When it comes to making money in real estate investing, there are only a handful of ways to do it.Though the concepts are simple to understand, don't be fooled into thinking they can be easily implemented and executed.An understanding of the basics of real estate can help investors work to maximize their earnings. Real estate gives investors another portfolio asset class, increases diversification, and can limit risks if approached correctly.
There are three primary ways investors could potentially make money from real estate:
- An increase in property value
- Rental income collected by leasing out the property to tenants
- Profits generated from business activity that depends upon the real estate
Of course, there are always other ways to directly or indirectly profit from real estate investing, such as learning to specialize in more esoteric areas like tax lien certificates. However, the three items listed above account for a vast majority of the passive income—and ultimate fortunes—that have been made in the real estate industry.
Real Estate Increase in Property Value
First, it's importantyou understand that property values do not always increase.This lack of asset increase can become painfully evident during periods like the late 1980s and early 1990s, and the years 2007-2009 when the real estate market collapsed.In fact, in many cases, property values rarely beat inflation—the increase in average prices in an economy.
For example, if you own a $500,000 property and inflation is 3%, your property might sell for $515,000 ($500,000 x 1.03%), but you aren't any richer than you were last year.That is, you can still buy the same amount of milk, bread, cheese, oil, gasoline, and other commodities (true, cheese may be down this year and gasoline up, but your standard of living would remain roughly the same).The reason is that the $15,000 gain wasn't real.It was nominal and had no real impact because the increase was due to overall inflation.
Note
Mortgage rates are an interest-related factor that influences property values. To calculate a mortgage, you need a few details about the loan, and you can then usethe mortgage calculator belowto crunch the numbers.
Inflation and Real Estate Investing
When inflation happens, a dollar has less buying power. It happens because the government has to create—print—money when it spends more than it takes in through taxes.All else equal, over time, this results in each existing dollar losing value and becoming worth less than it was in the past.
One of the ways that the savviest real estate investors can make money in real estate is to take advantage of a situation that seems to crop up every few decades. They do this when inflation is projected to exceed the current interest rate of long-term debt. During these times, you might find people willing to gamble by acquiring properties, borrowing money to finance the purchase, and then waiting for inflation to increase.
As inflation climbs, these investors can pay off the mortgages with dollars that are worth far less.This situation represents a transfer from savers to debtors.You saw a lot of real estate investors making money this way in the 1970s and early 1980s. Inflation was spiraling out of control until Paul Volcker Jr.—Federal Reserve president between 1979 and 1987—took a 2x4 to its back and brought it under control by drastically raising interest rates.
Cyclically Adjusted Cap Rate Purchases
The trick is to buy when cyclically adjusted cap rates—the rate of return on a real estate investment—are attractive. You buy when you think there is a specific reason that a particular piece of real estate will someday be worth more than the present cap rate alone indicates it should be.
For example, real estate developers can look at a project or development, the economic situation around that project, or the property's price and determine a future rental income to support the current valuation. The current value might otherwise appear too expensive based on present conditions surrounding the development. However, because they understand economics, market factors, and consumers, these investors can see future profitability.
You may have seen a terrible old hotel on a great piece of land get transformed into a bustling shopping center with office buildings pumping out considerable rents for the owner.Absent those cash flows, net present value, youarespeculating to some degree or another, no matter what you tell yourself. You will require either substantial inflation in the nominal currency—if you're using debt to finance the purchase—to bail you out. You could also depend on some sort of low probability event to work out in your favor.
Rental as a Real Estate Investment
Making money from collecting rent is so simple that every 6-year-old who has ever played a game of Monopoly understandson a visceral levelhow the basics work.If you own a house, apartment building, office building, hotel, or any other real estate investment, you can charge people rent to allow them to use the property or facility.
Of course, simple and easy are not the same thing.If you own apartment buildings or rental houses, you might find yourself dealing with everything from broken toilets to tenants operating meth labs.If you own strip malls or office buildings, you might have to deal with a business that leased from you going bankrupt.If you own industrial warehouses, you might find yourself facing environmental investigations for the actions of the tenants who used your property.If you own storage units, theft could be a concern.Rental real estate investments are not the type you can phone in and expect everything to go well.
