It’s hard to say when people started making money by owning and selling real estate. Although most real estate markets experience peaks and valleys, over time, real estate has been a secure and predicable way to increase wealth. Like most investments, it doesn’t happen overnight, and it requires some knowledge, time, and money upfront to get started. Here are a few tried-and-true methods for how to make money in real estate.
How to Make Money in Real Estate
By Owning Your Home
With a few exceptions, owning your home versus renting will prove profitable, but only over the long term. It takes about five years to recover the closing costs and build enough equity to see a net gain by investing in a home.
According to a study published by the National Association of Homebuilders (NAHB), the majority of households stay in their homes for 13 years, and first-time home buyers stay 11 years.
The rate of appreciation averages about five percent per year. In real terms, the rate of inflation cuts into net appreciation, but the good news is that the appreciation compounds annually.
Instead of looking at home ownership solely as a wealth builder, it’s also important consider the benefits over renting. In most markets, it costs more to rent a home or apartment than make a mortgage payment, and owning your home brings both a tangible and intangible sense of freedom and well being that could have a dollar value for you.
There’s also the mortgage interest deduction that renters don’t have. Even if life events push you into selling before you intended, home ownership may prove beneficial, even if it wasn’t as financially rewarding as you expected.
By Owning Rental Property
Owning rental properties is one of the few investment vehicles that gives you the power of leverage and provides a dependable dividend each month. With good credit and a 20 percent down payment, you can increase your monthly cash flow through rental properties. Lenders may allow mortgage applicants to use money for the down payment from:
- Gifts
- Partnerships
- Home equity lines of credit from existing properties
- Cash advances from credit cards
In today’s market, rental vacancies are low and rental rates have risen annually based on strong demand. Professional property management companies that offer and service turnkey properties can eliminate most of the work associated with rental properties. With their assistance, you can achieve a lucrative passive income that provides tax benefits as well. Selling the property in a strong market could give you a sizeable return on your investment (ROI).
Through Flipping Property
Distressed properties include foreclosures, estate sales, and short sales and more often than not, they need rehabilitation of varying degrees. If you’re familiar with home construction and their mechanical systems, it’s possible to turn a profit by purchasing these units.
These properties are not for everyone, since rehabbing them can be time consuming and expensive. Experience with remodeling and a trusted network of contractors will help you keep costs lower. Being able to contribute your own “sweat equity” also lowers costs and improves your ROI.
Some things, like plumbing, wiring and HVAC repairs or replacements should be done by a licensed contractor. Flippers who have real estate licenses net greater profits, since they’re able to handle many of the transactional details themselves, and pocket their own commissions.
See also Should You Flip or Rent Property?
Owning your own, investing in rental property, or going for the short term with distressed properties can help you increase your net worth. Each offers advantages, and while there are no guarantees, history has shown that real estate is a profitable venture.