How to Make Money in Real Estate | Life Bridge Capital

As an investment opportunity, real estate offers several advantages. The spectrum of real estate investment opportunities ranges from options like REITs for those with little capital and time to spare to multifamily and commercial development projects for those with ample time, knowledge, and funds to invest. If you’re just starting out, here are a few tips on how to make money in real estate.

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Types of Real Estate Investment Returns

We often hear that the wealthy made their money in real estate, so much so that the idea of real estate investment has turned into a nebulous concept with little specific detail. As you’ll learn in this article, real estate investing does not exclusively mean being a landlord or millionaire developer. In fact, there are more than a dozen ways to make money in real estate.

Investors use real estate to create and grow wealth in a few primary ways:

Through the appreciation of the property’s value
Through the income made by the property
Through dividends earned from real estate investments
Through financing real-estate-related debt

Appreciation-Focused Methods

Anyone who has ever sold a home for more than they purchased has already experienced the power of property appreciation. Moreover, property appreciation, even adjusted for inflation, is one of the most consistent and stable principles of the American economy (barring 2006 through 2012 during the mortgage crisis and resulting recession).

Because appreciation is nearly a sure thing, many methods for making money in real estate capitalize on the expected increase of a property’s value, either through time or through improvement.

Fix-and-Flip

Television portrayals that dramatize the process of purchasing and renovating a property for reselling glamorize a genuine real estate money-making strategy. Investors with large amounts of capital, or partners with capital, may go at a full-tilt pace as seen on television. However, home flipping can be done on a much smaller scale, with some investors choosing to live in a home for a few years as they slowly renovate it.

The flipping model relies on consumers who happily pay a higher price for renovated, move-in-ready homes and who lack the interest or budget to complete the repairs themselves.

Short Sales

Short sales happen before foreclosure when a homeowner is unable to make timely mortgage payments. At this time, the lender and homeowner may agree to sell the home for less than the loan value to avoid foreclosure.

Short sale purchases often take longer than other real estate transactions, but investors can sometimes snag a property for less than its worth. However, do not expect to get a property for pennies on the dollar during the short sale process. The bank must sign off on the purchase price, and it wants to recoup as much money as possible.

Because the short sale process can be lengthy, investors can find value in simply placing the property on the market as a traditional listing. This is much more appealing to buyers, especially those looking to move quickly, than a short sale.

Income-Oriented Methods

Rather than solely relying on the property’s value to increase, many real estate investors pursue a steady revenue stream through income-producing properties. As a result, some high-value properties may see little appreciation, but income potential makes them well worth the time and investment.

Short-Term and Vacation Rentals

With the Internet to connect owners and occupants, short-term rentals are a big business. It is also one of the most accessible ways to start making money in real estate, because it can turn a person’s own home into a revenue stream.

The duration of the stay characterizes short-term rentals. Rather than being rented for long-term residential or business use with monthly or annual leases, they are short stays for vacationers, business travelers, and others.

We can all dip our toes in the water of managing vacation rentals by leasing all or part of a home on platforms like VRBO or Airbnb. Those with spare space generate steady income by routinely renting out an extra bedroom or basement. Or, put an otherwise vacant house to work the next time you leave for vacation by renting the whole thing.

Those with a little more capital can invest in a property in a vacation destination and routinely rent it out. Vacationers often enjoy the convenience, space, and comfort of a home rather than a single hotel room, making a market for managing vacation properties. Beyond owning the properties, real estate investors can create businesses to fill this niche.

Buy and Hold

When thinking of making money in real estate, collecting rent and fixing leaks may come to mind. But, while property managers can take care of these tasks, they are indeed part of the buy and hold method, which applies to residential, industrial, and commercial properties.

The buy and hold strategy focuses on generating income from the property by putting it to use to generate revenue. The income from a property can be used to leverage debt and purchase more properties. Ideally, the property also appreciates, but income is the primary focus when buying and holding.

Lease Options

Some real estate investment strategies do not require that you own property, and dealing in lease options is one such method.

By leasing a property with an option to buy, an investor can lock in a purchase price for several years in the future. This gives the investor time to raise capital, improve credit, and, most importantly, watch the market. Then, when it is time to exercise the option to purchase, the buyer will be getting the property for that previously locked-in rate, which could be below the future market value. Lease options for desirable properties may be bought and sold to and from other investors.

Raw Land

Raw, undeveloped land may also have earning potential if the time does not feel right to sell. They range from renting out the entire parcel for agricultural use like grazing livestock or growing crops to mining resources, depending on the ownership of mineral rights. Further opportunities exist to put the property to work by allowing cell towers, utilities, and roads to be built on the property.

Alternative Real Estate Investment Methods

While most real estate opportunities focus on making money from selling or managing property, it is possible to reap the benefits of real estate investment without being the boots on the ground or a significant capital provider.

Real Estate Investment Trusts

For a quick, low-maintenance, and low-cost way to enter the world of real estate investing, consider real estate investment trust (“REIT”). REITs are companies that own, finance or operate income-producing properties. The profits from those properties are passed on to shareholders in the form of dividends, and REITs must disburse at least 90 percent of taxable income as dividends.

Purchase shares on publicly traded exchanges through your preferred investing platform. Because REITs are only one company or project, thoroughly research the specific REIT before investing.

Real Estate Exchange Traded Funds

For broader exposure to the real estate market in the same convenient form as REITs, consider real estate exchange-traded funds (ETFs). Real estate ETFs are a collection of REITs and may specialize in a particular market segment, like commercial properties, medical buildings, or storage facilities. Alternatively, some ETFs feature REITs from across the real estate world, helping investors achieve some portfolio diversity with just a few clicks.

ETFs are also publicly traded and are fixtures in many retirement portfolios because they feature many real estate companies and do not rely on a single type of property or project.

Real Estate Syndications

Real estate syndications are a contract-based form of investment that gathers a group of individual investors to pool resources for a larger real estate project. The syndicator, or project sponsor, is in charge of all the actual legwork of the project. The sponsor finds and prepares the project, manages the paperwork and financing, and ultimately oversees the project. The individual investors each receive a payout as determined by the syndication agreement.

Some syndication agreements structure the payouts to be closely tied to early income from rental payments. In contrast, others are more generous on the backend when the project terminates and the property is sold, ideally for a gain.

Lending

The hefty price tag of real estate means that financing real estate is a major business. Investors who have sufficient capital can be the hard money lenders themselves, but more commonly, investors buy and sell the debt to make money.

One typical investment vehicle is a mortgage-backed security (MBS). A MBS is made up of a collection of residential mortgages that the originating banks sold. To be sold on public markets, MBS loans must pass several standards regarding the issuing lender. Investors then become entitled to the payments made by the borrowers and receive periodic payments.

Final Thoughts

There are many ways to make money with real estate. Although real estate historically sees steady appreciation that, at minimum, matches inflation, no investment is guaranteed, and all retain risk of loss. Fortunately, the wide variety of investment options permits all investors to choose the method that best works with the individual’s risk tolerance, capital, and available time.

Real estate serves as an essential diversifier of portfolios, but remember to diversify within the real estate market as well. The previous year taught us that no industry is immune from crisis, and over-reliance on a particular market segment is a risk.