants contractual obligations.
The ‘first right of refusal’ is used when any business asks you for rented space on your property. This way, they can pay you as your first option for any office opening up at your spot. This contract is a great way to grow business and be fruitful if you wish to rule out long vacancies.
With commercial and residential real estate, it is important to strike a balance between demand and pricing. Charge rent that is higher and sufficient to cover expenses and still make a great profit. However, you must ensure it coincides with a property’s real value.
Low rent can put you at a loss, while a higher one will drive away customers. If you do not have structural buildings on your land, you can still rent them out. You can sell rights for resource harvesting to gain profits on any collected resources.
Some businesses may rent out your land for production or even agriculture. You just need to ensure the rental price will be enough to cover expenses, and the royalties you get can help you profit.
Residential Property Profit Techniques
There are several ways to make a profit on residential property. There are multiple options for one-time profit and even monthly income. However, the strategy you should pick depends on how involved you wish to be since they all require background knowledge and proper research.
Let us look at how you can make money on residential properties below:
Purchase And Hold
This is the most popular strategy to make a substantial profit. As mentioned earlier, you can make profits by purchasing property and waiting for the value to appreciate. You can also rent out your property in the meantime.
The best part is that purchasing separate properties is not essential for this strategy. You can wait for your residence value to increase and sell it for a high profit later. You can also rent out the rooms of your house to pay off the mortgage or simply profit from rent. Larger families can live in one house and rent other properties to generate income.
You become the de-facto landlord of your property when you rent out, so make sure you know what obligations you will need to fulfill. This includes maintenance, hiring contractors, caring for utilities, etc.
Failure to oblige can cause tenants to withhold payment legally. You can hire a property management company to do these tasks for you. However, they will charge 8% to 10% of your monthly rental income as payment for their services. They are great for screening new tenants too.
Fix-and-flip has slowly become an exciting form of investment. You may have noticed a lot of TVCs related to them. This investment works in a similar way to waiting for your property to appreciate but in a slightly different manner. You purchase low-priced land, spend on renovation to help raise the value, and then sell for profit.
House flipping can help you make massive profits, but most beginners avoid it due to obstacles. Knowing how much renovations will cost you and whether you need a huge budget will ultimately decide your profit. This may sometimes be too low.
Properties in scenic or tourist spots can be rented out for short terms. This is called a vacation rental and has gained significant popularity due to sites like Airbnb. Investing in similar real estate can make you a great profit even after removing maintenance and website commission costs.
However, it is important to know that regulations are also underway due to the housing crisis. Many local and state governments disallow holding properties to be used as vacation rentals instead of being used for long-term residence.
Therefore, make sure you are aware of local laws and that these allow vacation rentals before you jump on the bandwagon.
Starting Without A Huge Capital
If you do not have a big budget or substantial capital to purchase entire properties, you will be glad to know that you can still make profits through real estate. You can do so through multiple ways of lending. Let’s look at these below:
A REIT (Real Estate Investment Trust) works when owners of several commercial real estates sell shares for investors to buy. Purchasing a dividend will help you profit from any property you invest in.
This is a great option if you do not have a budget for purchasing properties directly.
An REIG (Real Estate Investment Group) works similarly to REITs but is for only a private group of investors. These may often have separate rules/structures and are a good option for only well-versed investors.
Mortgage Lending/Mortgage Loan
Real Estate Agent
The first option works similarly to how real estate agents sell properties, but the agent purchases the property at a premium price determined beforehand. They then start looking for buyers willing to purchase the property for a higher cost.
The agent receives a commission, but the risk is substantially high. However, the profit margin is super great. The other option is working as a regular estate agent and dealing with buyers and sellers to get a commission on all transactions.
You can also earn on real estate by working as a property manager or opening up a company that manages commercial and residential properties.
Factors To Consider Before You Start Investing
Certain factors that you should take notice of before jumping into real estate investments include:
Assess Your Local Real Estate Market
Many real estate investments work better if you live in or around the area you are investing in. Living close to a housing market with many opportunities is great, so you do not need to buy a place to live nearby.
