There is a lot of money to be made in real estate — which is why it’s popular with a variety of investors. Whether you are trying to build passive income or kick off a full-time investing career, there are numerous ways to find success and make money.
However, the question is: what exactly are the best ways to make money in real estate? Is making money in real estate as complicated as it sounds?
Let’s review how to make money in real estate first, and identify the best strategies for investors ready to get started.
Thinking about investing in real estate; it’s a good idea to learn from the experts, and registering for a seminar or short course is a great place to start.
How Does Real Estate Make Money?
There are generally four different ways to make money in real estate:
- Increase a property’s value
- Generate regular income through a property
- Buy and hold residential real estate
- Participate in investments that require you to buy property
Before you get started, consider a few different things:
- Your Risk Tolerance: All investments carry some degree of risk. In the real estate world, you’ll find investments that carry less risk and investments that carry lots of risk. How much risk are you willing to take on? However, the risk factors in real estate here in Australia are very low compared to some other investments.
- Your Local Housing Market: Some investments may require that you live in or nearby a housing market with ample real estate opportunities. If you don’t live by one of these dynamic markets, you may have to seek investments that don’t manifest themselves next door to where you live, but interstate.
- Liquidity: Most real estate investments are not “liquid.” In other words, if your personal finances take a plunge and you desperately need money, you may not be able to sell a property quickly or for a reasonable price. Certain real estate investments will require mortgages so discuss all options with your chosen finance broker to out line your options.
- Capital: How much money do you have to invest? Some investments require a huge amount of capital, while others do not, or simply by leveraging your domicile home.
- Know-How: How knowledgeable are you about the real estate market? With more investment education and gathered knowledge you’ll be able to take on more types of investments and make more informed choices.
- Time-Commitment: How much time are you willing to put into your investments? Are you trying to create a passive income or launch a real estate career? You’ll find that some investments can be made part-time, while others require your constant attention.
By answering the questions above, you’ll have a better idea of which types of real estate investments are suitable for you.
1. Increasing Property Value
The most common way to make money in real estate is through appreciation. Appreciation is when a property grows in value.
You might purchase a property for $400,000, and over the course of 10 years, it appreciates to a value of $700,000. Sell the property, and you’ll have profited $300,000.
Most properties tend to appreciate, and that’s why real estate is such a popular industry for investors. There’s an excellent chance that your property will eventually be worth more than what you bought it for much more.
Let’s talk about land first. “Land” is any property that has few or no existing structures. Land tends to appreciate for two reasons:
- Development: Land may appreciate if you construct a house or commercial building. Or you could refurbish structures that are already on the land.
- Natural Resources: If you discover gold or oil on your land, it will almost certainly skyrocket in value. You can also sell land rights to companies that wish to harvest resources off your land—typically, you can earn a percentage of whichever resources are collected. However, this is not that common in suburb Australia.
Residential and commercial properties appreciate for three main reasons:
- Location: This is the main reason residential properties appreciate. Properties are more likely to grow in value if they’re located by schools, commercial centres, scenic areas, or popular destinations.
- Development: A property will appreciate if the surrounding neighbourhood sees new developments or redevelopment. There are bargain to be had every day so it’s a good idea to search www.homeq.com.au on a regular basis.
- Improvements: A property may appreciate if significant building improvements are made. This is the main idea behind fix-and-flip investing.
Inflation in Property Value
Don’t forget to account for inflation—how prices increase over time. Inflation will cause your property to be a little less profitable than what you’re selling it for.
For example, your property may have appreciated by $200,000, but the average home price may have increased by $70,000 over the same period.
Keep this in mind when you’re trying to calculate your returns on a prospective property.
Always discuss the potential rental income with your chosen real estate agent who will introduce you to the property management team in their agency.
2. Regular Income
You’ll earn a one-time profit when you sell an appreciated property. But many real estate investors use their investment properties to generate a steady cash flow. You can generate regular income through residential properties, commercial properties, and vacant land.
When you own a residential property, you can rent out to tenants and collect monthly rent. You need to collect enough rent to cover the property costs, like mortgage payments, utilities, and property taxes—and you might even be able to collect a little extra that you can pocket. This is noy always the case as you may have to contribute a little of your own money that may give you some positive taxation considerations, this is called negative gearing.
Similarly, you can rent out commercial properties to businesses. With commercial properties, you could make additional money by offering your tenants contractual obligations. “First right of refusal” is a popular one: when a business rents out space on your property, they can pay you to grant them a first-option on an office space that opens up next door. This is a helpful contract for growing businesses, and it’s a good way for you to avoid prolonged vacancies. Also, with commercial leasing the tenancy agreement is usually a lot longer than a residential lease period.
