If you’re interested in real estate investment and want to know how it creates wealth without obscure strategies, this article will explain the timeless methods and recent opportunities.
No frills, just facts. Whether you’re curious about the investment potential of real estate or you’re simply sick of infomercials promising little-known ways to “profit from your property,” it’s worth learning, for real, how real estate creates wealth.
How To Make Money In Property:
Understanding the art of wealth creation in real estate is a valuable skill. It offers a chance to grow wealth, guard against inflation, and seize opportunities in a thriving market. Discover seven effective ways to embark on your journey as a successful real estate investor. Let’s explore your path to real estate riches.
1. Leverage Appreciating Value
Real estate typically gains value over time, a process known as appreciation. This means your property’s worth increases, often without any effort on your part, boosting your equity – the difference between its value and the remaining mortgage balance.
There are several factors behind home appreciation:
- Area Growth: As the surrounding neighborhood flourishes, your property’s value tends to rise, capitalizing on the improved area.
- Renovations: Enhancing your property through major renovations, such as kitchen or bathroom remodeling, or improving curb appeal and energy efficiency, can raise its value.
Consistently increasing your property’s value is a smart long-term strategy for real estate income. It ensures a solid return on investment, accelerating your wealth-building journey.
2. Buy And Hold Real Estate For Rent
As a property investor, there are various options for investing in real estate, one of which is the buy-and-hold strategy. When you buy and hold, you rent the property to tenants who may not wish to buy a home. Here are different ways to leverage buy-and-hold real estate:
- Long-Term Residential Rental Properties: These are homes you own and rent out on a long-term basis. You can have yearly leases that renew or find new tenants when needed. This approach offers monthly cash flow, where the rent should cover the mortgage, taxes, insurance, and maintenance, resulting in positive net income. Unlike many investments that don’t yield regular cash flow, long-term residential rentals can build wealth effectively.
- Short-Term Vacation Rental Properties: If dealing with year-round tenants isn’t appealing, consider short-term vacation rentals. You own the property and rent it to travelers for shorter stays. When you have a second or vacation home, you can also use it for your own vacations and rent it when not in use. Similar to long-term rentals, short-term vacation rentals generate cash flow, covering property expenses while benefiting from appreciation and equity growth.
- Renting Out Land: Even if you own vacant land without structures, you can earn cash flow by renting it out. While the income may not be as high as with developed properties, you can charge others to use the land for purposes like storage or wood collection. This cash flow can be saved for future property development or other investment opportunities. Land may not appreciate like buildings, but it can provide a steady stream of income.
- Commercial Spaces for Rent: Investing in commercial real estate is another way to generate cash flow. Owning commercial properties allows you to rent them to businesses. You, as the landlord, are responsible for maintaining the building, while the tenant covers the rent, which can be used to cover the mortgage and upkeep expenses.
These diverse approaches to buy-and-hold real estate offer opportunities to create income streams, accumulate wealth, and diversify your real estate portfolio.
3. Flip A House
Flipping houses can be profitable with the right approach. To flip a house, follow these steps:
- Purchase a property undervalued, like a foreclosure or a fixer-upper.
- Renovate the property.
- Sell it for a higher price than the acquisition and renovation costs.
Flipping houses involves multiple stages and demands a good understanding of the market. It’s ideal for real estate agents with market knowledge or experienced house flippers.
4. Purchase Turnkey Properties
Investors may need to sell an investment property early for various reasons, like management issues or financial needs. Selling a property with tenants in place is referred to as a turnkey property.
When you invest in a turnkey property, you acquire a home that generates immediate cash flow. It saves time as you don’t need to search for tenants and reduces expenses associated with owning a vacant property.
5. Invest In Real Estate
When traditional real estate investment isn’t your preference, there are alternative approaches to consider, such as:
- ETFs and Mutual Funds: You can invest in real estate through exchange-traded funds (ETFs) and mutual funds. ETFs are passively managed, while mutual funds are actively managed. ETFs offer lower costs and can be traded like stocks throughout the trading day, whereas mutual funds trade once a day after the market closes. They enable diversification across different types of real estate and markets.
