How to Create Wealth in Real Estate Investing
Real estate investing offers huge financial advantages to those who will learn how the system works. And, as this article will illustrate, any risks can efficiently be managed through legal structures and other common strategies that are neither difficult nor expensive. There are great advantages to investing in real estate both as a moneymaking business and as a wealth builder.
When investing in real estate, the goal is to put money to work today and allow it to increase so that you have more money in the future. The good news about real estate is that its value historically goes up. This is because as human population increases, the value of real estate increases. Having said that, the profit, or “return,” you make on your real estate investments must be enough to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities, regular maintenance, and insurance.
The financial benefits flow from several sources, including the appreciation of your land and property values and the monthly cash flow you can earn by renting out residential, offices, or commercial space in a structure you own on your land.
Real estate investing really can be as simple as playing monopoly when you understand the basic factors of the investment, economics, and risk. To win, you buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties. Nevertheless, keep in mind that “simple” doesn’t mean “easy.” If you make a mistake, consequences can range from minor inconveniences to major disasters. You could even find yourself broke or worse.
The 4 Ways Real Estate Investors Make Money
When you invest in real estate, there are several ways you can make money:
- Capital Gains
The value of your property will appreciate over time above the price you paid for it so you will be able to sell it for more than you bought it. There are two crucial points in time for your property: when you buy it and when you sell it. This is capital gains investing.
It is when the property increases in value due to a change in the real estate market, there is no other land around your property or when a major shopping center is built next door or the upgrades you put into your real estate investment to make it more attractive to potential buyers or renters.
- Cash Flow Income
This type of real estate investment focuses on buying a real estate property, such as an apartment building, and operating it, so you collect a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and many more. The goal is that your property will generate a positive income for you each and every month whether you get out of your bed in the morning or not.
- Real Estate Related Income
It is income generated by “specialists” in the real estate industry such as real estate brokers or consultants, who make money through commissions from buying and selling a property, or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. This type of real estate related income is easy to understand. For example, a management company gets to keep 5 percent of a hotel’s sales for taking care of the day-to-day operations such as hiring maids, running the front desk, mowing the lawn, and washing the towels.
- Ancillary Real Estate Investment Income
For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-captive collection of customers.
Tips for Buying Investment Properties
There are several ways to buy your first real estate investment. If you are buying a property, you can use debt by taking a loan out against a property. The use of leverage is what attracts many real estate investors because it lets them acquire properties they otherwise could not afford. However, using leverage to purchase real estate can be dangerous because, in a falling market, the interest expense and regular payments can drive the real estate investor into bankruptcy if they aren’t careful.
You will almost NEVER purchase a real estate investment in your own name. Instead, for risk management reasons, consider holding real estate investments through special types of legal entities such as limited liability companies. That way, if the real estate investment goes bust or someone slips and falls, resulting in a lawsuit, you can protect your personal assets because the worst that can happen in some circumstances is you lose the money you’ve invested.
It lets you sleep at night because your other investments are out-of-reach by the one that gets into trouble.
When you are ready to start the process of real estate investing, you’ll want to decide which of the real estate investment type is most appropriate for you.