Every smart investor seeks new ways to grow their money. The stock market, a hot mutual fund, angel investing in new technologies, and more ways have become popular methods. But the tried and true path remains the same: "Ninety percent of millionaires become so through owning real estate," Andrew Carnegie once said. While so much of the world has changed, his wisdom holds fast.
There are many strategies for making money in real estate, and the best for you will depend on your resources, goals, and risk tolerance. Here are a few common strategies for real estate investing.
Buy and Hold
This involves purchasing an investment property and collecting monthly rent from tenants. This can be a passive income stream, but it also requires a significant upfront investment and ongoing management responsibilities.
A smart real estate investor will expand their search to up-and-coming neighborhoods. That way, they can get in front of surges for demand for housing and be able to command a premium for monthly rent. Moreover, the value of their property will appreciate more in the long term, which is excellent news for the balance sheet.
You may also seek to join a real estate investment group to diffuse your risk. Being able to own a multi-unit residential property, or even a multi-tenant commercial property, makes you less susceptible to problematic tenants or sustained vacancies. The pooled money from multiple real estate investors also allows you to contract a good property management company, so all you need to do is sit back and monitor your monthly cash flow.
"Buy land; they're not making it anymore."
- Mark Twain
Fix and Flip
This involves purchasing a property, renovating it, and reselling it for a profit. This can be a lucrative strategy, but it requires a significant amount of time and money, as well as a good understanding of the real estate market and the ability to accurately estimate renovation costs and market value.
This is intended to be one of the shortest real estate investments, but one of the most proven ways to make money in real estate. First you will need a very shrewd real estate agent who can help find you an undervalued property in a desirable location -- no easy feat. Then you will need an equally-as-astute contractor who can project the budget and time needed to execute a renovation of the property. Of course, they'll need both a through understanding of trends within residential real estate, and a working rapport with real estate agents who can communicate the aspects which would entice buyers, and at what price point.
If you're able to get this process down to a science, then you'll become an expert on property values in your local market. As you grow your investment portfolio, you can add more concurrent properties and become more aggressive in your investment strategy, while being able to make sure you never lose money on the year.
Wholesaling
This involves finding a discounted property, securing a contract to purchase it, and then finding a buyer who is willing to pay a higher price. The wholesaler makes a profit by pocketing the difference between the contract price and the sale price. This strategy requires a strong network of buyers and sellers and the ability to quickly identify and secure good deals.
This method is slightly more nuanced than flipping houses since it more reliant on paperwork and data than it is tangible improvements. Larger groups like REITs (real estate investment trusts) are more suited to locate this type of "investment property," if that term can be applied. It takes time to gain proficiency in wholesaling real estate assets, and it provides a far more uneven cash flow, so be warned.
Rent-to-Own
This involves purchasing a property and then leasing it to a tenant with the option to purchase the property at a later date. The tenant pays a higher rent and makes a down payment, which the owner can use to offset the cost of the property. This can be a good strategy for building equity and generating income, but it also carries the risk of the tenant defaulting on the purchase option.
Obviously, this practice is far more common for residential properties than commercial real estate. And it makes if you have some financial parameters you're trying to satisfy, like executing a 1031 exchange to circumvent capital gains, or subsidizing your property taxes / mortgage payment with an enhanced, positive cash flow. However, the risk comes from the profile of your tenant. If someone wants to own a home, but is looking at rental properties on a rent-to-own plan, then that usually means their own finances are tight. (After all, if they had the money then they'd put down a down payment and secure financing from mortgage or hard money lenders to buy it outright). So the onus is on you to truly vet out sounds candidates to buy rental real estate.
Short-Term Rentals
This involves purchasing a property and using platforms like Airbnb or Vrbo to rent it out to short-term guests. This can be a lucrative strategy, but it also requires a significant amount of time and effort to manage the property and bookings.
The advent of online platforms to source micro tenancy has facilitated a boom in property owners becoming hosts of vacation rentals and similar accommodations. It has enabled a new kind of person to immediately make money in real estate without much upfront work or resources. There are a few notable drawbacks.
First, is the ongoing management and communication. All that rental income comes at the cost of constantly being on-call to assist and directs guests; making sure they have everything they need and responding to their issues or requests can become tiresome, especially when you have a constantly revolving door of new visitors with new needs. Second, is the degredation of your physical real estate and property. Let's be honest, guests can be sloppy and clumsy and damage or ruin the interior (or exterior) of any home. Even if you aren't renting your primary residence, you still want to protect against any damages. Finally, the biggest drawback to short-term rentals are the external cost implications. Namely, local governance may require you to pay hotel tax if your investment properties are rented out short term the majority of the calendar year. Also, the rental platforms themselves can take a huge cut of your real estate income earnings. So make sure to factor these considerations into your decision to entertain different real estate strategies.
"Landlords grow rich in their sleep."
- John Stuart Mill
Conclusion
There is more than one way to make money using real estate. The best option for you depends on your own financial situation, timeline, and personal goals. A few strategies to experiment with include buying and holding, flipping, wholesaling, renting-to-own, and short-term renting. Usually, with enough commitment and patience, one of these will be making money for you. Best of luck with your next investment property!
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