Any investment comes with a certain degree of risk. Assess how much risk you are willing to take and then invest accordingly.
Calculate how much budget or capital you have for investing. The type of investment you will be able to make relies heavily on this.
Real estate properties are not usually liquid. This means you cannot sell your property quickly or with a huge profit if you urgently need money. Therefore, make sure you are willing to take risks to invest in property if you have unstable financial conditions.
Do you wish to generate passive income, or are you hoping to create a real estate career? The answer to these questions will help you understand whether you should invest in an estate that requires full or partial attention.
Jumping into investments with no real knowledge of real estate can land you in a hot mess. You are more likely to lose money and make investments that produce little to no profit. It is important to ensure you have comprehensive education and are trained to make various investments if you are hoping to launch a career.
What Are 3 Things That Make A Great Real Estate Investment?
Anyone interested in real estate wants to make money while knowing the risks involved. Making smart decisions is therefore utmost essential whenever you wish to invest. It is a good idea to try and achieve the following goals below:
The Investment Should Not Be Very Risky
Real estate investments are surely risky but the risk factor should not be extremely high when you make any. Real estate development, purchasing land, fixer uppers, private funds, and even TIC (Tenant-In-Common) investments have higher risks. It is better to buy an established property to secure cash flow.
Making bad investments can cause you to lose whatever you invest. It is smart to get properties transferred to your name and purchase entire properties to avoid this. Always do your research, analyze, assess, see review reports and perform any budgeting and tests to ensure your investment has a very low risk.
Brings In Sufficient Profits
You have to pay out of your pocket when you purchase any property. You may have to liquidate financial assets to invest in illiquid real estate. To earn a profit, you must make sure you land good deals. A cash flow-positive real estate will help you make a profit on rent and entire sales, even if it is sold after a few good years.
Is Not Too Hectic To Handle
Some investments demand huge budgets and loads of time. These include vacation rentals, properties in poorly built areas, college rentals, etc. Your best bet is to invest in simple and decent properties that will be appreciated over time. You can eventually make money on rent before selling it out for a high profit.
Ensure your property does not take too long to manage and is easy to look after, depending on your schedule. Treat your tenants fairly and fulfill all obligations to rule out issues. You can also hire property managers to do these jobs for you instead. However, ensure you are willing to offer them a part of your monthly rent earnings.
What Is Needed To Make Money In Real Estate?
- You will need money to make money. This means you will need a good budget if you want to purchase a property.
- Buying property at wholesale prices or using beginner strategies can help investors break into the market with a low budget or bad credit.
- You will require real estate knowledge, research, time, and money, especially in the beginning.
- Apart from wholesale purchasing, full-fledged purchases and flipping houses will also require capital. You need to make sure you have enough.
- If you wish to work with a partner or lender, assess your scenario, thorough input research, analyze deals or hire a property manager.
- Deal execution and management of finances are also skills needed for successful investments.
How Can Beginners Make Money Through Real Estate?
Investing in commercial projects or using the fix-and-flip technique can be quite complicated for beginners. So, what can beginners do to earn through real estate? Let’s look at the best ways below:
If you lack the capital or budget to buy full-fledged properties or houses. You can either rent out an entire floor or separate rooms for monthly rent. This can help you repay your mortgage and purchase new property over time.
You can earn significantly more if you have a large house, triplex, or duplex. You can rent out several rooms in single-family homes if you are comfortable. If you cannot rent your house, you can rent a guest house or your garage. You can accumulate enough to buy another real estate property later.
Purchase A Single-Family Home
This strategy is simple yet effective. Purchasing a single-family home and renting it out is a great way to earn money.
Although a larger home can help you earn a lot more, the initial purchase will always be costlier. The process can also be time-consuming, hectic, and complicated. Not only are single-family houses easier to maintain, but they also appreciate fast.
Make sure you consider the location and neighborhood of the single-family home you purchase. People like to live in places with good neighbors and safe surroundings. Nearby markets and other facilities are also a plus. So, always do your research beforehand.
