3 Ways to Make Money through Real Estate
So, you have money and you want to watch it grow. You could choose liquid investments such as shares of stock or mutual funds - One day your up, next day your down, maybe you’re way up next week and lose on your original investment a month or two down the line. Real estate investments on the other hand are not as liquid as stocks and bonds, and fluctuations in the market do affect final pay outs. We’ll cover some of the ways to make money through investing in real estate in this article. The goal is for you to get ahead of the competition in a way that is comfortable and minimizes risk for you as an investor.
1. Cash Flow Income
You may have the capital, but do you have the time and energy? People who invest in a cash flow income property must consider two things: net operating income and capital expense reserves. The net operating income is the gross rental income minus the expenses that occurred from operating the property.
Cash flow income properties take work. An apartment building is an example of a cash flow income property, where each month the owner collects rent. Easy flow of income, right? Wrong.
Expenses in our apartment building example may be landscaping, trash removal, keeping hallways clean and pretty much any required maintenance the building needs on an annual basis. Capital expense reserves can be defined as an account kept for large anticipated expenses such as replacing roofing, water heaters, heat-and-air systems, driveways, and the list goes on. Not so simply, right?
If you have a flexible schedule and have the tenacity to collect monthly rent from tenants, schedule maintenance and can supplement the property’s monthly income for taxes, net operating, and capital expense reserves this type real estate investment may be right for you. For those of us who don’t have the time to run a cash flow income property, a property management company can be hired to operate your property year-round, but this means less profitable income for you at the end of the day. Remember, in the end the profit must be worth the work!
2. Appreciation in Real estate
Remember that part of town that was nothing to write home about? Ever wonder how it suddenly became the new and trendy neighborhood with new construction and exciting new restaurants? Appreciation, in real estate terms, is an increase in value of property over a period time. One example of real estate appreciation occurring is when an area of town goes from an older/more run-down state to a renewed and hot attraction. Appreciation of a property can occur for several reasons, i.e. increased demand being one of them.
How does one get ahead of a real estate investment they want to appreciate though? Timing, timing, timing. An investor must be in a financial position at the right time to purchase low and sell high, or hold on to the property while renting it at a high rate. It’s hard to gauge this sort of investment. You should have a decent understanding of the history and plans of an area to really benefit from this investment strategy.
There are other ways real estate can appreciate. Renovations to a home or building is another way to execute real estate property appreciation. Replacing the old kitchen cabinets and countertops, adding an addition, or updating the bathroom are all ways investors or homeowners appreciate the value of their properties.
3. Real Estate Property Management
Ever wonder how those massive buildings maintain themselves? Whether it be residential, office, or recreational, all properties need care and maintenance to preserve their value. Take hotels for instance, they require a tremendous amount of work involving administration, cleaning, record keeping, and many other services. As a result, a management company is typically hired to perform these services and is paid by receiving a percentage (i.e. 5%) of the hotel’s profits. Real estate property management companies function the same way. Some management companies eventually invest in real estate and use their own services to operate the properties as time goes on.
Learning how to run a property management business could be extremely beneficial to a prospective investor. You could learn the ins and outs of the industry first hand, not to mention make excellent connections. As noted above, many successful management companies often generate enough profit to invest in real estate, so this could be a great option for you if you are looking to obtain real life experience and make money before making that big investment.