If you’re looking for a great way to create long-term wealth and invest in your future, investing in real estate could be an option. There are many ways to create wealth by investing in real estate. One, certainly, is to own property and rent or lease it to tenants. But there are other options, even some that don’t require you to have any specialized knowledge or skills.
Before we look at how to get started in real estate, let’s find out how investors make money and the benefits of investing in real estate.
3 ways real estate investors make money
There are three ways investors make money in real estate:
1. Increasing property value
Generally, real estate property values appreciate (go up) over time. This is good news for property and building owners, who earn money without having to do much of anything.
The key to making money with property values is that the increase has to be more than the inflation rate, or else you’re just losing money. If your property value goes up by 5%, but inflation has raised prices by 8%, you’ve lost 3% of the value.
2. Rental income
This is the way most people think of making money in real estate. You own a house or building and rent or lease the use of the building, charging tenants monthly rent. This can be a great first step into real estate investment, as you can start with one building and grow at your own pace.
There are some drawbacks. In order to make consistent income you need to find reliable tenants who will pay you on time and treat the property with respect. In addition, you’re responsible for paying for needed maintenance and repairs, no matter who caused the damage.
3. Real estate business operations
Another way to make money with real estate is to provide add-on services that are sold to a property’s tenants or users. Examples include selling on-demand movies to hotel guests or offering vending machines or on-site parking for building visitors.
Benefits of investing in real estate
Monthly cash flow
If you’ve got good, responsible tenants you will enjoy the predictability of receiving payments each month. You’ll then use the proceeds to make your loan payment and pay for any needed repairs or maintenance costs. Any additional funds can be claimed as income. With long-term leases and contracts, you can enjoy steady cash flow for the foreseeable future.
Over time, real estate appreciates
We’ve already touched on this, but generally, most real estate will appreciate in value over time. There may be short periods of time where the value drops due to market conditions, but overall, the effect should be positive. This makes real estate a great long-term investment. Those looking for a quick buck may want to search elsewhere.
Owning real estate is a legitimate business, so, like a business, you can deduct the expenses you incur. This will reduce the amount of taxes you owe. If you’re serious about investing, you may want to establish a separate business entity for all your real estate transactions. Separating your personal and real estate transactions makes reporting and tax planning simpler and easier.
You have control
Want to start slow? With real estate you are in complete control over how much you spend, when you buy, when you sell, and when you raise rents. You can grow your business by acquiring new properties or sell a few if you’re feeling overwhelmed or your needs change.
How to get started in real estate
Here are three ways you can get started investing in real estate:
1. Real estate investment trusts (REITs)
Real estate investment trusts (REITs) are a great way to get started in real estate without having to invest a lot or do much. You purchase shares of a trust that invests in real estate. It’s like owning part of a property. Based on the property’s income, you receive a portion of the income. REITs often have higher returns than traditional stocks or bonds, and you don’t have to have any specialized knowledge to invest.
There are publicly traded and privately held trusts. Most trusts focus on a particular sector of the real estate market, like shopping malls.
2. Buy a rental property
There are several ways to buy rental property. You can buy it direct off the market through traditional channels. Or you can buy a turnkey property, which is one that is already occupied with tenants. Of course, you want to pay the lowest price you can to maximize your profit potential. Then you’ll need to advertise for tenants and select the best candidates. There are many laws you need to know as a property owner, so be sure to do your research before becoming a landlord or hire a property manager to handle all your tenant issues.
3. Flip homes
Another way to make money in real estate is to flip homes or buildings. This involves purchasing distressed properties, fixing them up, and reselling them for a profit. You’ll want to focus your efforts on undervalued properties or those that need some sprucing up. You’ll need to secure financing for not only the building purchase, but the repairs and improvements as well. It pays to be connected to a contractor who can help you or perform the work yourself. This work can be labor intensive, but it’s great to see old or damaged buildings get a new look.
If you decide to purchase property or flip buildings, you’ll need some expert help with repairs and maintenance. The customer service representatives at all your local Parr Lumber locations can help you find just the materials you need at a price that will allow you to keep more money in your pocket.