How To Make Money In Real Estate: A Guide For Beginners
Sam Hawrylack7-minute read
July 07, 2023
Knowing how to make money in real estate is a superpower. With the proper steps, you can grow your wealth, hedge against inflation and take advantage of a growing market. There are over seven ways to start growing your wealth using real estate to your advantage. Let’s dive in and see how you, too, can become a lucrative real estate investor.
1. Leverage Appreciating Value
Most real estate appreciates over time. Appreciation means a home increases in value, sometimes without you doing anything. 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? There are a few ways:
- Most properties appreciate over time. As the area increases in value, so does your home, allowing you to take advantage of the higher value.
- You can improve a property’s value by renovating Whether you make major renovations, like remodeling the kitchen or bath, or you fix up the home’s curb appeal, or install energy-efficient windows, you can increase a home’s value.
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 your investment, which helps you build your wealth further and faster.
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2. Buy And Hold Real Estate For Rent
As a property investor, you have several options to invest in properties, including buy and hold real estate. When you buy and hold, you rent the property out to tenants who can’t or don’t want to buy their own home. There are several ways you can take advantage of buy and hold real estate, including the following.
Long-Term Residential Rental Properties
Long-term residential rental properties are homes you own and rent to tenants for the long-term. You can have yearly leases that renew each year or find new tenants if your current tenants leave.
Rental properties are a great way to build wealth because they provide monthly cash flow. The rent you charge should cover the mortgage payment, real estate taxes, homeowners insurance, and home maintenance costs. The difference between the gross rent and your costs is your net proceeds.
Like stocks and bonds, many investments don’t pay a monthly cash flow, so having long-term residential rental properties is a great way to build wealth.
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. They are another great way to learn how to make money in real estate.
The premise is the same - you own a property or properties, but instead of renting on a long-term lease, you rent to travelers for shorter periods. When you buy a second home or vacation home, you can even use it for your own vacationing pleasure, renting it out when you’re not using it to enjoy the cash flow and cover the cost of owning the home.
Like a long-term rental property, you’ll earn cash flow when tenants rent the property. You can use the cash to cover the property’s expenses while enjoying the property’s appreciation and your equity, maximizing your real estate income.
Renting Out Land
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 there, but you could charge others to use the land for things like storage or to collect wood. Use the cash flow to save to build a property on the land or to build your portfolio in other ways. Land doesn’t appreciate as buildings do, so that you won’t earn too much that way, but the cash flow is nice.
Commercial Spaces For Rent
Investing in commercial real estate is another way to earn cash flow. When you own the physical property, you can rent it out to businesses. As the landlord, you must maintain the building, but you don’t have to worry about the business itself. The tenant pays you rent, just like a residential tenant would, which you use to cover the mortgage and any upkeep expenses.
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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)
- Fix the property up
- Sell the property for more than the cost to buy it and fix it up
Since flipping a house 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’t manage the property, want their money for something else, or had a financial emergency, they may sell their property with tenants in it. 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 methods you can use when you learn how to invest in real estate, including:
ETFs And Mutual Funds
You can also invest in real estate exchange-traded funds (ETFs) and mutual funds. A fund manager manages both investments (ETFs are passively managed, and mutual funds are actively managed). 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. They are a great way to diversify your real estate investments across different types of real estate and even different real estate markets.
You may be familiar with crowdfunding to help someone who needs money on GoFundMe, but the same strategy applies to real estate crowdfunding. You and hundreds of thousands of other investors can pool your money 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. It’s a great way to get your hand in the real estate investment pot without carrying the responsibility of owning real estate yourself.
A Real Estate Investment Trust (REIT) invests in commercial real estate properties. You crowdfund your money with other investors. Since commercial properties don’t appreciate as quickly as residential properties, the benefit of REITs is the monthly cash flow you may earn.
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.
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 since you pool your money together.
Real estate wholesaling is 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 much more.
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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 payment, you open up your budget, allowing you to invest more in the home, possibly making renovations to inject equity into your home. You can do the same if you tap into the home’s equity, using the cash to reinvest in the home, increasing its value.
Other Strategies For Making Money In Real Estate
The above strategies are the most common ways to invest in real estate, but here are a few more ways to make money in real estate.
- Investing in short sales: Homeowners who owe more than their home is worth often feel stuck. They can’t refinance, but they’ll be on the hook for the difference if they sell the property. They can ask their lender for a short sale, which is the bank’s approval to sell a property for less than you owe. If the bank agrees, they will accept the sales price as paid-in-full or paid-as-agreed. Keep in mind, short sales typically sell at market value, so you may not always get a much lower price than other homes selling in a market.
- 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 in real estate or even home buyers buying a primary residence. You set the rate and terms and collect payments. When you’re a personal lender, you’re responsible for all aspects of the loan, including collecting on past-due payments or collecting the collateral if the borrower defaults.
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. If you have a lot of capital, you can buy an undervalued property, fix-and-flip it. If you would rather leverage your investment by using a mortgage to invest in a tenant-ready property, consider buying a long-term rental property or second home where you vacation and rent out to others when it’s not in use. If managing real estate yourself isn’t your cup of tea, there are many other ways to invest in real estate through the market or by crowdfunding your money and/or working with other investors.
If you’re ready to explore your options for real estate investments and want to buy a property to realize the cash flow, get approved with Rocket Mortgage® today.
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