You’ve seen those shows on HGTV where average people make it big in real estate from investing a little time and money. You’ve heard of people in their twenties becoming real estate millionaires by the time they hit thirty, while many are finally getting their first real pay raise in their corporate job that they hate. Can you make money in real estate? How do you do it? Let’s talk about it.
Different Ways to Make Money in Real Estate
Yes, it is possible to make money in real estate. In fact, there are several ways to do just that. While there is some flexibility, this depends on your goals and objectives. The primary means to make money are through appreciation, rental income cash flow, and interest from loans.
Real Estate Investing for Appreciation
Appreciation in real estate is where you purchase a home with the intent to sell it at a higher price later. When the market is really low, it could represent an excellent opportunity to snatch up some properties to trade for a profit after the market picks back up.
In the 2007-2008 housing market crash, while everyone was panicking, Robert Kiyosaki and his partners were buying. They took out a million dollar loan and bought several properties. At the time, many thought this move was incredibly risky but, looking back, these properties were an incredible deal. Robert and his partners hung on to most while renting a few out for cash flow. After only a few years, they sold out and walked away with three times their money.
Even though Mr. Kiyosaki is a top-dog real estate investor, his methods can be replicated by the average investor through diligence, hard work, and an understanding of the real estate market. Many track the market, buy when it's low, and sell at the peak, but it's not the only way to make money. Records show that properties increase in value over time, so as long as you have cash flow from renting the property out, you will still make money.
Residential real estate is any dwelling space and includes multi-family living quarters up to four units. The zoning laws for residential real estate are typically more relaxed than those for commercial real estate and usually sell for less.
Striking gold in the residential real estate market with appreciation requires some homework on your part. Checking city plans for future public transport, roads, buildings like schools, etc. will help you determine which part of the city is going to be a hot place to live. Knowing this in advance will help you be able to snag some homes in that area for a lower price and sell them once the city becomes more developed.
Commercial real estate is any property zoned for commercial purposes, meaning any property you can use for business purposes. This includes living spaces with more than four units as well as buildings for cafés, government buildings, churches, etc.
Commercial property is always in high demand if it is near the right commodities. A few of those commodities include docks or transportation hubs, a populated city (if the use for space thrives on that), and the potential it has, i.e., can it be renovated or developed further.
Land in real estate is any parcel of land without a building on the property.
Land appreciates based on its location; it’s zoning and its potential. If the area of the property is excellent for the new highway that is being built, you stand to make a lot of money. The location also becomes a factor if it’s a high-demand city and people are eager to build a home in the area.
The zoning also makes a significant difference in the appreciation value, especially if it’s in a growing city. If you have a large piece of land in the middle of a town that has doubled in size since you first purchased the plot, you now have the option of selling it to commercial developers to create a new shopping mall or McDonald's, if the zoning on the property is for commercial. The potential for a parcel of land is about more than what can be built on it. Some pieces of land have oil or precious minerals under the soil. Others have an abundance of timber that people would love to own. If you have the rights to these, the appreciation over the years could be significant.
One consideration to make when counting on appreciation is the level of inflation. Remember, inflation is an increase in the value of services and goods while simultaneously the purchasing power of money decreases. Because the value of the dollar decreases as inflation increases about 2.50% on average per year, it makes no sense to purchase a home today for $200,000 with the idea of selling it in 2022 for $220,000 because you will have lost money. Finding a home that is currently undervalued and snagging it is key to making this type of investment work.
Real Estate Investing for Rental Income & Cash Flow
This type of investment is a bit easier to understand. You purchase a property with the purpose of renting it out for a steady, more passive monthly income. Investing in rental properties are a great way to make money in real estate. Although you will typically have to have to put 20% of the purchase price down upfront, you are immediately able to rent out the home in its entirety and make money on that while you pay off the rest of the house. As a bonus, the tax write-off incentives are phenomenal as well.
Rental properties require may require more legwork than other types of real estate investing due to the nature of the investment. First, you have to locate a property that has a relatively stable market, where you will be able to make more than your mortgage payment in rent each month and have a reasonably predictable stream of tenants. Next, you’ll need to make any repairs necessary to get the property ready to rent out. Make sure you fix up the units in such a way that it'll attract the right type of tenants. Finally, once you get tenants, you will have to maintain the property. This includes any and all repairs in between tenants and answering calls about pests and plumbing, among other things. If you are renting out commercial or industrial real estate, the right tenant could mean more stability as those leases are typically longer.
Working With Investors
You don't have to be in this game alone. In fact, having investors go in with you on a large project can put you in the path of even bigger projects.
Many start out looking to work with sophisticated investors. The newbie searches high and low for the perfect property to pitch, and is over the moon when they strike a deal for a 6% Preferred Return and 85% equity. The newbie thinks they've made it and the sophisticated investor KNOWS they have.
That's because Preferred Returns and equity percentages look something like this:
You find a property that you expect to make 10% cash on cash return on. Your sophisticated investor puts $150,000 into the project, and all you see are dollar signs. When your property begins to rent out, the money starts rolling in. Because you agreed to a 6% Preferred Return, your investor receives the first $9,000 (6% of $150,000) the investment makes, and 85% of the profits after that. So, if your projected outcome comes to pass and the investment makes $15,000 in the first year, you think you're on top. In reality, however, the investor makes the initial $9,000 and $5,100 (85% of the remaining profits), leaving a grand total of $900 for your work that you continue to put in to keep the investment running.
And that's not the worst part. If, for some reason, your investment didn't do well and the investor didn't even get their minimum $9,000 for the year, it carries over into the following year. Which means you could end up paying for your investment. Yikes.
Have no fear, though, there is another way. Start asking your friends and family members if they would like to invest in properties with you. Sure, the invested amount won't be hundreds of thousands, but you also won't be paying a preferred rate. It's worth not getting the largest apartment complex, if only that you'll be getting the experience and making the money you are worth along the way.
Remember, every case is going to be different. You may find a sophisticated investor that has great terms and find fame and fortune with them, but don't bet the farm on it. Make sure you get the money you are worth or the deal will never be worth it.
Other Ways to Make Money through Real Estate Investing
Here's an idea you can use with multiple types of the previously mentioned money makers. If you have a commercial property, for example, added income could come from things such as vending machines, small attractions, or other business operations that are related to real estate. The possibilities with this one are endless!
So, is it possible for the average Joe to make money in real estate? Absolutely. It all depends on how much risk you are willing to take on, the amount of money you have available to you, and how you use that money. As with most investments, patience is the key to success. Making sure you know what you are getting into before jumping into the market will help you find that financial freedom you seek from real estate investing.
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