Many investors know the potential of real estate wealth, and there are several key ways to earn it. Appreciation and rental income are common profit channels, and they depend on location, development, and home improvements. Economic factors, like inflation, can affect real estate value.
This article will explore proven strategies and how to look for timely opportunities, as well as alternative investment options such as REITs, MBSs, and REIGs.
Understanding Property Appreciation and Value Growth
When real estate appreciates, it increases in value. Investors commonly earn a profit when they sell. However, property owners can increase their return on investment on a property by refinancing the loan at lower interest. This will lower the cost basis for the property, thus increasing the amount that they clear from it.
The appreciation for undeveloped land is achieved by developing it. Once developers build houses or commercial buildings, it raises the value. Appreciation in land can also come from discoveries of valuable minerals or other commodities—provided that the buyer holds the rights to them. Commercial property gains value for the same reasons as raw land and residential real estate: location, development, and improvements.
For residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds, and more, these changes cause the home’s value to climb. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays. Home improvements, such as adding an extra bathroom or remodeling a kitchen, may increase the value of a home.
Income Streams From Real Estate Investments
- Raw Land Income: Companies may pay real estate owners royalties for any discoveries or regular payments for any structures they add. This may include pump jacks, pipelines, gravel pits, access roads, and cell towers. Raw land can also be rented for agricultural production.
- Residential Rent: Residential property income comes as rent where tenants pay a fixed monthly rate. A desirable location is critical for owners to secure tenants easily.
- Commercial Property Income: Commercial properties also earn income through rental payments. Many commercial tenants may also pay fees for contractual options like the right of first refusal on the office next door. Tenants pay a premium to hold these options, whether they exercise them or not.
Effective Strategies for Buying and Selling Real Estate
- Buy and Hold: Many real estate investors buy a single-family home and rent it out or buy a multifamily home and live in one of the units while renting the others to cover the mortgage. Buyers can choose to manage the property or hire a management company.
- Flipping: Property flippers specialize in adding high-return fixes to houses in a short time and then selling them. Flipping can be lucrative for those who find the right properties to fix.
- Vacation Rentals: When there is demand for home-away-from-home rentals, homeowners can earn income by renting out a house or even just a room on a short-term basis, especially if the property is in an area that’s a well-known tourist destination. Local bylaws commonly dictate the rules for listing a property on Airbnb, Vrbo, or HomeAway.
Exploring Alternative Income Sources in Real Estate
- REITs: Real estate investment trusts (REITs) allow investors to buy shares of a fund of multiple commercial properties with the rental income shared as a distribution. The REIT is the landlord for the tenants, but the owners of the REIT record income once the expenses of operating the buildings and the REIT are taken out. There’s a special method for assessing a REIT.
- Mortgage Investment Corporations (MICs), real estate investment groups (REIGs), and mortgage-backed securities (MBSs): These invest in private mortgages rather than the underlying properties. MICs differ from MBSs in that they hold entire mortgages and pass on the interest from payments to investors. REIGs are usually private investments with a unique structuring, offering investors equity investments or partnership servicing.
Exploring Real Estate Investment Alternatives
An informal residential real estate option requires investors to pay a fee, or premium, to have the right to buy a house for a specified period for an agreed-upon price. The premium is essentially a finder’s fee for matching a person looking for an investment with a person looking to sell.
Short sales involve purchasing a home from a lender when the mortgagee is behind on payments. Short sales can be a time-consuming and complicated proposition. Lease options allow investors to lease with an option to buy. Contract flipping involves the transfer of the rights of a purchase contract to another buyer and pairing distressed sellers with motivated buyers.
Is Real Estate Investment Always Profitable?
Real estate investment is not a sure bet. The real estate market has boom and bust cycles, and real estate investors can lose and make money.
What Is a Common Way to Profit in Real Estate?
The most common way to make money in real estate is through appreciation—an increase in the property’s value realized when they sell.
How Do Investors Find Properties for Sale?
A realtor or real estate professional can help investors find properties. Online sites such as Zillow or Redfin also list properties for sale.
The Bottom Line
There are several proven strategies for making money in real estate. Appreciation and rental income rank high, but several alternative real estate investments exist. REITs, MICs, REIGs, and real estate crowdfunding are potential options.
Real estate investors should consider the costs and risks associated with buying properties, as well as location, market conditions, and potential pitfalls like inflation. Real estate investment is not always guaranteed to be profitable, given the market’s boom-and-bust cycles.
