Have you thought about getting out of the 9-5 grind? Are you looking to build wealth and passive income? Are you trying to find that magical formula for turning the money you have now into a lot more money down the road? In this article, I want to provide you with an overview of this exciting and potentially lucrative investment vehicle. We’ll look at the ways in which you could be a real estate investor and make money!
A disclaimer!
Real estate investing is just one potential answer to making passive income. There are many ways to invest money in yourself, in a business, or in different types of investments. Real estate investing is just one of many routes that you can take, and the route you take should match your financial goals, be within your personal risk tolerance, and your personal preferences.
What is real estate investing?
Real estate investing is not just one thing, it is a whole category of investing! If you want real estate to be a part of your investment portfolio, you can achieve this objective in many different ways. It is helpful to divide this very broad category into two main types:
Investing in real estate on paper
You can invest in real estate without ever owning a piece of real estate. This type of investment is largely passive and you’ll never have to unclog a toilet or evict a sketchy tenant. I’m talking about investing in real estate investment products or securities. These are essentially paper investments where you own an investment product or security which is backed by actual real estate, but you do not own actual real estate. Examples include buying shares in publicly listed real estate companies, investing in REITs (Real Estate Investment Trusts), and mutual funds or ETFs that have a focus on real estate related securities.
Investing in the real thing!
Moving away from paper investments in real estate, we need to look at “brick and mortar” real estate investing. This is what most people think of when they think of investing in real estate. Owning an actual piece of property, that you can touch, see and feel, is what makes real estate investing so compelling and tangible for people.
Two ways to make money
When investing in a piece of real estate, there are essentially two ways you can make money. The first way is through appreciation, and the second way is through rental income.
Appreciation
Over time, real estate increases in value and this is called appreciation. Appreciation is not always linear, what goes up can also go down, and there are always events that can cause a piece of property to cost less one year than it did the year before. A dramatic downward turn in the economy, such as what followed the 2008 financial crisis, caused property prices in the US (and many other countries) to plummet. In general though, a home today almost always costs more than an equivalent home 5, 10, or 20 years ago.
There is also something called forced appreciation. This is when a homeowner or real estate investor, makes improvements to a property to make it more valuable. For example, a rundown house is likely cheaper than an equivalent home that has been fully renovated. A final point on appreciation is that it only becomes cash in your hands once you sell the property.
One type of real estate investor is the “fix and flip” investor who purchases a rundown property, renovates it, and then sells it for more than they bought it for. In other words, the investor forces appreciation in the value of the home and hopes that the difference between the cost of the home (plus the renovation and holding costs of the property) and the eventual selling price results in a profitable payday!
Rental Income
The second way to make money is through rental income. This involves purchasing a property and then offering it to tenants for a monthly rent. Bear in mind, this form of investing is only profitable when there is a positive cash flow. A positive cash flow is when you still have some money in your pocket after you have covered ALL the costs of owning and maintaining the property. You’ll probably need to make a mortgage payment on the property, pay property taxes and insurance, and set aside money for maintenance and repairs. Only once you have covered all these costs and still get a positive cash flow, does this type of real estate investment makes sense. This type of investing is called “buy &hold” real estate investing.
Final thoughts.
Real estate investing is not for everyone. It can be a lot of work, it involves taking risks, and it does require you to have money upfront or to borrow large sums of money. But, it can also be lucrative and a lot of fun.
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