There are multiple ways through which investors make money from their real estate properties. But the two conventional ways to make money from any real estate property are through appreciated value of the property over time and cash flow from its rental income. But we shall discuss various ways you can make money by investing in real estate in 2020.
1. Buying Real Estate Properties and Renting Them Out
This is the classic approach in real estate investing. You could buy a house or condo and then rent it out to tenants. The tenants pay the rent, and if you have a mortgage, their payments help pay down the property. This method of real estate investing has a number of advantages.
It is seen as rather low risk by banks, so they’re almost as willing to lend money to you to become a landlord as they are for you buying a new home of your own. If you’re moving out of a house, you can easily become a landlord by renting out your old residence. Or you could learn about land-lording by renting out your garage apartment or mother-in-law suite.
Another version of this strategy is tapping into short-term rental sites like AirBnB. You can buy condos, townhomes and single family homes to rent out on these sites. Note that this is only an option if local regulations don’t prohibit it. If the rules do allow it, you may still have to register with the city, pay hotel taxes and meet other legal requirements.
If you live in the house, you’ll almost certainly be able to rent out the guest bedroom while you’re there or the whole house while you’re vacationing without any additional paperwork, including in cities that outlaw buying a house to rent out to a series short term visitors.
2. Buying Properties and Offering Them as Rent-to-Own
This strategy is similar to the classic model of renting out the property but with a twist. The difference is that the tenants are paying money toward the final purchase of the home.
This tactic has a number of benefits. The tenants who take that deal are much more likely to take care of the property. If you want to invest in real estate knowing that the tenants won’t wreck the place, this is a good option.
They’re less likely to move out into a home of their own, because they probably don’t have the good credit necessary to get a mortgage in their own name.
You can draw up rent-to-own contracts that result in them owning the property in 20 to 30 years, so you’ll be out of the landlord business when you’re probably ready to retire. If they fail to pay the rent, it is generally easier to evict them than if they weren’t paying their mortgage payment to you.
3. Buy and Rent Out Vacation Rentals
This real estate investing strategy may give you the ability to enjoy a house on the beach or lakeshore when you want, while you’re still paying the insurance and mortgage via short term rentals during the rest of the season. If you already own a vacation property, you could ease into land-lording by renting out the vacation property you already own.
You have to be careful drawing up the rental agreements, especially if you want to be able to use the property from time to time. The income you’ll receive for the property depends on how desirable it is to tourists. The downside with this approach is that the property has to be maintained year-round, though it only generates income part of the year.
Furthermore, relatively few properties are attractive to tourists. If you make a mistake in pricing your property, you may miss out on the few weeks of the year where you’d otherwise generate income or you’re earning less than you might have made.
4. Buying, Renovating and Flipping Real Estate
This is the real estate investing method you see touted as a guaranteed money maker on many reality shows. In theory, if you buy the property cheap because it needs renovations and make the renovations, you can sell the property for a hefty profit.
However, this approach comes with a number of risks. If you pay too much for the property, it is almost impossible to make money. If you spend too much on the renovations, you’ll wipe out your profit margin. If the property is simply slow to sell, every month you pay carrying costs like the mortgage likewise eat into your profit margin.
If you overdo the renovations, whether putting in too many bedrooms or installing a luxury kitchen and bathroom in a modest working class neighborhood, no one will pay the price you’re asking for the property.
Another factor to consider is the risk of owning your job.
A number of general contractors and handymen think that house flipping is a great way to monetize their skills. The problem is that they may clear as much money a month as they do at their jobs fixing and flipping homes, but they risk losing everything if they are late finishing the project or make design choices that scare away home buyers.
5. Owing Shares of Real Estate Companies
A REIT is a real estate investment trust. REITs have a number of advantages, the foremost being liquidity. If you own 20% of an apartment building, you cannot get your money out unless someone else buys your share or the property is sold.
When you own shares in a real estate trust, it is generally as easily sold as shares of stock. You can buy targeted real estate investment trusts such as those in firms that build medical buildings, nursing homes, malls and industrial parks.
It is easier to diversify your holdings by owning a variety of REITs, and you never have to manage anything. The modest downside is that they take a chunk of the profits in administrative overhead before distributing the remainder to shareholders.
A related financial product is the real estate mutual fund. These mutual funds are more liquid than REIT shares. They are more diversified, too. They may invest in REITs, the publicly traded shares of homebuilders, and companies that sell building supplies.
Real estate ETFs are simply ETFs that invest in the same sorts of businesses. A REIT ETF is an ETF that invests in REITs. You’ll have lower returns, but there is less risk than investing in a REIT. In every case, you don’t have to invest in real estate directly, much less manage it.