Using Cap Rate to Compare Investments
The good news is that there are tools available that make comparisons between potential real estate investments easier.One of these, which will become invaluable to you on your quest to make money from real estate is a special financial ratio called the capitalization rate (cap rate). Cap rates show the rate of return on a commercial real estate investment. It takes its basis from the net income the property will produce.
If a property earns $100,000 per year and sells for $1,000,000, you would divide the earnings ($100,000) by the price tag ($1,000,000) and get 0.1, or 10%. That means the cap rate of the property is 10%, or that you would earn an expected 10% on your investment if you paid for the real estate entirely in cash and no debt.
Just as a stock is ultimately only worth the net present value of its discounted cash flows, a real estate is ultimately worth a combination of:
- The utility the property generates for its owner
- The net present cash flows it generates—relative to the price paid
Rental Income as a Margin of Safety
Rental income can be a margin of safety that protects you during economic downturns or collapses.Certain types of real estate investments may be better suited for this purpose.Leases and rents can be relatively safe income.
To go back to our earlier discussion—about the challenges of making money from real estate—office buildings can provide one illustration. Typically these properties involve long, multi-year leases.Buy one at the right price, at the right time, and with the right tenant and lease maturity, and you could sail through a real estate collapse. You would collect above-average rental checks that the companies leasing from you have to provide still—due to the lease agreement they signed—even when lower rates are available elsewhere.Get it wrong, though, and you could be locked in at sub-par returns long after the market has recovered.
Money From Real Estate Business Operations
The final way of making money from real estate investments involves special services and business activities.If you own a hotel, you might sell on-demand movies to your guests.If you own an office building, you might make money from vending machines and parking garages.If you own a car wash, you might make money from time-controlled vacuum cleaners.
These investments almost always require sub-specialty knowledge. As an example, some people spend their entire career specializing in designing, building, owning, and operating car washes.For those who rise to the top of their field and understand the intricacies of a particular market, the opportunity to make money can be endless.
Other Real Estate Investment Ideas
Still, other investment opportunities exist in real estate. You can invest in real estate investment trusts (REITs). Publicly Traded REITs issue shares and are traded on an exchange, while privately held REITs or non-traded REITs are not available on any exchange. All types of REITs will focus on particular sectors of the real estate market, such as nursing homes or shopping malls. There are also several exchange-traded funds (ETFs) and mutual funds that target the real estate investor by investing in REITs and other investments in the real-estate sector.
FAQs
Real estate can be a great way to make money as an investor. Not only do real estate investments have the potential to produce excellent long-term results but also tax advantages, and they can add diversification to your overall investment strategy.
Is real estate investing a good way to make money? ›
Real estate can be a great way to make money as an investor. Not only do real estate investments have the potential to produce excellent long-term results but also tax advantages, and they can add diversification to your overall investment strategy.
How do people make money from investing in real estate? ›
There are three primary ways investors could potentially make money from real estate: An increase in property value. Rental income collected by leasing out the property to tenants. Profits generated from business activity that depends upon the real estate.
How much money can you make from investing in real estate? ›
The average real estate investor salary sits between $70,000 and $124,000, according to most sources. But to be fair, salaries can vary greatly depending on the type of investing you're doing, how many deals you take on per year, the time you devote to it, and a whole slew of other factors.
How long does it take to make money from real estate investments? ›
You will eventually be making millions in real estate as you build up your real estate portfolio, and you could see a million-dollar net worth in less than five years. If you own dozens of rental homes, consider selling them to buy professionally managed multi-family housing.
Do most millionaires invest in real estate? ›
Some of the most successful entrepreneurs in the world have built their wealth through real estate. In fact, it's estimated that 90% of all millionaires invest in some form of real estate. There are several reasons for this, but in today's article, we'll share seven reasons why millionaires invest in real estate.
