Whether you know little to nothing about real estate investing, it is always important to learn the basics of knowing how your property(s) can help you generate long-term wealth.
This article won’t detail the different investment strategies you can take to get into real estate. Instead, go over to the basic core fundamentals on how your properties can generate money.
- The most common way of making money through your properties is through appreciation.
- Location and condition are the primary elements that raise the value of your house.
- Rental properties is also an excellent way to generate consistent cash flow monthly.
Increasing Property Value
One of the most common and hands-free ways to generate money from your property is by increasing its value, in other words, having it appreciate over time. Technically speaking, you won’t generate cash on a month-to-month basis, since most of these profits aren’t realized until you sell your home. However, you can do different strategies to increase the payoff you get once you do sell it.
Starting from the best way to generate profit is by buying undeveloped land and developing it. As cities expand, the land you purchased tends to increase in value, and if you developed the land, you could expect it to skyrocket.
When it comes to residential, your profits tend to come from location and upkeep as the neighborhood around the house continues to evolve by adding schools, stores, and transits, which brings up the price of your home. If you don’t keep up with the maintenance of the house, you can potentially net a negative, even if though the surrounding communities have grown.
Inflations Role in Real Estate
When looking at appreciation, you have to take in the economic effect of inflation. For example, an annual inflation rate of 10% means that your dollar will only be able to buy around 90% of the same things the following year, including real estate. So if a piece of land were worth $100,000 in the 1970s but sat idle and unused for decades, it would be worth much more now. Why? Because of rampant inflation in the 1970s and a consistent rate since then, purchasing that land now would undoubtedly cost more than $500,000, assuming $100,000 was fair market value at the time.
You have to keep in mind, though, while you may get five times the amount of money when you sell due to inflation, many other products cost five times as much to purchase.
The second-best way to generate money from your properties is by renting them out.
This method is the most commonly known when it comes to generating income. You would lease out your property to a tenant, typically 6 to 12 months, and have them pay a fixed amount per month. As inflation and demand increase, so do the rent prices. Ensure the house is in a desirable part of town, since having vacancies can be detrimental to your profits.
This one isn’t as common, but companies will pay you fees or even royalties to borrow your land depending on your rights to the land—for example, oil drill pumps, billboards, and cell phone towers. You can also rent out land for production use like agricultural and timber production.
Commercial real estate is very similar to residential, but instead of renting out to tenants for housing use, you rent them out for commercial purposes.
You can make your rentals virtually hands free by hiring a property manager. They do charge a fee (each company charges different prices) but they will handle everything from screening new renters to maintaining the property. Before you hire a management company, make sure to do your research on said company. As a property management company ourselves, we have seen many homes go from perfectly livable homes to complete nightmares simply because of negligence from their previous property managers.
Flippers prioritize maxing profits in the shortest amount of time by renovating broken-down homes. Flipping can be very profitable if you have the necessary skills to find stressed homes, negotiating a fair price, and overseeing a crew to carry out the work.
A quick tip: Flippers make the majority of their money based on the first acquisitions. Before you go bidding high prices for a stressed home, you must do the math to make the deal make sense. If you plan on listing the house with a real estate agent, you have to calculate their fees as well to the overall project.
People have been making money from real estate since the inception of society, but they hold risk, just like any investment. Ensure you do your due diligence if you plan on buying and holding and if you’re flipping, make sure to do the math and make sure everything checks out because you make your money based on the acquisition cost.