Make Use Of Rental Sites
Vacation rentals can help you make a lot of money, especially if you purchase a property near or within a tourist spot. Beautiful, scenic views and other tourist attractions are a bonus.
Airbnb or other popular sites are a great way to rent your property to tourists or visitors. Creating a listing on the site ensures you get great investors or renters in the future. This means you will be paid constantly without facing vacancies for too long.
However, ensure you understand that a vacation rental requires tons of regular maintenance. It will need to be thoroughly cleaned by a house cleaning service after each visitor leaves. Make sure to hire a company that responds promptly.
Also, make sure to check on local area rules and regulations to ensure you do not end up getting penalized.
Purchase Turnkey Properties
Turnkey properties are those that companies own. They often have an inventory of fix-and-flip properties that have been sold off. Turnkey properties have a lower risk than fix-and-flips.
This is because renovations do not need to be done within a certain time frame and budget. Renovations are done for you, and all you have to worry about is making a small down payment. They are also a lot less of a burden on your pocket.
Become A Property Manager
There is a great demand for property managers and property management companies. Most investors cannot find time to deal with each investment independently since they have several to deal with.
Therefore, they are willing to pay professionals to do the job for them for a fee. A property manager/property management company usually charges around 8% to 10% of the monthly rent for each property. The tasks they perform include:
- Vacancy advertisement.
- Screening and searching prospective tenants.
- Rent collection.
- Managing maintenance requests.
- Staying up-to-date on any information or task the client requires for a property.
What Are The Best Practices Of Successful Real Estate Investors?
Successful investments can surely make you rich, but these can be highly risky and challenging, especially if you are a beginner. Wholesaling, joint ventures, and property management are some ways that people can make a fortune through investments.
High competition means those that have background knowledge and relevant education are the only ones who can succeed. Many universities offer coursework and programs to help with this. Whether a real estate investor has a degree, certain habits and practices make them successful. Let’s look at these below:
Setting short-term and long-term goals call for investors to work like business professionals. This means they should study and plan before they make any decisions.
Planning allows investors to see the bigger picture, focus on the main goal and tackle any drawbacks. Since investments are often challenging and taxing, staying organized will reduce many burdens.
A good plan should account for and estimate the investment that needs to be made, rental income, renovation costs, upgrade/maintenance costs, number of units, demographic adjustments, and other factors that can affect your investment.
Understand The Market
Proper knowledge of the market you wish to invest in is essential to rule out loss and other errors. Make sure you know about geographical information, neighborhood type, and what differentiates commercial and residential properties.
Stay on top of the latest trends, mortgage rates, unemployment rates, consumer spending cycle, and other statistics. All these will help you assess how hot the market is in a particular timeframe and make decisions accordingly.
You will also be able to predict trends and make better decisions regarding potential investment opportunities.
- Stay updated on rules, regulations, laws, taxes, new terminologies, and market trends.
- Breaking laws can cause penalizations and loss.
- Make sure to have sufficient knowledge of taxes and investments, so it does not affect them or hamper your real estate business.
Deal With Honesty
Although ethics and honesty are not definite rules, following them paves a path to success. Practicing fraud and taking advantage of certain situations will also ruin your reputation in the market. Being fair, understanding, and honest will help you attract more customers, especially if you are an agent or property manager.
Pick A Niche
The overall knowledge is great but being an expert on a certain real estate niche is even better. Make sure to pick a niche based on what calls out to you, whether it is residential, commercial, or vacation homes.
Gaining deeper insight or knowledge on a certain topic will minimize the chances of error and ensure long-term success. You can also master several markets if you wish to make multiple investments. Other niches include low-income multi-unit houses, luxury residencies, and rural farm rehabs.
Referrals are truly essential for real estate investors. Maintaining a good reputation and treating associates, business partners, renters, clients, and other people involved with respect should be your utmost priority.
Make sure you listen to what others say, pay attention to details, and promptly respond to queries/complaints. A positive outlook and strong relationships will make you credible and more likely to win over clients, sellers, or buyers.
Accept The Risks
Investing in property has risks, but you should also be well aware of others in a particular niche and be mentally prepared for loss.
