How To Make Money In Real Estate: A Guide For Beginners

Knowing how to make money in the real estate industry takes a lot of hard work – but the hard work pays off. With the proper steps, you can grow your wealth, hedge against inflation and take advantage of a growing housing market.

Below, we’ve identified seven ways to start boosting your income using real estate to your advantage. Let’s dive in and see how you can become a successful real estate investor.

1. Leverage Appreciating Value

Most real estate appreciates over time. Appreciation simply means that a home increases in value, sometimes without the homeowner making any changes to the property. When a home appreciates, it automatically increases your equity, which is the difference between the home’s value and your outstanding mortgage principal.

How does a home appreciate in value? There are a few ways:

• Most real estate properties appreciate over time. As the area where your house is located becomes more favorable to buyers, so does your home, allowing you to take advantage of the higher property.

• You can improve a property’s value by renovating. Home renovations can go a long way in terms of increasing your property value. Some examples of home improvements include remodeling the kitchen or bathroom, fixing your home’s curb appeal and installing energy-efficient windows.

Continually improving your home’s value is an excellent long-term tactic to earn real estate income. It ensures you have a decent return on investment (ROI), which helps build your wealth further and faster.

2. Buy And Hold Real Estate For Rent

As a property investor, you have several options for investing in properties, including buy and hold real estate. When you buy and hold, you rent the property out to tenants. There are several ways you can take advantage of buy and hold real estate, including the following:

Long-Term Residential Investment Properties

Long-term residential rental properties are homes you own and rent to tenants for long-term occupancy. These investment properties may be single-family homes or multi-family complexes. Depending on how you choose to outline the lease agreement, you may have month-to-month leases or annual leases that are up for renewal each year. When the lease agreement expires or your tenants decide to leave the property, you may be in charge of finding new renters.

Rental properties are a great way to build wealth because they provide monthly cash flow. The rent you charge might cover the mortgage payment, property taxes and homeowners insurance. Keep in mind that you’ll likely have to front the money for home maintenance and repairs. The difference between the gross rent you charge and your housing costs equals your net proceeds on a rental property.

Many investments, like stocks or bonds, don’t pay a monthly cash flow, so having long-term residential rental properties is a great way to generate a steady income stream.

Short-Term Vacation Rental Properties

If you’d rather not deal with the hassle of having tenants year-round, you can invest in short-term vacation rental properties. The premise is similar to buying and owning long-term rentals – you own a property or properties, but instead of renting on a long-term lease, you rent to travelers for shorter periods of time. Some investors use platforms like Airbnb or VRBO to attract potential occupants to their short-term rentals.

When you buy a second home or vacation home, you can even use it for your own vacationing pleasure. Then, you can rent it out when you’re not using it to earn some cash flow and cover the cost of owning the home.

Like a long-term rental property, you’ll make money when tenants rent the house. You can use the cash to cover the property’s expenses while enjoying the property’s appreciation and your equity, maximizing your rental income.

Land Rentals

If you own land but don’t have a property on it yet, you can still earn cash flow by renting out the raw land. You won’t make as much cash as you would if there were a property on it, but you could charge others to use the land for things like storage or to collect wood.

You might consider using the cash flow toward building a property on the land. Keep in mind that land doesn’t appreciate in value like residential properties do, so building a house could be an investment that’s worth it in the long run.

Commercial Spaces For Rent

Investing in commercial real estate is another way to earn a solid cash flow. When you own the physical property, you can rent it out to businesses. Commercial properties can include office buildings, retail spaces, small businesses and industrial properties.

If you’re acting as the landlord or property manager, you’ll likely be in charge of maintaining the building and making any necessary repairs – though you won’t have to worry about the businesses themselves.

The tenants pay you rent, just like residential tenants would, which you then use to cover the mortgage and any upkeep expenses.

3. Flip A House

Flipping houses is a great way to make a profit if you understand how it works. To flip a house, you will:

• Buy an undervalued property (such as a foreclosure or home that needs extensive repairs)

• Repair, renovate and remodel the property

• Sell the property for more than the cost to buy it and fix it up

Since flipping properties takes several steps and requires careful evaluation of the market, it’s best for real estate agents who know the current real estate market or buyers who previously flipped homes.

4. Purchase Turnkey Properties

Sometimes investors want to sell an investment property prematurely. Whether they can no longer manage the property, want their money for another venture or have had a financial emergency, they may end up selling the property with tenants still occupying the residence. This is known as a turnkey property.

When you buy a turnkey property, you buy a home that will earn cash flow right away. You save time because you don’t have to look for tenants. You also save money since you don’t have to worry about carrying costs (covering the cost of owning the home without tenants).