With residential and commercial properties, you need to strike the right balance between price and desirability. You need to charge rent that’s high enough to cover your expenses and turn a profit, however, as mentioned previously a small contribution by you may be required in the short term. Similarly, the rent needs to be reasonably proportionate to the property’s quality. If your rent is too low, you could lose money. And if your rent is too high, you could suffer from extended vacancies—which are even more costly.
You can generate regular income from raw land, too. They can rent out your land to harvest resources, in which case they’ll pay you royalties on their profits. A business can rent out land for production purposes—most rented land is used for agriculture.
3. Residential Real Estate Income
Residential properties offer a variety of ways to make money. Whether you want to generate monthly income or one-time revenue, different options can suit your needs. The best residential strategy often depends on your preferred level of involvement — though they all require a certain level of research to be successful. Here are just a few different ways to break into residential real estate:
Buy and Hold
This is the most popular investment strategy for residential real estate. As mentioned in the previous sections, you can buy a property and hold it until it appreciates, or you can rent it out to tenants.
You don’t have to own a separate property to buy and hold, either. You can use this investment strategy to make money at your primary residence. You can rent out rooms in your house (a great way to collect extra money for the mortgage payment), or if you own a multi-family home, you can live in one unit and rent out the others.
When you rent out a property to tenants, you’ll become the de-facto landlord of the property. You’ll have several landlord obligations to fulfill, including hiring contractors to do maintenance tasks when needed (you’re the one who’s got to hire the plumber). Be kind to your tenants and keep them happy – your property manager will, in most cases, take care of these issues under the leasing agreement with the agent.
Property management companies are generally part of the real estate agency. Most property management companies will charge between 8-10% of your monthly rental income, but they’re a godsend for investors who are too busy to handle landlord duties or screen new tenants.
Talk to your chosen real estate agent for their advice first.
Fix-and-Flip
“House flipping” has become one of the most exciting types of real estate investments—hence the large number of TV shows dedicated to them.
A fix-and-flip investment is when you purchase a run-down or low-valued property. Over a short period, you renovate the property to increase its value, and then sell it for a profit.
You can generate significant returns with a successful house flip, but they’re challenging and not always suitable for beginning investors. You need to have a good sense of how much renovations will cost (the higher the renovation cost, the lower your profit margin) and how much those renovations will affect the home value.
Vacation Rentals
If you buy a property in a desirable location for travellers, you could rent it out as a “short-term rental,” also known as a holiday let. Holiday rentals are more popular than ever, thanks to websites like Airbnb. These properties can be tremendously lucrative investments, even when you’ve accounted for cleaning costs and website commissions.
It’s important to know that short-term rentals are being increasingly regulated, primarily due to the escalating housing costs—many state and local governments are apprehensive about properties being held as holiday rentals rather than being used for long-term housing. However, that’s up to you, it’s you’re dwelling.
Keep up with the housing laws in your local market so you’ll know whether or not a holiday rental is a good proposition.
What Do You Need to Make Money in Real Estate?
There is a common phrase in the investing world that it takes money to make money, but that isn’t always the case in real estate. Many real estate investors can start in wholesaling, even with low cash reserves. Wholesaling, and many other beginner-friendly strategies, allow aspiring investors to break into the industry without many resources.
That being said, you do need a strong work ethic and time to make money in real estate, especially in the beginning. If you want to wholesale, buy, or flip a property, you need to make sure it has potential. Furthermore, suppose you’re going to work with a business partner or other type of private lender. In that case, you will typically need to do the heavy lifting in terms of market research, deal analysis, and, in some cases, property management.
There are a lot of misconceptions about what you need in the real estate industry. In most cases, it all comes down to how well you can understand the market, identify creative financing, and execute deals. As you gain experience, these factors become much easier, but try not to get discouraged early on.
Ready to take the next step in your real estate education?
Learn how to get started in real estate investing by attending lectures and seminars – a lot of these are free and can be online.
How to Make Money in Real Estate for Beginners
Some real estate investments, like fix-and-flips and commercial properties, are too complicated for beginning investors. So, what are the best investments for those who are just getting started in real estate?
Here are six of the best ways for beginners to make money in real estate:
- Invest in single-family homes
- House hacking
- Invest in turnkey properties
- Rent out properties on Airbnb
- Manage real estate properties
1. Invest in Single-Family Homes
The single-family home is a tried-and-true real estate investment—simple and effective. Rent out a single-family home to tenants and use the rent payments to pay for the mortgage.
