According to financial blogger Brandon Turner, real estate has been far and away the vehicle of choice to propel people into millionaire status. But how exactly do you make money in real estate? First, you must decide:
One of the most obvious questions to answer when investing in real estate is the type of real estate investing you want to pursue. Basically, there are two kinds: investing on paper and investing in person. When you invest in paper, you can put money into a real estate trust, which is kind of like a stock for real estate. The trust uses the money you invest to buy properties for you, and you gain interest on your money. Then there is investing in person, where you go out and actually pick a property to buy on your own. This is what most people think of when thinking of real estate investing, and will be the focus of this article.
Now that you have decided to buy a property, how do you decide which one is right for you? One of the ways to tell is by looking up the "comps" or "comparables," which are the prices of other houses in the area. If you are looking for a three bedroom, two bath house on a certain street in a certain neighborhood, then you can use this information to check out the prices of other three bedroom, two bath houses on the same street and in the same neighborhood to see how they compare to the price of the house you wish to purchase. If the house's price is less than the other comps in the area, then you may have found a bargain.
I’m pretty risk-averse, so I generally tell people to pay cash for real-estate or not buy it at all. Realizing that you’re probably going to ignore that advice, however, I’ll suggest that if you must borrow money to buy real estate, that you put at least 20% down to avoid PMI. Most experts agree that having at least $10,000 cash on hand is a good idea, in order to cover repairs, renovations, and other incidental expenses. Depending on the area and the sale you go to, this may be enough to secure the property, or at least put enough down so you can purchase it with – urgh - a loan.
According to Amoso Properties, there essentially four main ways that real estate can make you money. They are:
- This occurs when you rent out the property to tenants. While being a landlord may not be your dream, it comes with the upside of positive cash flow if you rent it for more than you owe on your mortgage. There are many hassles to being a landlord. However, the hassle factor can be mitigated with the assistance of a good management company.
- This occurs when the price of your house goes up. If the value of your home that you purchased increases in the coming years, then this is extra money in the form of equity. It adds to your net worth, and can even be tapped for cash through a home equity loan.
- Your tenants come in handy again in this simple way to make money in real estate. As you rent to them month after month, they pay down your mortgage for you. With each payment of rent, they make they are helping to reduce your indebtedness to the bank, and are giving you that much more net worth through equity in the home.
- One of the great tax benefits of owning real estate is that you don't have to pay capital gains taxes on properties that appreciate when you sell them as long as you put the money toward the purchase of another property. This can allow the beginning of a real estate empire if you continue to follow this plan.
So how much money can you make investing in real estate? As much as you want to. The sky really is the limit.
Rachael Murphey is an entrepreneur and blogger on topics of personal success, fashion, business, marketing, personal finance, and health. She graduated from the University of Colorado Boulder with her Associates in English, and from the University of Colorado Denver with her Bachelors in Business Management. She currently lives in Denver with her dog Charlie.