If you're considering or trying to make money in real estate investing, there's a couple of things you should know.
Real estate investments can be incredibly lucrative, as long as you do it properly. Keep reading to learn how to make money in real estate investing.
How To Make Money In Real Estate Investing
Before we get into the nitty-gritty of real estate investment, you should know there are three main ways you can make money from investing in real estate.
First, you can make money if there is an increase in property value. You can also make money in your investment from the rental income that can be collected if the property is leased out to tenants. And finally, you can make money if there are profits from business activity that depends on the real estate property.
Basically, those are the three main ways you can make money from your real estate investment. Of course, there are other things you can do, especially when you automate lease management of your real estate properties.
For example, if you are trying to sell your property, you might have a better chance if you hire a stager or professional photographer to make your listing really pop.
If this is a route you want to take, look into local photography experts.
There are also ways to either indirectly or directly profit from real estate like learning about esoteric areas such as tax lien certificates. But those three are how most property owners profit from their real estate investments.
Increase In the Property Value of Your Real Estate Investments
It's important that you know the property values don't always increase. There's evidence of thing from the late 1980s, early 1990s, and the 2007-2009 real estate collapse. In most cases, property values don't beat inflation.
So this means if you own a property that is worth $500,000 and the inflation is 3%, your property may sell for $515,000 ($500,000 times 1.03 percent), but you still won't be richer than you were last year.
Sure, you can still buy your necessities, but your standard of living would stay the same. This is because that $15,000 "profit" wasn't real, it was simply nominal.
This happens since the government needs to create money when it spends more than it takes from taxes. So over time, this leads to each existing dollar decreasing in value and being worth less than it was in the past.
One way that savvy real estate investors make money in real estate is when they take advantage of situations that come up every few decades.
This is when the rate of inflation is projected to exceed long-term debt. You could find that people are willing to gamble on buying properties with borrowed money and then waiting for the inflation to go up, so they can pay off the mortgage with money that is now worth less than before.
A lot of real estate investors made money this way in the 1970s and early 1980s. This is when inflation spiraled out of control before it was brought back under control when interest rates were drastically raised.
Rental Income Generated by Your Real Estate Investments
You can also make money on your real estate investment when you collect rent.
Obviously, this is so simple, if you ever played Monopoly you know how this works. If you own a house, hotel, apartment building, office building, or any other form of a real estate investment, you can charge people rent and let them use your property or facility.
However, if you own an apartment building or rental homes, you now might find yourself dealing with broken toilets to tenants operating a meth lab. If you own an office building or strip mall, now you might have to deal with a business you leased out to going bankrupt.
If you own an industrial warehouse, you may be faced with environmental investigations for whatever your tenants are doing on the property.
If you own storage units, then you can have an issue with theft and you may be liable. You have to be hands-on when you rent out your real estate property.
There are tools that can help you make a comparison between your possible real estate investments much easier. One of these tools is a financial ratio called the cap rate. This is short for the capitalization rate.
So what this means is if your property earns $100,000 a year and sells for $1,000,000, you would then divide the earning ($100,00) by what's on the price tag ($1,000,000) and you would get 0.1 or 10 percent.
This means that the cap rate of your property is ten percent and you should get ten percent of your investment.
Similar to how a stock is only worth the net present value of it's discounted cash flows, real estate is usually worth a blend of the utility it gives its owner and the net cash flow it gets relative to the price the investment was paid for.
Rental income can be that safety margin that can protect you from collapse. There are types of real estate investments that are better for this.
Again, remember there are challenges in profiting from real estate especially with office buildings, which is why they usually have long multi-year leases.
So you want to buy your investment at the right time and price, and with the proper tenant and lease maturity profile. This way you can avoid real estate collapses from collecting above the average rental checks.
Money from Real Estate Business Operations
And the last way you can make money from your real estate investment is with business activities and special services. So this means, if you own a hotel, you may be able to sell on-demand movies to your guests.
If you own an office building, you could make more money with parking garages or vending machines. If you own a car wash, you might make money from vacuum cleaners.
All of these investments do need some sub-specialty knowledge, meaning there are people who spend their whole career building, owning, designing and operating car washes.
Invest In Real Estate Today
Now that you know how to make money in real estate investing, and the three main ways you can make a profit, invest in real estate today. It's time to profit properly off of properties!
