We all know that there’s a lot of money to be gained through investing. One of the known ways to get an excellent ROI is by navigating the real estate world the smart way.
So in this post, we’re going to explore how to make money in real estate and build long-term wealth.
Channel surfing will take you to some form of real estate, from million-dollar listings to DIY house flipping.
While it’s entertaining to see a dramatic home change unfold over an hour, it’s even more fun to participate. Real estate is a popular investment because it provides income (through rent) and appreciation (when you sell appreciated property). It’s also an excellent strategy to diversify your portfolio.
And it may be more accessible than you realize for the average person. Almost everyone can invest in real estate, though it takes a lot of time, patience, and (of course) money.
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Ways To Make Money in Real Estate
Real Estate Investment Trusts (REITs)
If you wish to start investing, a real estate investment trust (REIT) will give you exposure to the market. And without the effort and expense of purchasing your own property.
REITs are real estate investment trusts that own, operate, or finance properties and ventures. They, like mutual funds and exchange-traded funds, possess a basket of assets rather than just one. Investors purchase a REIT’s shares.
The most prevalent sort of REIT is a real estate investment trust (REIT). It allows investors to pool their funds to fund the purchase, development, and management of real estate holdings.
A real estate investment trust (REIT) focuses on a specific type of real estate. Such as hotels, apartment buildings, shopping malls, or hospitals. Dividends should make up 90% of the company’s annual earnings.
The majority of REITs trade on public stock exchanges, which is a prominent selling feature. As a result, REITs combine the ability to own and profit from real estate with the convenience and liquidity of a stock.
REITs, which are primarily focused on producing revenue from rent and leases, provide consistent returns and hefty dividends. REITs also attract investors due to their unusual tax structure. They are pass-through corporations, which means they do not pay corporate tax. This translates to better profits for their investors.
Stick to publicly traded REITs if you want to keep your money liquid (a few REITs are private ventures). Shares are purchased through a brokerage business, an IRA, or a 401(k) (k).
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Real Estate Crowdfunding
Real estate crowdfunding is a method for businesses to raise funds from a massive number of people. It’s done through online platforms that function as a meeting point/marketplace for real estate developers and potential investors.
Investors accumulate equity in a development project as well as potential distributions.
Not everyone has access to all real estate crowdfunding platforms. Many are only available to licensed investors or those with a significant net worth and/or extensive experience. Nonetheless, platforms like Fundrise and RealtyMogul, which are less limited, allow newcomers to spend as little as $500.
You open an account on these sites and then choose either a portfolio strategy based on your goals. Brokers distribute your money across a series of investment funds. Or you browse and select investments yourself, keeping track of their development through a 24/7 online dashboard.
Despite their ease, crowdfunding platforms carry a high level of risk. They’re not as liquid (easy to sell) as other publicly traded instruments, such as stocks, because they’re private investments. Your funds are locked up for the long haul. For example, Fundrise suggests that investors have a five-year time horizon.
Be a Landlord
Buying a property and leasing it, or a portion of it, is a well-known method to invest in real estate. It is possible to make money as a landlord in a number of ways.
The first option is to buy a single-family home and rent it out. But this technique will only be profitable if your overhead expenditures are realistic. If your tenant’s rental payment can’t make up the mortgage, insurance, taxes, and maintenance, you’re effectively losing money.
Your monthly mortgage payment will be relatively stable while rent costs increase. This allows you to put away more funds over time.
It’s possible to look for rental properties online through sites like Roofstock, which connects sellers of vacant homes ready for tenants to put up their properties, simplifies the purchasing process, and lends a property manager to the potential buyer.
Another method is to buy a multi-unit building and live in one apartment while renting out the other units. It’s called “house-hacking.” This method decreases your living expenditures. It also allows
making enough revenue to cover your taxes, mortgage, and insurance payments.
Renting a part of your home through a site like Airbnb is a low-risk version of house-hacking. It will earn you extra monthly cash without requiring you to take on a long-term tenant.
A condo flip is where you buy a multifamily building and then change the units into condominiums. You find buyers and sell them off separately. It is a more ambitious option.
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Real Estate Limited Partnerships
A real estate limited partnership (RELP) offers investors a diversified portfolio of real estate investment opportunities by combining your money with those of other investors to buy, lease, develop, and sell properties that would be difficult to manage or finance on your own.
RELPs, like REITs, often control a pool of properties, but their structure and organization differ. RELPs are primarily a type of private equity, as they are not listed on public exchanges.
