Mykeehis) 1) How to Make Money in Real Estate

  How to Make Money in Real Estate

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.

Rather than providing obscure strategies for investing in real estate or a primer on homeownership for first-time buyers, this video  will focus on how to make money through real estate. It will cover both the basic methods that haven’t changed in centuries, no matter what kind of gloss the gurus of the moment try to put on them, and specific opportunities that have arisen relatively recently.

Real Estate Profits from Increasing Property Value

The most common way that real estate offers a profit: It appreciates—that is, it increases in value. This is achieved in different ways for different types of property, but it is only realized in one way: through selling. However, you can increase your return on investment on a property in several ways. One way—if you borrowed money to buy the property—is to refinance the loan at lower interest. This will lower your cost basis for the property, thus increasing the amount that you clear from it.

The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land outside the limits becomes increasingly valuable because of the potential for it to be purchased by developers. Once developers build houses or commercial buildings, it raises that value even further.

Appreciation in land can also come from discoveries of valuable minerals or other commodities—provided that the buyer holds the rights to them. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees, and other natural resources.

When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds, and more, these changes cause the home’s value to climb. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays.

Home improvements can also spur appreciation. Putting in an extra bathroom, heating a garage, and remodeling a kitchen with state-of-the-art appliances are just some of the ways that a property owner may try to increase the value of a home.

Commercial property gains value for the same reasons as raw land and residential real estate: location, development, and improvements. The best commercial properties are perpetually in demand.

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—including property—the following year. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it still would be worth many times more today.

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.

Real Estate Profits from Income

The second big way that real estate generates wealth is by providing regular payments of income. Generally referred to as rent, income from real estate can come in many forms.

Raw Land Income

Depending on your rights to the land, companies may pay you royalties for any discoveries or regular payments for any structures they add. For example, these include pump jacks, pipelines, gravel pits, access roads, and cell towers. Raw land also can be rented for production, usually agricultural production, and land tracts with trees may be valuable for the timber that can be periodically harvested.

Residential Property Income

The vast majority of residential property income comes in the form of basic rent. Your tenants pay a fixed amount per month—which will go up with inflation and demand—and you take out your costs from it, claiming the remaining portion as rental income. A desirable location is critically important to ensure that you can secure tenants easily.

Commercial Property Income

Commercial properties can produce income from the aforementioned sources, with basic rent again being the most common, but can also add one more in the form of option income. Many commercial tenants will pay fees for contractual options like the right of first refusal on the office next door.

Residential Real Estate: Paths to Profits

Here is a closer look at some of the many ways that you can earn income from residential properties.

Buy and Hold

This is one of the more traditional ways of earning income from real estate. There are a number of ways to accomplish this: You can buy a single-family home and rent it out; buy a multifamily home and live in one of the units while renting the others—ideally to cover the mortgage and your own housing expenses; or purchase a multifamily home and rent all of the units—either managing the property yourself or hiring a management company to handle renting units, collecting rent, addressing needed repairs, and so on.

Flipping

Property flippers specialize in adding high-return fixes to houses in a short time and then selling them. Flipping can be lucrative if you know how to find properties to fix up, you have the necessary skills to do the renovations yourself or oversee a crew to carry them out, and you have a sense of a property’s underlying costs and potential value.

Airbnb and Vacation Rentals

The demand for home-away-from-home rentals had taken off in recent years, as many travelers preferred this option to staying in a hotel. Homeowners could earn income by renting out a house or even just a room on a short-term basis, especially if the property is in area that’s a well-known tourist destination. It’s unclear when that market will return. But should it reappear, keep in mind that short-term rentals are regulated and sometimes even banned in certain cities. 

Alternative Real Estate Income Sources

Real estate investment trusts (REITs), 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.

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