How To Make Your Own Money At Home – Whether you’re curious about real estate’s investment potential or simply tired of commercials promising little-known ways to “earn from your property,” it’s worth learning how real estate actually creates wealth.
Rather than providing obscure real estate investment strategies or a primer on home ownership for first-time buyers, this article will focus on how to make money in real estate. It will cover both the basic methods that have not changed for centuries, no matter what kind of gloss the gurus of the moment try to put on them, as well as specific opportunities that have arisen relatively recently.
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The most common way real estate makes a profit: It appreciates—that is, it increases in value. This is achieved in different ways for different types of properties, but it is achieved in only one way: through sale. However, you can increase the return on your investment in a property in a number of ways. One way—if you borrowed money to buy the property—is to refinance the loan at a lower interest rate. This will reduce the cost basis for the property, thereby increasing the amount you will clear from it.
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The most obvious source of appreciation for undeveloped land is, of course, its development. As cities expand, land outside the boundaries becomes increasingly valuable due to the potential for developers to purchase it. Once developers build homes or commercial buildings, it increases that value even more.
Appreciation in land can also come from discoveries of valuable minerals or other commodities — provided the buyer has the rights to them. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees, and other natural resources.
When considering homes, location is often the biggest consideration. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds and more, these changes cause the home’s value to rise. Of course, this trend can work in reverse as well, with home values falling as a neighborhood deteriorates.
Home improvements can also boost appreciation. Adding an extra bathroom, heating a garage, and renovating a kitchen with state-of-the-art appliances are just a few of the ways a property owner can try to increase the value of a home.
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Commercial real estate gains value for the same reasons as raw land and residential real estate: location, development and improvements. The best commercial properties are constantly in demand.
When considering appreciation, you need to consider the financial impact of inflation. An annual inflation rate of 10% means your dollar can only buy about 90% of the same goods—including real estate—next year. If a piece of land was worth $100,000 in 1970 and sat idle and untouched for decades, it would be worth many times that much today. Due to invisible inflation during the 1970s and a steady rate since then, it would probably take more than $700,000 to buy this land in 2021, assuming $100,000 was fair market value at the time.
So inflation alone can lead to real estate appreciation, but it’s a bit of a pyrrhic victory. While you might get five times your money due to inflation when you sell, many other goods cost five times as much to buy as well, so purchasing power in your current environment is still a factor.
The second big way real estate generates wealth is by providing regular income payments. Generally referred to as rent, income from real estate can take many forms.
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Depending on your rights to the land, companies may pay you royalties on any discoveries or regular payments for any structures they add. For example, these include pump jacks, pipelines, gravel, access roads and cell towers. Raw land can also be leased for production, usually agricultural production, and tracts of treed land can be valuable for timber that can be harvested periodically.
The vast majority of income from housing comes in the form of basic rent. Tenants pay you a fixed amount per month – which will rise with inflation and demand – and you deduct your costs from this, claiming the rest as rental income. A desirable location is extremely important to ensure you can easily secure tenants.
Commercial real estate can generate income from the aforementioned sources, with base rent again being the most common, but it can also add one more in the form of discretionary income. Many commercial tenants will pay fees for contractual options such as right of first refusal in the office next door. Renters pay premiums to own these rights, whether they exercise them or not. Option income sometimes exists for raw land, even for residential properties, but is not common.
Here’s a closer look at some of the many ways you can earn income from housing.
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This is one of the more traditional ways to earn income from real estate. There are several ways to achieve this: You can buy a detached house and rent it out. buy an apartment building and live in one of the units while renting out the others—ideal for covering the mortgage and your own housing costs. or buy an apartment building and rent out all the units—either manage the property yourself or hire a management company to handle renting out units, collecting rent, dealing with necessary repairs, and so on.
Propertyflippers specialize in adding high performance repairs to homes in a short period of time and then selling them. Flipping can be profitable if you know how to find properties to fix up, have the skills to do the renovations yourself or supervise a crew to do them, and have a sense of the underlying cost and potential value of a property.
Demand for home-away-from-home rentals has taken off in recent years as many travelers prefer this option to staying in a hotel. Homeowners could earn income by renting out a house or even a room on a short-term basis, especially if the property is located in an area that is a popular tourist destination. It is unclear when this market will return. But if it does happen again, keep in mind that short-term rentals are regulated and sometimes even banned in some cities. Check your city’s regulations before listing a property on a site like Airbnb, Vrbo or HomeAway. Also, consider what extra deep cleaning and sanitizing between guests will add to the cost.
Real estate investment trusts (REITs), mortgage-backed securities (MBS), mortgage investment companies (MICs), and real estate investment trusts (REIGs) are real estate investment alternatives. They are generally considered vehicles for generating income from real estate, but have different procedures for doing so and different entry procedures.
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With a REIT, the owner of several commercial properties sells shares (often publicly traded) to investors (usually to finance the purchase of more properties) and passes on the rental income in the form of distributions. The REIT is the landlord to the tenants (who pay rent), but the REIT owners record income once the costs of running the buildings and the REIT are deducted. There is a special method of valuing a REIT.
These are removed one more step as they invest in private mortgages rather than the underlying real estate. MICs differ from MBS in that they own entire mortgages and pass the interest payments on to investors, rather than securitizing portions of the principal and/or interest. However, both are not so much real estate investments as they are debt investments. REIGs are typically private investments with their own unique structure, offering investors an equity investment or partnership service.
Many reliable real estate alternatives are available to make money in the industry, but they come with different caveats and entry points.
An option is an informal residential real estate option that requires you to pay a fee, or premium, to have the right to buy a home for a specified period at an agreed price. You will then find investors who will pay more than your option price for the property. In this case, the premium you get is essentially the finder’s fee for matching a person looking to invest with a person looking to sell—it’s really no different than a real estate agent’s commission. Although this is income, it is not derived from owning (ie holding title to) a property.
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Maybe, but it’s not a sure bet. The real estate market has boom and bust cycles, and real estate investors can lose money as well as make money.
The most common way to make money in real estate is through appreciation—an increase in property value that occurs when you sell. This is the simplest way to make money in real estate, but it is still risky.
There are several ways. You can earn money in the form of rental income for both residential and commercial properties. Companies can also pay you royalties on raw land for any discoveries, such as minerals or oil. You can also invest indirectly, through real estate investment trusts (REITs), mortgage-backed securities (MBS), mortgage investment companies (MICs), and real estate investment trusts (REIGs).
There are many proven strategies for making money from real estate. Appreciation, inflation and income rank high on the list, but there are also several real estate investment alternatives. Understanding your investments, risks and whether
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