Instead, they exist for a predetermined period of time, usually between seven and twelve years. RELPs operate like small businesses during this time, developing a business plan and identifying properties to buy, develop, oversee, and eventually put up for sale, with profits dispersed along the way. The partnership dissolves once all of the holdings have been distributed.
They’re ideal for high-net-worth investors in general: Most RELPs need a minimum investment. Some require minimum “buy-ins” starting from $100,000 to several million dollars.
Treat Your Home Like The Asset That it is
Focus on your home if you want to invest in real estate. Owning a home is a goal that many Americans aspire to accomplish, and it makes sense. Residential real estate has seen ups and downs. But, in the long run, it generally appreciates.
The majority of folks do not purchase a property upfront instead of going for a mortgage. Having enough to pay off your mortgage and buying your home all together is a long-term investment that can protect you from the real estate market’s unpredictability.
It’s frequently considered as the initial step before investing in other types of real estate, and it comes with the added incentive of increasing your net worth because you now own a significant asset.
Some people go even further and buy properties to spruce up and put up for sale. These TV shows make it look simple. But “flipping” is one of the most time-hungry and costly methods to make money in real estate. However, it also has the most significant chance for profit.
To be a successful flipper, you must always be ahead of unforeseen challenges. Things like budget hikes, time-consuming mistakes, a lengthier remodeling time frame, and challenges selling the property.
It’s critical to be in touch with a team of professionals you can rely on. This includes contractors, interior designers, attorneys, and accountants. It’s only prudent to have enough funds on hand to troubleshoot. Even the most seasoned flippers discover that a job always takes longer and costs more than they anticipated.
Some advice? Go after the ugliest houses in the most affluent areas. That is where the actual value is found. The other challenge is locating those homes when you don’t have a strong network of real estate brokers and determining your after-repair worth.
You could also go into flipping commercial properties. Investing in commercial real estate is one of the best ways to make significant money in real estate.
Commercial real estate developers aren’t just interested in flipping houses; they’re also interested in developing them and adding value to them to boost their net profits through repairs and upgrades. They also provide advice on initiatives that may require more experienced real estate investors to see through to completion.
In the real estate industry, commercial real estate is one of the most profitable sources of income and profit. Investing in commercial properties can be one of the most lucrative sources of revenue if you can identify ways to add value to the transaction.
People will always require office and retail space to conduct their businesses. In the real estate industry, these actual places are the bread and butter. As you progress, you may be able to open shopping complexes, construct large-scale structures, and more. Still, everybody has to start somewhere.
Flipping contracts is one way to make money in real estate without having to put up a lot of cash or credit. You only need to discover a stressed-out seller and a determined buyer and then bring them together. While discovering a distressed seller may appear to be tough, Clothier has automated the entire process. The key to contract flipping is to find a distressed seller and a ready-to-move buyer.
You’ve eliminated the need to look for a buyer after you’ve signed a deal by bringing these parties together. That situation is more dangerous. Instead, by locating the sellers and purchasers ahead of time, you may confidently sign a contract knowing that you will not be forced to close escrow on the property.
To do so, you’ll need to be able to spot vacant houses or houses that are late on their mortgage payments. That is the tricky part. You’re essentially looking for troubled sellers, but homes that are currently unoccupied are ideal for this type of opportunity.
Hard Money Lending
Hard-money lenders make short-term loans to persons who would not typically be eligible for them. You’ll need some money to participate in hard-money lending. These are loans with high-interest rates because they are only for a short period.
A hard money lender could help you close your first deal. This could be your best bet if you have a “sure thing” but lack the necessary funds.
You might also work as a hard money lender, but you’ll need some money to get started. This isn’t likely to be your initial source of income in real estate, but as your network, resources, and transaction portfolio grows, you may be able to provide these bridge loans and earn a high rate of return.
Even if you don’t have a lot of money, if you can discover the good deals, put up a small amount of money, and have a high success record, you’ll have no trouble finding investors.
The interest rates are reasonable in this case. There is a greater danger, but there is also a more significant payoff. It can be an excellent method to keep your cash liquid while still making a big profit in the short term, even without waiting so long for those gains to show up.
When the existing owner of a home falls behind on their mortgage but the property hasn’t yet gone into foreclosure, it’s called a short sale. All parties involved must agree upon the transaction because the property is being sold for less than what is owed in the current mortgages. This could be a fantastic way to make a quick profit without having to invest in long improvements.
Short sales and other default-type auctions, on the other hand, are notoriously difficult to win. Typically, you must pay for the residences in cash upfront, and this must occasionally be done sight unseen.