Multi-family homes can generate higher returns, but they also require more capital to buy, and the transactions are complicated.
Single-family homes, on the other hand, are far more cost-effective and easier to manage. They also appreciate faster.
But don’t just buy a single-family home anywhere. Location is always important. Do thorough research and ensure that the property’s location will produce enough income to make a profit in the short term.
2. House Hacking
If you don’t have the capital to buy an investment property, you can turn your primary residence into an investment property. Consider renting out rooms in your home to tenants and collecting rent from them—you can use the rent to help pay your mortgage or save for a second property.
It’s easier if you own a duplex or triplex, but you can still do this in a single-family home so long as you’re comfortable having roommates. Also, consider renting out a guest house on your property or a garage (so long as it can be properly outfitted into a living space).
Smart, patient investors use this method to accumulate money to buy a second investment property.
3. Invest in Turnkey Properties
A “turnkey property” is real estate that a company owns. These companies typically manage an inventory of fix-and-flip properties that are sold to buyers.
Unlike traditional fix-and-flips, turnkey properties are less risky, and you don’t have to worry about completing renovations under a strict budget and timeframe. The renovations are done for you. Turnkey properties are also easier to finance and can be purchased with a small down payment.
In summary turnkey houses are those, usually new homes that are ready to move into.
4. Rent Out Properties on Airbnb or a managed complex or high rise.
As mentioned earlier, a property located in a desirable location for travellers can be turned into a holiday rental. Airbnb is one of the most popular websites for listing holiday rentals, and it does a good job of vetting prospective renters and holiday makers and ensuring you get paid. If you want to learn more on how to turn your property into an Airbnb rental contact them direct – there are many on the internet.
Holiday rentals require more maintenance than long-term rentals. You’ll need to thoroughly clean the property after each rental. Find a reliable and cost-effective house cleaning service that can perform these services for you if you don’t have the time.
You can make a good profit on holiday rentals, but remember to research your local area’s rules and regulations on these types of properties.
5. Manage Real Estate Properties
There’s a high demand for property management companies. Many real estate investors don’t have the time to manage multiple investment properties, and they’re more than willing to pay someone else to do it for them. Your real estate agent will be able to guide you through this process as most agencies have a rentals department.
The monthly tasks for a property management company include:
- Advertising vacancies
- Finding and screening prospective tenants
- Collecting rent
- Responding to maintenance requests
- Performing any upkeep of the property that a client stipulates
Most property management companies earn 8-10% of each month’s rental income for a single property (you’ll try to manage as many different properties as possible).
Summary
Now that you’ve read this article on how to make money in real estate, here is a quick summary of what we covered. There are four main money-making strategies for real estate investors: buy a property and wait for it to appreciate in value; rent out a property to tenants or businesses to generate cash flow; invest in residential properties; invest in real estate projects or find other work in the industry. Each of these strategies combines numerous real estate basics from fix-and-flip investing to lending your own capital for investment deals. Some investors may find they don’t even need to own property to make money on real estate. No matter which option you choose, know that there are numerous other paths waiting for you to make money off real estate.
This is only an overview of possibilities and not a step-by-step process to guarantee your success – so do your due diligence.
Why choose real estate as your investment choice?
- Less volatility – Property can be less volatile than shares or other investments.
- Income – You earn rental income if the property is tenanted.
- Capital growth – If your property increases in value, you will benefit from a capital gain when you sell.
- Tax deductions – You can offset most property expenses against rental income, including interest on any loan used to buy the property.
- Physical asset – You are investing in something you can see and touch.
- No specialised knowledge required – Unlike some complex investments, you don’t need any particular specialised knowledge to invest in property.
What to consider when buying an investment property
The decision to buy an investment property should be part of your investment plan and take into consideration your goals and risk tolerance.
Once you have a property in mind, compare the income you expect to your outgoing expenses. If there is a shortfall, consider whether you can cover the expenses long-term. Also, work out whether you could cover all expenses short-term if you had no tenants for a while.
Research the property market to decide how to get an investment property. Where and what you buy will affect your return on investment.
Where to buy
- Areas you’re familiar with will take time to research.
- Look for areas with high growth, higher rental yield and low vacancy rates.
- Find out about proposed planning changes in the suburb that may affect future property prices.
What to buy
- Look for properties with appealing features like a second bathroom, a garage and access to schools, shops and transport.
- Consider maintenance costs based on property type, age and features.
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