How Do You Become A Real Estate Investor – Whether you’re curious about real estate’s investment potential, or just tired of the little-known ways of “profiting from your property” that commercials promise, it’s worth getting a real look at how real estate creates wealth.
This article will focus on how to make money with real estate, rather than providing an obscure strategy for investing in real estate or an introduction to home ownership for first-time buyers. It will cover basic methods that have not changed over the centuries, whatever splendor the masters of the time tried to give them, and the specific opportunities that have recently emerged.
How Do You Become A Real Estate Investor
The most common way real estate provides profit: it appreciates – that is, it increases in value. This can be achieved in different ways for different types of properties, but only in one way: through a sale. However, there are a number of ways you can increase the return on your property investment. One approach – if you borrow money to buy a property – is to refinance the loan at a lower interest rate. This will lower your cost base for the property, thereby increasing the amount you clear from it.
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The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land beyond the borders becomes increasingly valuable as it has the potential to be purchased by developers. Once a developer builds a home or commercial building, its value increases further.
Land appreciation can also come from the discovery of valuable minerals or other commodities—provided the buyer has rights to them. An extreme example is oil, but appreciation can also come from gravel deposits, trees and other natural resources.
When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around the house grew, adding transportation routes, schools, shopping centers, playgrounds, and more, these changes caused the value of the home to climb. Of course, this trend can also work in reverse, with home values falling as neighborhoods decline.
Home improvement can also stimulate appreciation. Adding an extra bathroom, heating the garage, and remodeling the kitchen with state-of-the-art appliances are just some of the ways homeowners might try to add value to their home.
Become A Real Estate Investor
Commercial real estate appreciates for the same reasons as original land and residential real estate: location, development and improvements. The best commercial real estate is always in high demand.
When considering appreciation, you must consider the economic impact of inflation. 10% annual inflation means your dollar can only buy about 90% of the same goods — including property — the following year. If a piece of land was worth $100,000 in 1970 and had been dormant and undeveloped for decades, it would still be worth many times more today. Due to runaway inflation throughout the 1970s and a steady pace thereafter, buying the land could cost over $700,000 by 2021, assuming $100,000 was a fair market value at the time.
So, inflation alone can lead to real estate appreciation, but it’s an unearned victory. While you may get five times your money when you sell it due to inflation, many other items also cost five times as much to buy, so purchasing power in your current environment is still a factor.
The second largest way real estate generates wealth is through regular income payments. Often referred to as rent, income from real estate can come in many forms.
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Depending on your rights to the land, the company may pay you any royalties found or periodic payments for any structures added to it. These include, for example, oil pumping units, pipelines, gravel pits, access roads and cell phone towers. Raw land can also be leased for production, usually agricultural, while land with trees can be valuable for timber that can be harvested regularly.
The vast majority of residential property income comes in the form of base rent. Your tenant pays a fixed amount each month – which will rise with inflation and demand – and you deduct the cost from it, taking the remainder as rental income. The ideal location is critical to ensuring that you can easily protect your tenants.
Commercial real estate can generate income from the above sources, with base rent being the most common, but one can also be added in the form of option income. Many commercial tenants will pay for contract options, such as the right to choose an office next door first. Tenants pay a premium to hold these options, whether they exercise them or not. Option income is sometimes present on original land and even residential properties, but it is not common.
Below is a detailed look at some of the many ways you can earn income from residential property.
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This is one of the more traditional ways to earn income from real estate. There are many ways to do this: You can buy a single-family home and rent it out; buy a multi-family home and live in one of the units while renting the others – ideally to pay the mortgage and your own Housing costs; or buying a multi-family home and renting all the units – either manage the property yourself or hire a management company to handle the rental unit, collect rent, fix needed repairs, etc.
Propertyflippers specialize in adding high-return restorations to homes in a short period of time before putting them up for sale. If you know how to find a property to fix, you have the necessary skills to do it yourself or supervise a crew doing it, and you have an idea of the potential cost and potential value of the property, flipping can be lucrative.
Demand for “home away from home” rentals has exploded in recent years, as many travelers prefer the option to staying in a hotel. Homeowners can earn income by renting out their home or even a room on a short-term basis, especially if the property is located in a well-known tourist destination area. It is unclear when the market will return. But if it comes up again, keep in mind that short-term rentals are regulated and sometimes banned in some cities. Check your city’s bylaws before listing a property on sites like Airbnb, Vrbo, or HomeAway. Also, calculate how much additional deep cleaning and sanitizing between guests will add to the cost.
Real estate investment trusts (REITs), mortgage-backed securities (MBS), mortgage investment companies (MICs) and real estate investment groups (REIGs) are investment options in the real estate industry. They are generally considered tools for earning real estate income, but they have different processes and different entry processes.
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With REITs, the owners of multiple commercial properties sell stock (often publicly traded) to investors (usually to fund the purchase of more properties) and pass on rental income in the form of distributions. The REIT is the landlord of the tenant (who pays the rent), but the owner of the REIT records income after deducting expenses for operating the building and the REIT. There is a special way to value REITs.
These go even further, as they invest in private mortgages rather than underlying property. MICs differ from MBSs in that they hold the entire mortgage and pass on the interest from the payment to the investor, rather than securitizing some of the principal and/or interest. Still, both are not real estate investments, but debt investments. REIGs are typically private investments with their own unique structures that provide investors with equity investment or partnership services.
There are several solid real estate alternatives available for making money in the industry, but they have different caveats and entry points.
One option is the informal residential real estate option, which requires you to pay a fee or premium for the right to buy a home for an agreed-upon price within a specified period. You will then find investors willing to pay more than your option price for the property. In this case, the premium you get is essentially a brokerage fee that matches the person looking for the investment with the person wanting to sell – not really that different from a real estate agent’s commission. Although this is income, it does not come from owning (ie holding a deed) a piece of real estate.
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It can, but it’s not a sure bet. The real estate market has boom and bust cycles, and real estate investors can lose money as well as make money.
The most common way to make money in real estate is through appreciation—realizing an increase in the value of the property when you sell it. This is the easiest way to make money in real estate, but there are still risks.
There are many ways. You can make money from rental income from both residential and commercial properties. The company can also pay you royalties on undeveloped land for any discovery, such as minerals or oil. You can also make indirect investments through real estate investment trusts (REITs), mortgage-backed securities (MBS), mortgage investment companies (MICs), and real estate investment groups (REIGs).
There are several proven strategies for making money in real estate. Appreciation, inflation and income top the list, but there are also several options for real estate investing. Know your investments, risks and whether
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