Do millionaires invest in real estate? ›
Between the passive income potential, long-term appreciation, and tax benefits, real estate continues to be the investment of choice for the wealthy. Even better, real estate can make millionaires out of everyday investors.
How to be a millionaire investing in real estate? ›
8 Tips On How To Become A Real Estate Mogul or Millionaire
- Have a Good Business Plan. ...
- Find Sustainable Real Estate Markets. ...
- Narrow Down Your Scope. ...
- Build Your Real Estate Team. ...
- Acquire Your First Investment Real Estate. ...
- Step Back and Evaluate Your Investments. ...
- Step Back and Wait.
Real estate has proven itself a worthy investment that provides cash flow and appreciation over time. Whether you're an aggressive or conservative investor, it's a great way to diversify your portfolio and can pay off in the short-term and long-term.
What type of real estate makes the most money? ›
Commercial properties are considered one of the best types of real estate investments because of their potential for higher cash flow. If you decide to invest in a commercial property, you could enjoy these attractive benefits: Higher-income potential.
Basically, the rule says real estate investors should pay no more than 70% of a property's after-repair value (ARV) minus the cost of the repairs necessary to renovate the home. The ARV of a property is the amount a home could sell for after flippers renovate it.
What is the 50% rule in real estate investing? ›
The 50% rule in real estate says that investors should expect a property's operating expenses to be roughly 50% of its gross income. This is useful for estimating potential cash flow from a rental property, but it's not always foolproof.
What is 1% rule in real estate investing? ›
The 1% rule of real estate investing measures the price of the investment property against the gross income it will generate. For a potential investment to pass the 1% rule, its monthly rent must be equal to or no less than 1% of the purchase price.
Which will make you richer real estate or stocks? ›
Is real estate or stocks more profitable? Investments in real estate have historically earned 3% to 4% per year on average; contrasted to investments in stock market indexes earning approximately 10% annually over the long-term.
Is it hard to be a successful real estate investor? ›
Investing in real estate can be successful, but going it alone can be challenging and highly risky. Joint ventures, wholesaling, and property management are just a few of the ways that investors can profit from real estate. It also takes a little savvy to become successful in this highly competitive arena.
What is the fastest way to make money in real estate? ›
The most common way to make money in real estate is through appreciation—an increase in the property's value that is realized when you sell. Location, development, and improvements are the primary ways that residential and commercial real estate can appreciate in value.
How much do top 1% realtors make? ›
Each real estate office sets its own standards for top producers, but it's safe to say that a top producer would have to sell at least one home per month to qualify. Top producers earn around $112,610 a year to start, according to the BLS. 1 Mega-stars could earn $500,000 per year and up.
Why real estate is better than stocks? ›
While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right circ*mstances, real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
How to invest 150k in real estate? ›
Where To Invest $150k In Today's Real Estate Market
- Wholesaling properties.
- Fixing and flipping homes.
- Buying and holding rental properties.
- Investing in mortgage debt.
- Private money lending to other investors.
- Stocks, REITs and partnerships.
Citi Private Bank is the private banking department of Citibank. Their services are reserved for worldly and wealthy individuals as well as their families. While eligible clients can get deposit accounts and retirement accounts as you'd find at any other bank, there are also many specialized products and services.
Becoming a millionaire from real estate investing isn't as far-fetched as it may seem, but it's not an easy goal to reach. You shouldn't expect it to happen overnight, but it is achievable. If you have the right knowledge, develop a plan, and be persistent enough, you can become a millionaire real estate investor.
Where do the rich invest their money? ›
Ultra-wealthy individuals invest in such assets as private and commercial real estate, land, gold, and even artwork. Real estate continues to be a popular asset class in their portfolios to balance out the volatility of stocks.
Why real estate creates 90% of millionaires? ›
Federal tax benefits
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
How many rental properties does it take to become a millionaire? ›
To become a real estate millionaire, you may have to own at least ten properties. If this is your goal, you need to accumulate rental properties with a total value of at least a million.
