In short, in the case of real estate investment, the goal is to put money into work today and let it increase so you have more money in the future.
The profits or “returns” you make on your real estate investments should be sufficient to cover the risk you take, the taxes you pay, and the cost of owning real estate investments such as utilities, regular maintenance, and insurance.
Real estate investing can really be as conceptually simple as playing monopoly when you understand the basic factors of investment, finances, and risk.
To win, you buy property, avoid bankruptcy, and generate rent so you can buy even more property. However, remember that “simple” does not mean “easy”. If you make a mistake, the consequences can range from minor inconveniences to major disasters. You may even find yourself abrupt or worse.
The 4 Ways Real Estate Investors Make Money
When investing in real estate, there are several ways you can make money:
Real Estate Appraisal
This is when property increases in value as a result of a change in the real estate market, the land around your property becomes sharper or busy, like when a major mall is built next to or upgrades you put in your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is a difficult game. In fact, it is riskier than investing in cash flow income. In the case of real estate investment, this is important.
This type of real estate investment focuses on buying real estate, such as an apartment building, and running it so that you collect a stream of cash from rent, which is the money a renter pays you to use your property for a set amount of time. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.
Property related income
These are revenues generated by “real estate” specialists such as real estate agents who earn money through a commission from the purchase and sale of real estate or property management companies who get to keep a percentage of rents in exchange for running day-to-day operations of a property. This kind of real estate-related income is easy to understand. Eg. Get a hotel management company to keep 5 percent of a hotel’s sales to take care of day-to-day operations like hiring maids, running the front desk, mowing the lawn, and washing the towels.
Ancillary Real Estate Investment Income
Additional real estate investments include things like vending machines in office buildings or laundry rooms in low-rent apartments. In effect, they serve as mini-companies within a larger real estate investment, allowing you to make money from a half-caught collection of clients.
Tips for buying real estate
If you buy a property, you can use debt by taking out a mortgage against a property. Using leverage is what attracts many real estate investors because it lets them acquire properties they otherwise could not afford. However, using leverage to buy real estate can be dangerous because the cost of interest and regular payments in a declining market can lead property investments to bankruptcy if they are not careful.
Instead of considering risk management, consider holding real estate investments through specific types of legal entities such as limited liability companies or companies (you should consult a qualified attorney for his or her understanding of which ownership method is best for you and your circumstances).
That way, if the real estate investment breaks or a person drops and falls, resulting in a lawsuit, you can protect your personal assets because the worst that can happen in some circumstances is you lose the money you invested. It lets you sleep at night because unless you’ve turned up somewhere, your 401 (k) plan assets, Roth IRA investments and other retirement accounts should be inaccessible.
What type of real estate investment should you make?
When you’re ready to begin the real estate investment process, you’ll want to decide which of the types of real estate investment is best for you.
Most new real estate investors know it, but what they don’t know is how many different types of real estate investment there are. It goes without saying that every type of real estate investment has its own potential benefits and pitfalls, including unique quirks in cash flow cycles, lending traditions, and standards of what is considered appropriate or normal, so you’ll want to study them well before you start adding them to your portfolio.
As you uncover these different types of real estate investments and learn more about them, it is not unusual to see someone build a fortune by learning to specialize in a particular niche.
If you decide that this is an area where you may want to spend significant time, effort, and resources in your own quest for financial independence and passive income, we would like to go through some of the different types of real estate investing so you can get a general layer of ground.
Before we dive into the different types of real estate investments that may be available to you, we need to take a moment to explain that you should hardly buy investment property directly in your own name. There is a myriad of reasons some have to do with personal protection. If something goes wrong and you find yourself facing something inconceivable like a lawsuit that exceeds your insurance coverage, you and your advisers need the ability to put the unit owning the property into bankruptcy so you have the opportunity to walk away to fight another day.