Although advertisements may make it seem that putting money into real estate has zero risks, that is very much the opposite. A successful real estate investor knows and accepts the risks, can dodge legal implications, and adjust to lower risk.
Hire An Accountant
Handling taxes can get confusing, and even small errors can create a huge problem. It is a good idea to hire an accountant to do the job for you, so tax calculations become simpler. Doing the job yourself will be taxing and time-consuming if you are unaware of recent tax laws.
An accountant will help minimize errors, file the taxes for you and manage other financial tasks for a certain fee. This fee is much less than the savings you can make through proper tax filing.
Learn From Others
Doing things on your own and learning from experience is great, but taking help from others can help minimize errors greatly.
A good investor always has supportive friends and good connections with lawyers, mentors, or other investors. They can help investors with risk management, budgeting, and tackling problems. Plus, you can learn much from other successful people and make money simultaneously.
Create A Network
Building a network is a great way to grow. When you sit, deal and talk with other investors, you can profit mutually and offer each other advice and insight. Your group can have investors, NGO members, clients, partners, businessmen, and other investors. You will be able to support each other when the need arises.
A network can also help you understand whether you should make or break a deal and even helps with referrals.
What Are The Advantages And Disadvantages Of Real Estate Investments?
Let us now look at what advantages and disadvantages real estate investment can bring for you:
Advantages Of Real Estate Investments
- The housing or real estate market is not extremely volatile. It is better to invest in real estate as compared to purchasing stocks for profit.
- Real estate properties often see a steady rise in profit margins and property value.
- With rent, you can have a steady cash flow each month.
- With tax breaks, you can easily pay off property tax, mortgage, etc.
- If you save up through rent, you can purchase another property soon.
Disadvantages Of Real Estate Investments
- The profit earned through real estate is not as high as that earned from stocks.
- You need a substantial budget and income to invest and generate income through real estate.
- Any loans, renovations, maintenance, and costs will have to be paid out of your pocket initially.
- Properties are not easy to sell off immediately.
- Tenant and building maintenance can be time-consuming. You may need to pay property managers to do the job for you.
- Taking care of power outages, leaks, and breakages and collecting rent can get tiresome.
Frequently Asked Questions
How To Determine The Value Of A Property?
Comparative market analysis is the best way to deduce the value of any property or real estate. Properly examining neighborhood properties or similar real estate can help determine the range.
What Real Estate Investment Strategy Should I Pick?
Strategies and the type of real estate investment you should pick can get confusing. If you are a beginner, opt for low-risk investments and keep time constraints and budget in mind. Make sure also to consider any long-term investment goals that you may have.
Do I Need A Real Estate Agent To Buy Property?
Working with a real estate agent is safer if you are a beginner, but you can surely purchase property independently if you are an expert. Hiring an agent makes the process less taxing and time-consuming, and you can make sure you comply with all requirements. Market knowledge, finding a lawyer, opening and closing deals, etc., will be made much easier through an agent. However, ensure you interview several agents and check reviews to pick the best one.
How To Find A Suitable Tenant For Renting?
The better your tenants are, the easier it will be for you to manage your estate. Payments will be on time, and maintenance issues will be fewer. Place advertisements and always thoroughly screen each applicant before making a final decision. It is also important to conduct background checks, check credit history, and any rent payment histories as well.
What to do if tenants damage property?
This is a very common query. To reduce the risk of bearing damage expenses, it is a good idea to take a security deposit from tenants before they move in. This deposit should be able to cover any damages that take place while the tenant is living on your property. The remaining security deposit is then returned at the tenancy’s end. However, you should be fair and let go of general wear and tear.
Real estate investing is a lot more accessible than most people imagine. The best part is that there are several ways to get involved in this business.
You can invest indirectly, buy a home, rent a property, or flip homes. However, it is essential to input proper research and ensure you have the time, money, and patience to bear risks and financial burdens.
Make sure you will have to initially pay taxes, maintenance, renovations, and other costs out of your pocket. Be aware of local market trends and build networks to make impactful decisions. Good luck!