Short sales are more suited to auctions since you have the opportunity to inspect the property and engage in a bargaining process. Jumping in without a thorough investigation and assessment, unless you’re a seasoned investor, could be dangerous.
Short sales might take a long time to complete, but they are often well worth the wait. A short sale’s potential return can be instantaneous. Because the bank is engaged in a disastrous investment, tens of thousands to hundreds of thousands of dollars could appear as soon as the property transaction is completed.
However, don’t expect to receive the property for a bargain; you’ll have to haggle for a reasonable price. Depending on how quickly the bank wants to get rid of the home, it may have to look out for another buyer, so don’t go too low.
Choose The 1031 Exchange in Real Estate
As an investor in real estate, you can use the 1031 Exchange tax code to sell an investment property and use the returns to buy a new property of equal or more excellent value. You can postpone paying taxes until the following property is sold, or you can do another 1031 Exchange this way.
When you opt to put your house on the real estate market, you must pay capital gains taxes. The Internal Revenue Code’s Section 1031 permits you to defer paying taxes on capital gains if you reinvest them in another property. The IRS considers you to be swapping one real estate property for another.
Refinance Your Mortgage
Refinancing your mortgage is another option. The primary advantage of refinancing your mortgage is that you can get a loan with a lower interest rate and decrease your monthly mortgage payment.
One of the advantages of refinancing your mortgage is that it gives the borrower new money at reduced interest rates, allowing the homeowner to reduce the amount owed each month.
One more upside of refinancing your mortgage is that lower interest rates allow homeowners to replace an existing loan with a new one, resulting in a shorter loan term and no change in the monthly amount.
You make a monthly settlement to the lender when you buy a rental property with a mortgage. There are two portions to this payment: principle and interest. The interest is the lender’s profit, while the principal is the money you’re using to pay off the loan.
Your tenant is essentially paying down your loan for you over time, assisting you in building wealth on autopilot. For example, if you put down $100,000 for a property five years ago and took out an $80,000 mortgage (let’s suppose it was a 30-year fixed-rate mortgage with a 5% fixed rate), you’d only owe $74,000 now.
You would owe only $65,000 in ten years. This indicates that your equity grew year after year. As long as the property worth didn’t drop, you’d earn value. After the mortgage is paid off, you’ll have a property worth $100,000 or more that you didn’t save for, even if it had no cash flow or broke even and never increased in value.
Due to the “debt pay-down,” your tenant paid it off. This will not be possible if you pay for the property with all of your cash or savings and do not use the financing choices. This is the most effective way to make money in real estate and get wealthy.
Tips For Successful Real Estate Investments
Specific techniques will serve you well regardless of the form your real estate investment takes.
Prepare Your Finances
Because real estate is such a costly investment, you’ll need cash on hand for a down payment, a partnership share, or to purchase a home outright. You’ll also need a reserve fund to draw from if and when something breaks, which should be kept separate from your regular emergency fund. Build up an emergency fund, pay off consumer debt, and automate your retirement contributions before you begin.
Familiarize Yourself With The Local Market
Prepare yourself financially: Learn about the local market: “The three most important factors in real estate are location, location, location,” says an old adage. Begin by learning about the local market. Speak with real estate agents and locals to learn about who lives in the region, who is relocating to the area, and examine the property price history.
In a nutshell, do your homework and “concentrate on creating relationships with people — because that’s what real estate is, a business that relies on connections,” says Dana Bull.
Don’t Overcomplicate Things
In real estate investing, a modest technique can go a long way. Don’t be tricked into thinking that you have to go big to achieve passive income if you want to produce passive income. It’s best not to overshoot and keep your costs as modest as possible.
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Real estate investing may be more attainable than you believe, and there are various ways to participate in this highly profitable commodity. How to make money in real estate is all just a matter of knowing where to look. My wife and I invest in multiple ways including wholesaling, flips, long-term rentals, and Airbnb properties. You can read more in our streams of income portfolio.
Real estate crowdfunding, investing in real estate limited partnerships, and purchasing real estate investment trusts are all pure financial plays that don’t require you to manage them. Each of these factors reduces the danger of investing in a large project on your own and without help.
Direct investments, such as purchasing a home, a rental property, or a fix-and-flip property, are also viable options. However, before committing to one of these ownership strategies, make sure you’re financially secure enough to take on some risk and familiarize yourself with the local real estate market.
Keep in mind that real estate is a highly illiquid asset in general. It may take a long time to settle and pay off a project. As a result, you virtually always have to think of real estate as a long-term investment.