How to Make Money in Real Estate
Following decades of economic shifts, industry development, and social changes, real estate still remains one of the best investment options. Constantly doing research, keeping yourself updated with the industry, and knowing how to interpret market conditions will help you learn how to make money in real estate.
Here are several great ways to make a nice profit from your real estate investments and enjoy financial success.
If you look at a property’s value over time, you’ll notice that they typically tend to go up. Since the 1970s, most US states have seen a median home value increase of more than 100%. It’s renowned that every investment you put your money in needs to be able to grow in value. Real estate ends up being an amazing hedge because it’s outpacing inflation. Of course, this depends on the area: while properties located in some areas will grow by 3-5% in value over a year, properties in other areas will experience a 6-8% growth. There are even situations when the value will grow by 20%. For example, between 2005 and 2018, the median property value has grown by 71% in Texas, 64% in Louisiana, 88% in Montana, 19% in California, 22% in Florida, and 33% in New York.
Buying below market will get you instant equity that, whenever you sell, will be converted into a nice profit. Equity is the difference between the property’s fair market value and the amount of money you owe on the mortgage. Let’s say that you’re buying a property that has a $100k market value with $80k. Congrats, you’ve just earned $20k in equity, so you’re $20k wealthier!
Perhaps you’re wondering how you can buy low. Sometimes, for various reasons, properties are being sold for considerably less than their market value. So keep an eye on what’s going on in the areas you’re looking to invest in. If that’s not the case, you can offer the seller a valid reason for selling low: buying with cash, assuming some liabilities or debts, fast closing, etc. Or simply make a low offer.
Most real estate projects, like rentals, produce cash flow. This means that after you’ve covered your liabilities (debt, mortgage, expenses, and so on), you can have money left over. For example, if you buy a single-family home and you have a $1,000 obligation to the bank and $400 of expenses every month but you’re renting it out for $2,000, you’ll be left with a monthly $600 positive cash flow in your pocket.
Normally, when you buy a piece of real estate you get a loan from a private lender or bank which you then pay every month. The great thing is that over time, by making partial payments toward the debt, the original amount is reduced and the loan gets paid down faster. Let’s say that you buy a property for $150,000. You pay 20% down and borrow the remaining $120,000 in a 10-year loan. Instead of paying just your set monthly payments, you apply an additional amount to the principal each month. By expediting your paydown, you reduce the interest that you have to pay on the mortgage. This also helps you pay off your mortgage sooner.
Improve and repair
Fixing repairs that are needed makes common sense – the secret is being creative and super strategic in order to find improvements that make your investment more attractive but don’t cost an arm and a leg. Brainstorm a bit and find improvements that will raise the property’s value several times more than what they cost you. Some smart improvements that will raise the value of a property include laminating wood floors, resurfacing cabinets, replacing hardware, and replacing carpets.
Commissions or management fees
If you’re going to invest in real estate, you could also earn a realtor’s license, a loan officer’s license, a title license, a property management license, or another relevant authorization. You can make money on any of these. When you buy real estate and you have an industry license, there’s room to make an extra profit of a few thousands of dollars.
If you invest in real estate and take calculated risks, your chances of generating a passive income stream and potentially making money are high.