The property market has gained momentum in the past two years due to ample liquidity and all-time low-interest rates. You do not have to be rich to make these investments. Real estate investments rank ahead of Stocks, Mutual funds, bonds, and gold all the time.
Today, even though investors have ample possibilities for investing in land for sale, there is no one-size-fits-all solution. However, real estate can be an excellent vehicle for accumulating wealth if you take the time to enlighten yourself about the process and the best strategies for maximizing profits.
Related: The Ultimate Marketing Guide for Real Estate Agents
5 Ways to Make Money in Real Estate
Given the number of options available for real estate investments, the following moves will help you make the most of your property investment to make money.
1. Making Money through Real Estate Investment Trusts (REITs)
REITs are corporations that own and operate real estate to produce income. They provide exposure to the real estate market without you having to invest large sums of money by buying or managing a property.
If you are a new investor, its tax-advantaged structure proves to be fruitful. Since REITs are likely to be invested in mortgages and properties, you can diversify your holdings in real estate. Also, it becomes easy to buy and sell shares as they are publicly listed.
Long-term returns of REIT stocks are similar to the value stocks and more than the returns of lower-risk bonds. As REITs provide stable dividend income, it is an essential investment for people who have retired or plan to retire. In addition, insurance companies, bank trust departments, pension funds, and foundations invest in REITs.
It is essential to choose the REIT correctly and target companies in high-growth sectors like industrial real estate.
2. Making Money through Renting Out Properties
Renting out properties is a tried and tested strategy to make money in real estate. You can consider buying a holiday guest house or second home and renting it out when not in use.
There is also an option of buying distressed homes, renovating, and then renting them. Another alternative is to own residential, commercial, or industrial plots and enjoy benefits from the rents.
Rents on vacation homes or full-time tenants are an excellent source of constant income. Renting also requires understanding the local building rules and community norms. You need to know the rules for increasing the rent and evicting an unwanted tenant. What if a property is not giving you enough returns? The best option would be to sell it off and clear the debts.
So, be smart and do not rush to buy many properties at one go as it may increase your debt. Instead, start with a single apartment and learn the basics.
3. Making Money through Mortgage Options
When you buy a property to rent it out through loans, you have to make a payment to the lender each month. This payment includes the principal amount and interest. The principal amount is your actual loan amount, whereas the interest is the profit to the lender. So now, when you rent this property, it will help you pay the loan off with the rent collected from the tenant.
Even if the property value drops, you would have nothing to lose as the property is still there with you. It cannot happen if you buy real estate by emptying your savings. Hence, opting for mortgage options would be the best move for earning money through real estate.
Refinancing your mortgage is another way to earn money in real estate. Refinancing a mortgage means exchanging your old mortgage with a new one at a new interest rate. It is beneficial as the interest rate is low, and there is a decrease in the mortgage payment amount.
4. Making Money by Opting For 1031 Exchange in Real Estate
A 1031 exchange allows you to sell one property and buy another by avoiding capital gains tax. However, there is a time limit of 180 days on these exchanges, i.e., you have to purchase a new real estate property within 180 days.
The highlight of this exchange is that you can sell a property and use the profits to buy a new one of equal or greater value. You can defer paying taxes till the new property is sold or opt for another 1031 exchange. Usually, you can choose a 1031 exchange if you are looking for a property that can give you better returns or want to broaden your assets.
Since 1031 requires a higher minimum investment, they are suitable for people with more cash flow and due to their complexity to be handled by professionals.
5. Making money by Real Estate Appreciation
Real Estate Appreciation means an increase in its value after some time. It can happen due to location, future developmental plans, demand & supply of property, and changes in physical structure. You can buy to sell them later when the price appreciates.
Another appreciation that comes to our minds is the Forced Appreciation. Forced appreciation is when the owner renovates the property by adding a park or a children’s play area to enhance the property value.
Forced appreciation is through an increase in rentals for the property or increased property price. Since this is not the natural form of appreciation, the competition is minimal.
Conclusion
Investing in real estate is one of the best decisions you can make to increase your wealth. You will surely reap benefits if you have a good fundamental knowledge of investing in profit-bearing properties. Moreover, real estate is one of the niches where bank loans are always available.
However, the economy, interest rates, government policies, and unforeseen circumstances similar to the Covid-19 pandemic play a vital role in real estate prices. So, you need to play safe with proper and thorough research and monitoring of real estate holdings.