How much real estate to make $1 million a year? ›
Consider what it would take to make $1 million in gross commissions your first year selling real estate (before expenses and taxes). It would involve selling approximately $50 million of real property with an average salesperson commission of 2%.
Is 100k enough to invest in real estate? ›
Bottom Line. Real estate represents a huge investment opportunity that welcomes investors with as little as $100,000. This amount will let an investor purchase a single property for rent or resale. Crowdfunding or joint ventures enable smaller investors to buy more costly commercial or residential properties.
Why not to invest in real estate? ›
Real estate investing can be lucrative, but it's important to understand the risks. Key risks include bad locations, negative cash flows, high vacancies, and problem tenants. Other risks to consider are the lack of liquidity, hidden structural problems, and the unpredictable nature of the real estate market.
Is 2023 a good time to invest in real estate? ›
Despite what some may think, 2023 is still a good year to invest in real estate, thanks to advantages like long-term appreciation, steady rental income, and the opportunity to hedge against inflation. Mortgage rates are expected to decline, but the housing market is likely to remain competitive due to low supply.
What are 4 ways you make money in real estate? ›
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 don't require you to buy property.
What Types of Commercial Properties Are the Most Profitable? High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces.
The 2% rule is an investing strategy where an investor risks no more than 2% of their available capital on any single trade. To apply the 2% rule, an investor must first determine their available capital, taking into account any future fees or commissions that may arise from trading.
What is the 80% rule in real estate? ›
The 80% rule means that an insurer will only fully cover the cost of damage to a house if the owner has purchased insurance coverage equal to at least 80% of the house's total replacement value.
What is the 5% rule investing? ›
In investment, the five percent rule is a philosophy that says an investor should not allocate more than five percent of their portfolio funds into one security or investment. The rule also referred to as FINRA 5% policy, applies to transactions like riskless transactions and proceed sales.
Is 5k enough to invest in real estate? ›
Despite the common misconception that you need a lot of financial capital to begin investing in real estate, you can start with as little as $5,000. Your chances of success can increase if you diversify your investments — especially should some deals not go as planned!
What is the 4 3 2 1 rule in real estate? ›
4-3-2-1 rule
The front quarter of the standard site receives 40% of the total value. The second quarter receives 30% of the total value. The third quarter receives 20% of the total value; and the rear quarter receives just 10% of the total value.
How to invest 5k in real estate? ›
Below are 7 strategies you can use to actively invest in real estate with $5,000.
- Buy an inexpensive primary residence. ...
- Find a property with seller financing. ...
- Buy property with a partner. ...
- Find a hard money lender. ...
- Borrow money from friends and family. ...
- Become a wholesaler and bring buyers and sellers together.
The BRRRR (Buy, Rehab, Rent, Refinance, Repeat) Method is a real estate investment approach that involves flipping a distressed property, renting it out and then getting a cash-out refinance on it to fund further rental property investments.
What is the 100 times rule in real estate investing? ›
Savvy real estate investors often pay no more than 100 times the monthly rent to purchase a property. In the case of the couple above, an investor following the 100 times monthly rent rule wouldn't pay more than $750,000 because the monthly market rent was $7,500.
What is the 2% rule in real estate? ›
This is a general rule of thumb that determines a base level of rental income a rental property should generate. Following the 2% rule, an investor can expect to realize a gross yield from a rental property if the monthly rent is at least 2% of the purchase price.
Is it better to save money or invest in real estate? ›
Real estate investment has undoubtedly proven to be the safest type of investment. Real estate is the first choice of almost every investor who saves. Residences, hotels, commercial properties, lands. All these real estate types bring profit to the investor if they are chosen correctly.
Buy your own home
It's one of the best ways for you to invest in real estate, offering numerous benefits. The first benefit is building equity in your home from your monthly payments, rather than paying rent which always seems to rise year after year.
What are the disadvantages of being a real estate investor? ›
Disadvantages of Real Estate Investing
- Real Estate Investing is a Long Grind. ...
