Discovering how to make money in real estate can be a daunting experience. Real estate is a vast subject matter and millions of people earn a living (and some actually become fabulously wealthy) from real estate. After being a part of more than 1,000 real estate transactions over the past decade personally, along with coaching and training thousands of investors from all walks of life throughout the United States and Canada, I've heard, seen and done enough in real estate to simplify for you how to make money in real estate. In fact, my book, How to be a Real Estate Investor, is a summary of the most important lessons I have learned over a lifetime of experience. And to summarize it all into one statement, you make money in real estate either short term or long term. Check out this video on the subject:
How to Make Money in Real Estate SHORT TERM
Much like the Internal Revenue Service, for purposes of this discussion, short term real estate revenue will be considered any profits generated from a deal within 1 year. And there are three main ways to earn short term real estate revenue:
- Buying & Re-selling: Sometimes referred to as "flipping" or "wholesaling", when you buy and then subsequently re-sell a property, you're making your money by being the middleman. This is very popular among beginner real estate investors because the most important part is finding a really good deal. Oftentimes, you can assign your interest in the deal for several thousand dollars and not even have to use any of your own cash or credit. There technique involves very little risk for a modest reward.
- Buying, Improving then Re-selling: This is what most people envision when they think of real estate investing; buying a dilapidated foreclosure, fixing it up until it sparkles and then re-selling to a first time homebuyer. But there is far more to this technique than simply renovating foreclosures. Developers transform raw land into build-able lots. Builders erect new homes on vacant lots. Conversion developers turn apartments into condos. In all of these examples, the buyer of the property added value to the real estate and then marketed for re-sale. This is different from simply finding a good deal and "flipping" it to another buyer. This model has produced millionaires and billionaires the world over but it has also produced its share of personal financial meltdowns. There technique involves more risk but the potential for a greater reward.
- Commissions/Fees: Most people who earn a living in the real estate industry do so by collecting a commission or earning a fee for services rendered. Real estate agents, mortgage brokers, inspectors, appraisers, title companies and closing attorneys all make their money in real estate from this technique. In general, these people are usually self-employed business owners so their success is dependent on how good they are at building a business. You typically have to be licensed in order to earn a commission or fee from real estate. And for the top 1%, making over million dollars a year is the norm. But for the vast majority, it's more like "barely get by" street than millionaire avenue.
How to Make Money in Real Estate LONG TERM
Perhaps the best part about making long term money in real estate is that it is so incredibly tax advantaged. Meaning, the tax rate on long term real estate income is usually far less than ordinary and short term income tax rates. This allows you to keep more of the money you make. Long term income in real estate can be created the traditional way or the creative way.
- Traditional Buy and Hold: Anyone who has ever played Monopoly understands the power of buying and holding real estate. There are actually 3 different profit centers from the traditional buy and hold approach. First, if you have a mortgage on the property, a portion of each monthly payment goes toward the principal so a portion of your tenant's rent payment is actually paying down the loan on your property each month. Second, if there is enough left over, you can get a monthly cash flow after paying your monthly mortgage payment, taxes, insurance and maintenance. Third, over time, real estate usually appreciates in value so you gain more and more equity the longer you own the property. This is the preferred method for most wealthy people to hold and grow their existing wealth. Although a powerful wealth building approach, it usually requires money for a down payment and/or the ability to qualify for a loan.
- Creative Buy/Control & Rent to Own / Sell on Terms: With real estate, you have the unique ability to control and/or buy it by simply using the right paperwork. This allows savvy investors to obtain the benefits of the traditional buy and hold approach without the need for a down payment or the requirement to qualify for a loan. To learn more about these, read the book, How to be a Real Estate Investor. Then, once you have acquired the property creatively, you can sell it creatively by offering it on a Rent to Own or providing Owner Financing. With a Rent to Own, you get more money upfront than a standard rental deposit and you get a tenant that is usually better than a standard renter. But the drawback is that it's difficult to offer a Rent to Own on any properties besides single residences such as houses, condos and townhomes. However, you can offer to the be the bank when you sell and provide owner financing to the buyer. This will allow you to collect interest in addition to selling the property overtime.
This gives you a fantastic 30,000 view of this gigantic subject. You can either make short term or long term money. With short term, you can be the middle man, you can buy it, improve it and then resell it or you can make a commission or fee for providing a service to the deal. With long term, you can buy and hold the traditional way or you can employ creative techiques for acquiring as well as leasing or selling the property overtime. And that is how to make money in real estate.