The thought of making money in the real estate sector can be intimidating for most people. It’s natural to feel that way about an unfamiliar subject. The cool thing about real estate is that it can give you both immediate income and long-term wealth. Well, there are multiple ways to get into the real estate business. So let’s look at a few. But, first, here’s what you need to know about making money in real estate.
Top tips to consider before buying or even selling property
- Can you rent out a part of your house? This will help you pay for your mortgage. Now, you might have doubts about letting a stranger into your home. Well, you can always install a secure lock to ensure your family’s safety.
- Hire a real estate lawyer as they will have your back.
- Having a real estate broker helps despite their 5% fee. They are more informed about the market and are familiar with all the required paperwork.
- Be organized and take the necessary documents such as paycheck receipts, bank statements, job offer letters and put them in a big folder.
- Try not to buy the fanciest house in the neighborhood as buyers will compare it to places that recently sold in the same area for less.
- Don’t buy in a remote area that is away from public transport, schools, and offices.
- If you see a drop in interest rates, immediately contact your mortgage broker and discuss options such as refinancing at a lower interest rate.
- Go for a fixed mortgage as the interest rate won’t change for the duration of the mortgage in comparison to a floating mortgage.
How do we make money in real estate?
Appreciation of property value
That’s right. Time will only increase the value of your property. The most apparent reason behind this is the development of land over time. Urbanization will transform the suburbs too. Location is another huge factor. A neighborhood with good schools, shopping centers, office hubs, subway services, and recreational activities will see a spike in property value. You hit the jackpot if you discover valuable natural resources in your land, such as oil, minerals, trees, soil, or any other resource. Every minor home renovation you make, building an extra bathroom or adding pantry cabinets to your kitchen, will only make your property more valuable than ever. With inflation, the cost of living surges but so will property value and cash flow. That house your parents bought in the 90s is worth so much more now compared to what they paid. Property values and rent rise in line with inflation but not your monthly mortgage payments.
To put it another way, you can buy for lower price and sell for high price. People can purchase rundown houses, preferably in a good neighborhood, to repair and sell for a lucrative return. We have all seen House Hunters on HGTV.
Real Estate Investment Trusts (REIT)
REITs are big companies that own many assets. When you buy their shares, you will earn a portion of the income produced by those assets. REITs have a variety of ventures, including shopping complexes, housing schemes, hospitals, hotels, and resorts.
If you live near a tourist destination, then this is for you. There has been recent popularity among travelers of choosing Airbnb over hotels. For homeowners just entering the real estate arena, this is a great way to get a taste of it. You can rent out one room in your house for a short rental in Airbnbs.
Investment Properties – Residential and Commercial Rental
If you decide to buy property for the sole purpose of renting and not as your primary residence, that’s called investment properties. The most common form of real estate income is buying and renting property. The classic landlord-tenant contract, called residential rental, will offer you a monthly rental payment. People will always need a home to live in. You can also sign a long-term contract for commercial purposes, such as workspaces which are called commercial rentals. These are both steady sources of passive income.
Tips to keep in mind before signing investment property contracts
- Consider hiring a lawyer to understand legal implications as certain regions have laws preventing you from renting for commercial purposes or Airbnbs. And even an accountant can help with tax implications. It is also advisable to prepare individual income statements for each of your properties.
- Try your best to choose locations that potential tenants will consider their primary residence, such as reputed school districts.
- If your schedule doesn’t allow enough time to manage properties, such as collecting rent and maintaining the property, consider hiring a landlord. You can pay them a percentage of your rental income that will save you a ton of time.
- Focus on the target market before investing in property. Do you target a family that prefers proximity to popular public schools or a bachelor who looks for superb restaurants and pubs?
- Try to do your renovations as most contractors could bankrupt you. Apart from dangerous tasks, you can learn to do other tasks such as installing carpets.
- Check comparable recent sales, meaning try to find out how houses similar to yours sold in recent times.
- Ask your accountant about any tax issues or benefits and make them look at the house to decide the need for clauses such as ‘this deal is subject to inspection.’
- Never buy the first place you see if you’re new to this. Your first investment should be small as properties are highly illiquid. Try to watch good shows about real estate shows to get a better idea.
- Foreclosures or auctions can help bargain with motivated sellers to find cheaper property.
- Please do your research as real estate agents are biased and are focused on their commission.
- You are staging your place in the event of selling, such as renting aesthetically pleasing furniture to elevate the ambiance. The return on investment on minor landscaping is very high, so if you buy a house with the plan of selling it a few years down the line, then plant those trees now!
Pros of real estate investment
You can always make more money, but you’ll never bring back lost time. Being able to spend one’s time the way they wish is the epitome of success for any person. Real estate will grant you a steady and predictable flow of income.
Better financial literacy
Knowing how the real estate world works will give you a better idea about property and wealth and will help you network and build new connections. In this fast-paced era, knowledge will always come in handy.
REITs are more liquid
Being risk-averse is no longer an excuse not to invest in real estate. Many have doubts about managing their property. Well, if that’s the case with you, then REITs are for you. By law, REITs usually offer 90% of their income as dividends in most countries which is much more favorable than stock dividends.
Home equity is a part of one’s net worth and is the portion of a home’s current value that the owner will possess after paying off their mortgage. More equity gives you a greater possibility for further investments and eventually doubling your cash flow.
Unique Tax Benefits
Governments are generous to real estate investors and offer them tax benefits such as depreciation and lower tax rates on long-term profits.
You’re in the driver’s seat!
You have the liberty of making your own decisions, unlike other forms of investments such as stocks. You have control over the deals you make, the tenants you pick, and the rent you charge.
Cons of real estate investment
Moving into the real estate business has the problem of lacking liquidity. In other words, liquidity is the ease of converting an asset to cash and vice versa. Unlike other investments, the property will take more time when it comes to confirming a transaction.
Real estate entails its fair share of dangers. The key to succeeding in this field is by navigating through hard times, such as keeping up with your monthly debt payments and repair and maintenance costs. Not to forget potential problems with tenants such as leaving a property in bad condition or not paying rent at all.
You need money!
This is for mortgage payments, insurance, maintenance expenses, property taxes, and even unexpected repairs.
Real estate can be a time-consuming process of learning and managing. Since we’re dealing with a lot of money here, you need to make informed decisions like buying the right property at the right time.
This summary is perfect for any newbie in the real estate business as it answers all possible questions. For those of you who were hesitant in the past to join the real estate business, this is your sign to start today!