- Real Estate Income Can Be Variable. ...
- Real Estate Requires Maintenance. ...
- Real Estate is Impacted by Rent Control. ...
- Real Estate Requires Your Time. ...
- Real Estate Transaction Costs are High. ...
- Real Estate Income is Subject to Taxation.
Yes, you can become a billionaire with significant real estate holdings and investments. It is unlikely that you will reach billionaire status as a real estate agent. Some of the richest people in the world have achieved their wealth through real estate investments.
How long does it take to become a millionaire in real estate investing? ›
It is possible to build a net worth of one million dollars in a couple of years with real estate. It also may take five years, ten years, or even fifteen years. Only five percent of households are millionaires so even if it takes a while you will be ahead of the pack.
What is contract flipping? ›
When you flip real estate contracts you transfer the rights of a purchase contract to another buyer. The process involves finding a property for sale, signing a contract for the real estate, then flipping that contract to a new buyer to make a profit.
How to become a millionaire? ›
8 Tips to Becoming a Millionaire
- Stay away from debt.
- Invest early and consistently.
- Make savings a priority.
- Increase your income to reach your goal faster.
- Cut unnecessary expenses.
- Keep your millionaire goal front and center.
- Work with an investing professional.
- Put your plan on repeat.
- Earn more. I think one of the first steps for building wealth is to earn as much as possible for a while. ...
- Watch your student debt. There are different approaches to debt, but I tend to agree that there's good debt and bad debt. ...
- Separate time from money. ...
- Buy assets. ...
- Build assets. ...
- Start saving for retirement. ...
- Educate yourself.
While stocks are a well-known investment option, not everyone knows that buying real estate is also considered an investment. Under the right circ*mstances, real estate can be an alternative to stocks, offering lower risk, yielding better returns, and providing greater diversification.
Why 90% of millionaires invest in real estate? ›
Federal tax benefits
Because of the many tax benefits, real estate investors often end up paying less taxes overall even as they are bringing in more income. This is why many millionaires invest in real estate. Not only does it make you money, but it allows you to keep a lot more of the money you make.
Does Warren Buffett invest in real estate? ›
There's a Difference Between Buying Real Estate and Investing in Real Estate. Buffett isn't opposed to investing in real estate and has invested in several real estate investment trusts (REITs) over the years. However, he knows it doesn't make sense for him to get into the business of being a landlord.
In this regard, there's no real competition. Over the long run, the S&P 500 has returned about 10% annually to investors on average vs. just 3% or 4% for real estate.
How much money do I need to invest to make 3000 a month? ›
To make $3000 a month in dividends you need to invest between $1,028,571 and $1,440,000 with an average portfolio of $1,200,000. The exact amount of money you will need to invest to create a $3000 per month dividend income depends on the dividend yield of the stocks.
Is investing in real estate better than 401k? ›
Real estate offers a lower capital gains tax rate at the time of sale compared to the tax rate investors will pay at the time of withdrawal from a 401(K).
What is one major disadvantage to investing in real estate? ›
Real estate investments tend to have high transactional costs, especially in legal and brokerage fees. The process of acquiring a new property is also very long and tedious with lots of legal formalities. Another disadvantage of property investments is that they are not easy to liquidate.
What are the five negatives of real estate investment? ›
Disadvantages of Real Estate Investing
- Real Estate Investing is a Long Grind. ...
- Real Estate Income Can Be Variable. ...
- Real Estate Requires Maintenance. ...
- Real Estate is Impacted by Rent Control. ...
- Real Estate Requires Your Time. ...
- Real Estate Transaction Costs are High. ...
- Real Estate Income is Subject to Taxation.
Commercial real estate is known to yield higher returns than residential real estate. If you can afford to manage a commercial space, it can prove lucrative over time, depending on your area.
Is real estate the fastest way to build wealth? ›
Investing in real estate can be one of the best ways to accumulate wealth. Wealth grows through compounding, which means putting money into something on the expectation that you will receive more money back later.
