How to Make Money Investing in Real Estate
In today’s guide we are going to talk about how to make money investing in real estate. If you’ve considered investing your money and are thinking about real estate as an option to grow your wealth, you’ve made a smart decision.
Real estate is a great way to build wealth. In fact, 90% of millionaires today have become millionaire status as a result of real estate investments. It’s a big part of their wealth.
Below are 7 different methods for making money from real estate with some being directly tied to owning property and others being more passive where you don’t have the headaches of decisions and ownership.
You decide if you want to be an active real estate investor who owns property and manages tenants for a higher risk reward ratio or if you want to be more passive and take on less risk for a lower return on investment.
#1: Renting Out Your House
The easiest way to get started making money in real estate is renting out your house. If you’re currently living in your house, then you have two options.
The first is renting out an extra room or maybe the basement to a tenant (or roommate).
This was the case when I lived in Los Angeles. My landlord’s family all lived in the house with me but they leased out an extra bedroom to me for $1,000 per month.
They also leased the basement to a family and they leased an upstairs bedroom to another tenant so they had 3 tenants living with them paying their bills with the rent money they collected.
The second option is renting out your house while you are away.
With services like AirBnb, you can list your property for rent for schedule days and make extra money while you’re away on vacation or gone for the season if you’re a snowbird who travels south during winter months to warmer weather.
#2: Buying Rental Property
The next way to make money investing in real estate is to purchase a rental property you are dedicating as rental property.
This method differs from renting out your house, because it’s an extra property you own in addition to your personal house you currently live in.
This extra property will never be lived in by you, it will solely be used as a rental property with long term tenants who sign 1 year leases.
Or again, you also have the option of doing short term rental income by leasing it on AirBnb. This is a popular method if you live in a coastal city that gets lots of tourism like Miami or Los Angeles.
The goal is to charge enough rent to cover the property taxes, insurance, any utilities, maintenance, and still have left over money from the rental income that can go into your bank account as profit (known as cash flow).
Over time you can re-invest these profits by purchasing a second, third, fourth rental property to grow your real estate portfolio and make even more money investing in real estate.
#3: Rehabbing Houses
If collecting rental income and managing tenants stresses you out, then an alternate option to make money from real estate is rehabbing houses.
Rehabbing houses, also known as flipping houses, is a strategy where you buy a property in bad condition below it’s market value and you renovate it with new paint, flooring, appliances, fixtures, lights, etc. so that it looks new again.
Then you list the house back on the market for sale at a higher price than what you bought it for plus the money spent on the rehab so that you can walk away with a profit when the flip is completed.
- Purchase Price: $125,000
- Renovation Cost: $45,000
- Closing Costs: $5,000
- Total Cost = $175,000
- Property Sells for $225,000
- Profit = $50,000
#4: Wholesaling Real Estate
An alternative strategy to rehabbing and flipping houses is wholesaling. A wholesale real estate deal involves similar steps to acquire a property:
- Find motivated sellers who will take less than market value
- Put the house under contract with the seller to buy it
But then the next step is to wholesale the contract to another investor. In other words, another real estate investor or house flipper buys the rights to the contract from you for a wholesale fee (Ex: $5,000) and they’ll be the one who closes on the property with the seller come closing day.
Then that investor takes ownership of the property and does the rehab and then sells it as a flip or holds onto it as a rental property.
But you get out of the deal with a smaller $5,000 property as your income for finding the deal and getting it under contract.
It’s a way to still make money investing in real estate without actually buying the property. You’re selling the contract for a fee which you can think of as a finders fee compensating you for the marketing work you did to find the deal and put it together.
Many real estate coaches online will teach wholesaling and call it a “No Money Real Estate Strategy” claiming you can make a living wholesaling houses without ever actually buying them with your own capital.
It also saves you the risk of rehabbing the property where unexpected events could be costly and you go over budget on renovations, eating away profits on the flip.
#5: Buying Real Estate Notes
Another way to make money in real estate is buying notes. A note is a promissory note where the buyer agrees to pay off the loan on a property.
The note outlines the length of the loan, the interest rate of the loan, and any other terms between the note holder and the borrower.
You make money holding the note because you become the bank holding the loan. The buyer (borrower) is making monthly loan payments to you now until the note is paid off or comes due, where a large lump sum payment is due.
With real estate notes, you can earn a 3% to 7% return usually depending on the interest rate that was set for the loan.
If the borrower defaults on the loan and stops making payments, you can foreclose on the loan which is tied to the real estate property that the borrower had purchased with the loan.
If you make it all the way through the foreclosure process and they still haven’t made the payments to satisfy the loan, then you’ll legally become the owner of the property and get possession of it.
Now it’s up to you if you want to sell the property on the market to cash out or keep it and use it as a rental property to collect income that way.
So with this strategy, there is two ways to make money investing in real estate.
The first is collecting loan payments which are part interest and part principal. The second is getting the house or property that is backing the loan as collateral if the borrower defaults and you foreclose on them.
#6: Real Estate Investment Trusts (REITs)
Another way to make money owning real estate is an indirect method where you invest into a fund known as a REIT, and collect dividend payments from them every month.
The real estate investment trust is set up to collect money from investors who buy into the fund and they take all that capital and use it to buy real estate around the world or state or city, depending how the fund is set up.
The income they earn from the real estate holdings gets paid back to the shareholders of the trust fund as a dividend, similar to how stock corporations pay dividends to their shareholders who own shares of stock in the stock market.
In fact, to buy a REIT you have to have a stock market brokerage account and locate the Ticker of the fund so you can buy shares of it through the stock exchange.
It’s a passive way to invest in real estate so you can earn money from real estate without directly owning the property yourself. Instead you allow a fund to own the property and you collect a share of the income and profits.
#7: Real Estate Crowd Fund Websites (Fundrise)
The final method for making money in real estate is through crowdfunding websites like Fundrise. This is a similar platform to buying a REIT as discussed one section above.
With Fundrise, you find real estate investment deals and projects that you want to invest in and you contribute funds to the project.
You are pooling your money together with other investors who also have an account on Fundrise.
The project creator or real estate developer who is raising capital, collects all the money being invested and uses it to fund the real estate deal outlined in the project biography.
You can read the disclosures to see what projected return is, what property you are investing in, where it’s located, timeline for when the project will be complete if they are building it, etc.
Investing in crowdfunded real estate deals is another passive way to earn 5 to 20% returns on investment without the headaches of managing a real estate property and making all the decisions.
Instead, you just supply the capital to the investor who is raising the capital and let them handle the real estate deals and projects, hopefully returning a profit to you as a partial investor in the deal.
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