- Crowdfunding: Similar to crowdfunding for various causes, real estate crowdfunding involves pooling money from numerous investors to participate in property equity or debt investments. Investors receive a portion of the rent as cash flow proportional to their investment, offering a way to enter real estate without the direct responsibilities of ownership.
- REITs (Real Estate Investment Trusts): REITs focus on commercial real estate properties. Investors pool their funds with others to invest in these properties. While commercial properties may not appreciate as rapidly as residential ones, REITs provide steady monthly cash flow. They are publicly traded, offering liquidity for buying and selling shares, expanding investment opportunities.
- REIGs (Real Estate Investment Groups): These groups consist of private investors working collectively towards common real estate investment goals. Within an REIG, investors may target long-term residential properties, short-term vacation rentals, or fix-and-flip properties. Collaborating with like-minded individuals enhances the potential for securing better deals and making larger investments by pooling resources.
- Wholesaling: Real estate wholesaling is for investors who can identify promising real estate deals and have a target market to sell to. Typically, wholesalers aim to turn properties around within 30 days, buying properties below market value and selling them at a profit.
6. Make The Most Of Inflation
Real estate serves as an inflation-resistant investment. While the dollar’s value may decline, property values tend to rise or remain stable, avoiding the typical stock market cycles of crashes. This stability provides an advantage for real estate income. As an investor, you can adjust rent prices during lease renewals to compensate for the rising prices in the economy, mitigating the impact of the devalued dollar.
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.
The Role of Inflation in Property Values
When considering appreciation, it’s essential 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, including property, the following year. For instance, if a piece of land was worth $100,000 in 1970 and remained undeveloped for decades, it would be worth significantly more today. Due to inflation over the years, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was the fair market value at the time.
Inflation alone can lead to appreciation in real estate, but it’s a somewhat Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods also cost five times as much to buy, affecting your purchasing power in the current environment.
Things to consider with Property Investing:
When determining the most suitable real estate investment approach for you, certain factors must be taken into account:
- Risk Tolerance: Assess whether the investment aligns with your risk tolerance. For instance, retirees seeking consistent cash flow may find house flipping unsuitable. On the other hand, owning a portfolio of rental properties can be a wise addition to their asset allocation.
- Local Real Estate Market: Consider your local housing market, particularly if you intend to invest in rental properties or engage in house flipping. Local regulations, market conditions, and prices can vary significantly. Consulting with a licensed real estate professional can help determine if your local market aligns with your investment goals.
- Liquidity: While stocks and mutual funds offer high liquidity, real estate often lacks this feature. Liquidity refers to the speed at which you can sell an investment at or close to its market value. Publicly traded REITs are quite liquid, whereas investment properties are not.
- Capital: Real estate investments often require substantial capital. For instance, when purchasing an investment property, you should expect to have at least a 20% down payment, in addition to funds for closing costs and reserves for mortgage payments during vacancies. Many crowdfunding opportunities also have minimum investment thresholds, typically around $25,000.
- Knowledge: Investing in Real Estate Investment Trusts (REITs) can be done with relatively little real estate knowledge. Acquiring your first investment property can be achieved with a basic understanding. However, endeavors like house flipping and wholesaling demand expertise, as they are highly competitive and carry significant financial risks. If you plan to engage in these, it’s advisable to gather substantial knowledge and start with a smaller project or investment to mitigate risks.
- Passive versus active investments: When it comes to real estate investments, you need to weigh the passive versus active options. Investing in shares of a REIT or participating in crowdfunded real estate deals allows for a hands-off approach, offering a steady income stream without daily involvement. On the contrary, purchasing rental properties, even if property management is involved, or engaging in house flipping can be quite labor-intensive. While these active investments can yield impressive returns, it’s essential to assess whether you’re ready for the time and effort they demand.