Investing can be a great way to make money, and real estate is one of the best ways to get a high return on investment.
In this post, we’ll look at how to make money in real estate.
We often see real estate on TV, from million-dollar listings to DIY house flipping.
It’s fun to watch but even more, fun to do it yourself.
Real estate can provide income and appreciation when you sell.
It’s also a great way to add diversity to your portfolio.
And it’s more accessible than you might think for the average person.
It takes time, patience, and money, but almost anyone can invest in real estate.
Making Money in Real Estate
Real Estate Investment Trusts (REITs)
You can access the real estate market without the time and money commitment of direct ownership through REIT (real estate investment trust) investments.
REITs are a basket of assets, like mutual funds and exchange-traded funds, rather than just one. Investors buy shares in a REIT.
Most are focused on a specific type of real estate, such as hotels, apartments, malls, or hospitals.
REITs must pay out 90% of their annual earnings as dividends.
They are also pass-through corporations, meaning they don’t pay corporate tax, so investors benefit from better profits.
Publicly traded REITs are the most liquid and can be bought through a brokerage, IRA, or 401(k).
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Real Estate Crowdfunding
Crowdfunding real estate is a way for businesses to get money from many people.
It’s done through websites that connect developers and investors.
People can get equity in projects and potential returns.
Not everyone can use all platforms.
Some are only for licensed investors or those with a lot of money and experience.
You open an account, pick a portfolio strategy or investments, and track them with a dashboard.
Crowdfunding has risks, though.
It’s not as easy to sell as stocks, and your money is locked up for a long time.
Fundrise suggests a five-year time horizon.
Be a Landlord
Investing in real estate can be done by buying a property and leasing it or part of it.
You can make money as a landlord in various ways.
- One option is to buy a single-family home and rent it out, but only if your expenses are realistic. You lose money if the rental income does not cover the mortgage, insurance, taxes, and maintenance.
The mortgage payment is stable while rent costs increase, allowing you to save more.
- You can search for rental properties online, such as through Roofstock, which connects sellers of vacant homes to potential buyers and provides a property manager.
- Another method is “house-hacking,” which involves buying a multi-unit building and living in one apartment while renting out the other units. This reduces your living costs and earns you enough to cover taxes, mortgages, and insurance.
- Renting a part of your home through Airbnb is a low-risk version of house hacking, allowing you to make extra money without a long-term tenant.
- A more ambitious option is a condo flip, where you buy a multifamily building, convert the units into condominiums, and then sell them off separately.
Real Estate Limited Partnerships
RELPs offer investors a diversified portfolio of real estate investments.
They’re not listed on public exchanges but exist for a predetermined period of time.
RELPs operate like small businesses, developing a business plan and buying, developing, and selling properties.
Profits are dispersed along the way, and the partnership dissolves once all holdings are distributed.
They’re ideal for high-net-worth investors, with minimum investments ranging from $100,000 to several million dollars.
Treating Your Home as an Asset
Many Americans strive to own a home, and it’s understandable why.
Residential real estate has highs and lows but usually appreciates in the long run.
Most people take out a mortgage rather than buy a property outright.
Paying off your mortgage and owning your home is a wise investment that protects you from the volatility of the real estate market.
It’s often seen as the first step before investing in other real estate types.
Owning a valuable asset can also increase your net worth.
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Some people buy properties to renovate and resell.
TV shows make it look easy, but flipping is time-consuming and costly to make real estate money.
However, it also has the biggest chance for profit.
To be successful, you must be prepared for unexpected issues like budget hikes, mistakes, a longer remodeling time, and difficulty selling.
It’s essential to have a team of trusted professionals, such as contractors, designers, lawyers, and accountants.
You should also have enough emergency funds.
Even experienced flippers find that jobs take longer and cost more than expected.
Hard Money Lending
Hard-money loans are short-term and given to those who don’t usually qualify.
You’ll need money to participate in this.
Interest rates are high because of the short term.
If you have a “sure thing” but lack funds, a hard money lender could help.
You can also become a hard money lender, but you’ll need money to start.
You can find investors if you find good deals and put up a small amount.
Interest rates are reasonable, and there’s a greater danger and a bigger payoff.
It’s a great way to keep your cash liquid and make a big profit in the short term.
A short sale occurs when the current homeowner falls behind on their mortgage payments.
Still, the property hasn’t gone into foreclosure yet.
All parties must agree to the sale since the property is being sold for less than what is owed.
It can be a great way to profit without investing in long improvements.
Short sales and other default-type auctions are hard to win.
Usually, you must pay in cash upfront and sometimes without seeing the property.
Short sales are better for auctions since you can inspect the property and negotiate.
Investing without investigation can be risky, so be careful.
Short sales may take a while, but they can be worth it.
You may get a return of tens to hundreds of thousands of dollars when the transaction is complete.
Don’t expect a bargain, though; you’ll have to haggle for a reasonable price.
The bank may be looking for another buyer, so don’t go too low.
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Choosing 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 one of equal or greater value.
This allows you to postpone paying taxes until the new property is sold, or you can do another 1031 Exchange.
When you choose to sell your house, you must pay capital gains taxes.
However, the IRS’s Section 1031 lets you defer these taxes if you reinvest the gains in another property.
The IRS views this as swapping one real estate property for another.
Refinancing Your Mortgage
Refinancing your mortgage is an option.
It can help you get a loan with a lower interest rate, reducing your monthly payment.
You can also replace an existing loan with a new one, resulting in a shorter loan term and no change in the monthly amount.
Lower interest rates make this possible.
All of these benefits make refinancing a great choice.
When you buy a rental property with a mortgage, you make a monthly payment to the lender.
This payment is made up of two parts: interest and principal.
The interest is the lender’s profit, while the principal is the money you use to repay the loan.
Your tenant is helping you build wealth by paying down your loan over time.
For example, if you put down $100,000 for a property five years ago and took out an $80,000 mortgage, you’d now owe only $74,000.
In ten years, you’d owe only $65,000.
This means your equity increases each year.
As long as the property value doesn’t drop, you’re gaining value.
Once the mortgage is paid off, you’ll have a property worth $100,000 or more that you didn’t save for.
This is only possible if you use financing, not if you pay for the property with all cash or savings.
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Investing in real estate can be easier than you think.
There are many ways to make money, such as wholesaling, flipping, long-term rentals, and Airbnb properties.
Real estate crowdfunding, limited partnerships, and REITs are financial investments that don’t require you to manage them.
Direct investments are also possible, like buying a home, renting, or fix-and-flip.
However, ensure you’re financially secure and understand the local market before committing.
Real estate is considered an illiquid asset, and it may take a long time to settle and pay off a project.
So, it’s best to think of it as a long-term investment.
Happy Hustling, though!