6. Being an Investor in Real Estate Projects
Once you’ve hit about ten rental homes, the work managing them is so great that you have to hire a property manager. Around this point, you could sell all of the investment properties and invest in a bigger piece of real estate. For example, you could use that money to buy an apartment building.
Or you could invest in commercial or industrial real estate. When you invest in real estate, you’ll have a say in the project from the very beginning. What type of renovations will they do? What criteria will they set for clients? How will the property be marketed?
The potential risk of being a partial owner of rental property is that if someone sues the building owners, you could be on their list unless a carefully constructed legal liability company shields every investor.
The legal problems of these deals can become nightmares, whether you have to find a way to liquidate someone’s share to meet the terms of their divorce or settle their estate. Another consideration is liquidity.
With this form of real estate investing, the money is typically locked in for the long-term. You can’t get that money out before the building is sold or someone else buys you out.
Problems can arise when different partial owners disagree on what to do with the property, such as when some want to sell and others want to hold the property.
When you invest in real estate, it is best to either have an air-tight legal document that covers all the contingencies and an expert project manager or a close partnership with equally good legal documents.
7. Becoming a Lender to Investors
Instead of owning 30% of a house being fixed and flipped, you could simply become a lender to those doing the work. One advantage of this tactic is that the borrowers owe you the money regardless of the success of their project.
You don’t lose money if the house doesn’t sell for as much as expected. Conversely, if they do a bad job and go bankrupt, you might not get your money back. A strategy with less risk is serving as a hard money lender, offering the modest amount they need to renovate the property instead of giving them all the money they need to buy the property.
The biggest benefit of this type of real estate investing is that you have no liability. If the investors who own the property are sued, you aren’t liable, because you’re simply a creditor. If you take the time to draw up the proper paperwork, you could protect your real estate investment by having a lien against the property, too.
If you invest in real estate this way, recognize that you can diversify your holdings by investing modest portions in several different projects. The people buying the property then either need to find other investors or invest their own money.
8. Becoming a Bundler
Bundlers are the ones who gather together a group of investors to fund a project. Bundlers may take an equity stake in the project like the other investors, or they may be paid for their efforts. This is an advanced strategy for investing in real estate, and it requires good legal advisors by your side.
The legal complexity of these deals is a risk in and of itself. Yet filling this role allows you to bypass nearly every aspect of the process of finding, buying, renovating and renting out the real estate.
How to Succeed in Real Estate Investing?
We’ve addressed the eight most common methods of investing in real estate, though other, more esoteric and high risk methods exist. We’ve outlined the pros and cons of each proven method of investing in real estate so that you can find the one that works best for you.
Maybe you have done a bit of real estate investing but want to take things further and make it into more than a hobby on the side. It’s only wise to think about how you can and should be investing your money.
In any property investment, cash flow is gold. A good cash flow means the investment is, needless to say, profitable. A bad cash flow, on the other hand, means you won’t have money on hand to repay your debt.
Therefore, finding a good real estate investment opportunity would be a key to your success. If you invest wisely in real estate, you could secure your future. If you are a beginner in the business of cash flow real estate investing, it very important to read good books on real estate.
The less expensive the investment property is, the lower your ongoing expenses will be. Roughly a $150,000 property is what some experts recommend starting with.
When looking for real estate investment anywhere, the generally accepted standard is to purchase a property that will give you a modest but minimum 1% profit on your investment.
An example would be: at $120,000 mortgage or investment cost, $1200 per month rental. That would be the ideal equation example. Even with rent increases, buying a $500,000 investment property is not going to get you $5000 per month on rent.
Most investors naturally gravitate to residential property investment. When looking for the best real estate investments, you should focus on markets with relatively high population and employment growth. Both of them translate into high demand for housing.
If housing supply meets housing demand, real estate investors should not miss the opportunity since entry prices of homes remain affordable.
You must also collaborate and learn from savvy real estate investors who have retired early on in their lives by investing in some of the best real estate markets in the country.
Beginners would usually follow the media, buy a property and wait for its value to increase. This could be risky. Real estate investing requires research. We recommend doing your own research or hiring a real estate investment specialist for guidance.
You should also join local real estate investment clubs and try to make connections with fellow investors. To be effective in the real estate industry, a concrete marketing design is vital. The real-estate market is constantly changing in their methods on how to look for that right property.
Buying or selling real estate, for a majority of investors, is one of the most important decisions they will make. Choosing a real estate professional/counselor continues to be a vital part of this process.
They are well-informed about critical factors that affect your specific market area, such as changes in market conditions, market forecasts, consumer attitudes, best locations, timing and interest rates.
