Different Ways To Make Money In Real Estate – Whether you are interested in the investment potential of real estate or are tired of commercials that promise little-known ways to “make real estate profits,” you need to know how real estate creates wealth.
Rather than providing real estate investment strategies or a primer on home ownership for first-time buyers, this article will show you how to make money through real estate. It includes both basic methods that have not changed over the centuries, and concrete possibilities that have only recently emerged, no matter how hard gurus try to gloss over them.
Different Ways To Make Money In Real Estate
The most common way property is valued is that it appreciates – that is, it increases in value. This is achieved in different ways for different types of property, but it can only be sold in one way: through sales. However, you can increase your property investment income in a number of ways. One way is to refinance the loan at a lower interest rate if you borrowed to buy the property. This will reduce the cost basis for the property, thereby increasing the amount you get rid of.
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The most obvious source of appreciation for uncultivated land is, of course, cultivating it. As cities expand, land beyond their borders becomes more valuable due to the ability of developers to purchase it. When builders build houses or commercial buildings, it further increases the value.
Land valuation can also result from the discovery of valuable minerals or other commodities – if the buyer has rights to them. An extreme example of this would be oil, but appreciation can also come from quarries, trees, and other natural resources.
When looking at real estate, location is often the biggest factor in valuation. As the neighborhood around the home grows, adding transit routes, schools, shopping centers, playgrounds, and more, these changes increase the home’s value. Of course, this trend can work in reverse, with home values falling as the neighborhood declines.
Home improvements can also inspire gratitude. Adding an extra bathroom, warming up the garage, and remodeling the kitchen with modern appliances are just some of the ways a property owner can try to increase the value of a home.
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Commercial real estate appreciates in value for the same reasons as raw and residential real estate: location, development and improvement. The best commercial properties are always in demand.
When thinking about gratitude, it’s important to consider the financial impact of inflation. With annual inflation at 10%, your dollar can buy about 90% of the same goods next year, and that includes real estate. If a piece of land was worth $100,000 in 1970 and it had been idle and uncultivated for decades, it would be worth much more today. Due to inflation and steady rates since the 1970s, assuming this land is at fair market value in 2021, it would cost more than $700,000 in 2021.
So inflation alone can cause property values to increase, but that’s a bit of a pyrrhic victory. While you may get five times your money back when you sell because of inflation, other things cost five times more to buy, so your purchasing power remains a factor in current circumstances.
Another key way to build wealth in real estate is through regular annuity payments. Commonly referred to as rentals, income from real estate can take many forms.
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Depending on your rights to the land, companies may pay you royalties for discoveries or regular payments for structures they add. These include, for example, pump jacks, pipelines, gravel pits, driveways and cell towers. Raw land can be leased for production, usually agricultural production, and wooded land can be valuable for timber that can be harvested from time to time.
Most of the income from real estate comes in the form of land rent. Your tenants pay a fixed amount each month – which will increase with inflation and demand – and you claim the costs as rental income. Adequate space is essential to easily secure tenants.
Commercial property can provide income from the sources mentioned, land rent being the most common, but can also add another in the form of option income. Many commercial tenants will pay for contract options, such as a right of first refusal on an office space next door. Renters pay a premium to save whether they use these options or not. Option incomes are sometimes available for real estate and even residential real estate, but they are uncommon.
Take a closer look at some of the ways to make money in real estate.
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This is one of the traditional ways to generate income from real estate. There are several ways to achieve this: You can buy a detached house and rent it out; buy a multi-family home and live in one unit while renting out the rest – ideal for covering your mortgage and housing costs; or buy a multi-family home and rent out all the units – either manage the property yourself or hire a management company to handle the rent, rent collection and necessary repairs.
The property specializes in adding high-yield improvements to homes in a short period of time and then selling them. If you know how to find properties to renovate, have the necessary skills to do the renovations yourself, or manage a crew, flipping can be profitable, and you get a sense of the property’s capital costs and potential value.
In recent years, the demand for door-to-door rentals has declined as many travelers prefer this option to staying in a hotel. Landlords can earn income by renting out a home or even a room on a short-term basis, especially if the property is in a popular tourist destination. It is not known when the market will return. But if it should happen again, short-term rentals are regulated and even banned in some cities. Before listing your property on a site like Airbnb, VRBO or HomeAway, check the city’s regulations. Also consider how extra deep cleaning and disinfecting between guests will increase costs.
Real estate investment trusts (REITs), mortgage-backed securities (MBS), mortgage investment companies (MICs) and real estate investment groups (REIGs) are investment options in real estate. They are generally considered vehicles for obtaining real estate income, but there are different processes for doing so and different processes for listing.
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With a REIT, the owner of a commercial property sells shares to investors (usually to finance the purchase of the property) and then distributes the rental income in the form of distributions. A REIT is owned by tenants (rent-payers), but the REIT owners own the buildings and record income when the REIT incurs expenses. There is a specific method for valuing REITs.
This is taken a step further because they invest in personal mortgages rather than real estate. MICs differ from MBS in that they hold the entire mortgage and pass the payments on to investors, rather than securing principal and/or interest portions. But both are not real estate investments because they are debt investments. REIGs are typically uniquely structured private investment, investment or partnership services for investors.
There are several reliable real estate options for making money in the sector, but they come with different pitfalls and entry points.
One option is an informal home equity option, which requires you to pay a down payment or premium to purchase the home for a specified period of time at an agreed price. Then you will find investors who will pay more than the option price for the property. In this case, the premium you receive is essentially a fee for matching an investment seeker with someone willing to sell—no different than a real estate agent’s commission. Although this is income, it is not from owning a piece of real estate.
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There are several proven strategies for making money in real estate. Value, inflation and income are high on the list, but there are also a number of alternative property investments. It’s up to you to understand the investment, the risks, and whether the overall process is worth it.
Requires authors to use primary sources to support their work. These include white papers, government data, original reporting and interviews with industry experts. We also refer to original research from other reputable publishers when appropriate. You can learn more about the standards we follow to produce accurate, unbiased content in our editorial guidelines. Joshua Cannon is an investment, asset and market and retirement planning specialist. He is the CEO and founder of Cannon-Green & Co., an asset management firm.
Charlene Reinhart is an expert in accounting, banking, investing, real estate and personal finance. She is a CPA, CFE, Chair of the Personal Tax Committee of the Illinois CPA Society, and was recognized as one of Ignition’s Top 50 Women in Practice.
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