5. Invest In Real Estate

If investing in physical real estate doesn’t work for you, there are other types of real estate investments you may be interested in pursuing. Some of the most common investment opportunities include the following:

Exchange-Traded Funds (ETFs) And Mutual Funds

If you’re looking for ways to diversify your investment portfolio, you might consider investing in real estate exchange-traded funds (ETFs) and mutual funds. Typically, a fund manager or investment advisor manages both investments. ETFs are passively managed and mutual funds are actively managed.

Real estate ETFs have lower costs than mutual funds, and you can trade them like stocks any time of day while the market is open. Mutual funds only trade once a day after the market closes.

Both of these investment opportunities can help you earn some extra income without having to put in the work of a landlord or property manager. And, because these investments are managed by professionals, you don’t have to worry about researching where your money should go.

Crowdfunding

Real estate crowdfunding is another way to diversify your investments and assets. Crowdfunding allows you to pool your money with other investors online to invest in either a property’s equity or debt. Either way, you earn a prorated amount of the rent as cash flow based on your investment.

Real estate crowdfunding is a great way to get your hand in the real estate investment pot without carrying the responsibility of owning and maintaining a property yourself.

Real Estate Investment Trusts (REITs)

A real estate investment trust (REIT) is a publicly traded company that owns, operates or finances properties that produce income in a certain area of the real estate market, like commercial properties. You pool your money with other investors.

While publicly traded REITs can allow individuals to invest in commercial real estate, you may also have the opportunity to work with residential REITs and healthcare REITs.

Because REITs are publicly traded, you can buy and sell shares on the market, which means your money is more liquid, allowing you more investing opportunities.

Real Estate Investment Groups (REIGs)

An REIG, or real estate investment group, is an organization of private investors who work together for a similar goal: investing in real estate. As a group, you may decide to invest in long-term residential properties, short-term vacation rentals or fix-and-flip properties.

When you work with a group of like-minded individuals, you may have a greater chance of securing better deals or making larger investments because you pool your money together.

Real Estate Wholesaling

Real estate wholesaling is an option for investors who know how to find real estate deals and have a target market they can sell to. Wholesalers usually turn properties around within 30 days. You buy properties at less than market value and then sell them for more money.

6. Make The Most Of Inflation

Real estate is one investment that hedges against inflation. Even when the value of the dollar decreases, property values usually increase or at least remain steady. They rarely crash like stocks typically do in cycles, which gives you greater leverage when you earn real estate income.

As the investor, you can increase your rent prices (upon lease renewal) to account for the higher prices in the economy, allowing you to make up for the dollar’s lower value.

7. Refinance Your Mortgage

If you have a mortgage on your investment property, you may be eligible to refinance it. Whether you refinance to take advantage of lower interest rates and save money, or you tap into the home’s equity and use the cash to invest in more real estate, you can use refinancing to your advantage.

If you lower your monthly mortgage payment, you make room in your budget for other opportunities. This can allow you to invest more in the property, like making renovations to inject equity into your home. You can do the same if you tap into the home’s equity and use the cash to reinvest in the home, increasing its overall value.

Other Strategies For Making Money In Real Estate

The above investment strategies are the most common ways to invest in real estate, but here are a few additional methods to consider.

Investing In Short Sales

Homeowners who owe more than their home is worth, called an underwater mortgage, often feel stuck. Refinancing might not be an option, and the homeowner will be on the hook for the difference if they sell the property.

In this case, the homeowner might ask their lender for a short sale, which is the bank’s approval to sell a property for less than what’s owed. If the bank agrees, they’ll accept the sales price as paid-in-full or paid-as-agreed. This is where real estate investors might come into play.

As an investor, buying a house in a short sale allows you to purchase the property at a massive discount. It gives you the opportunity to flip the house and sell it for a profit or keep it as a rental property.

Because short sales can be more complicated than traditional home sales, buyers might not experience as much competition. You may be more likely to have your offer accepted.

Purchasing Mortgage Notes

If you’d rather not invest in physical real estate but want to take advantage of its power, you can buy mortgage notes, meaning you invest in a home’s debt. You become the “bank,” so to speak, as you own the note and receive the monthly principal and interest payments.

Becoming A Personal Lender

If you have the capital, you can also be the “lender” for investors looking to put money into real estate or even home buyers purchasing a primary residence. Just like a traditional lender, you set the rate and terms and collect mortgage payments.

When you’re a personal lender, you’re responsible for all aspects of the loan, including collecting past-due payments or the collateral if the borrower defaults on the mortgage loan.

The Bottom Line: There’s No Single Path To Profit With Real Estate

Investors have many ways to invest in real estate today – there isn’t a one-size-fits-all solution. Learning how to make money in real estate is one of the best ways to diversify your portfolio. Whether you’re looking for a more involved, hands-on approach or for another individual to manage your streams of passive income, there are opportunities for all types of real estate investors.

If you’re ready to explore your options for real estate investments and want to buy a property to realize the cash flow, start an application with Rocket Mortgage^® today.