If you have ever considered a stable source of investment, I am sure real estate has always come up as one of the sure sources of consistent returns.
Despite the ups and downs in world economic scenario, the real estate market has remained a favorite bet for investors for generations now.
Of course in the aftermath of the subprime crisis, you need to be careful about making money in real estate, but the real estate market has consistently yielded stable returns over the longer term.
However, you must remember that timing is a crucial element in real estate market transactions.
The sub-prime crisis in US can well be considered the nadir in real estate world, but the secret to how to make money in real estate market is not too difficult to guess either.
Perhaps the biggest advantage of making money in real estate is most of the dealings is for the longer term, and investment in a hurry does not work very effectively in this market.
How to Make Money in Real Estate Market
One of the earliest lessons that you must keep in mind about making money in real estate is that patience and timing is crucial.
You cannot lose patience and neither should you be in a hurry.
So we decided to make the task even simpler for you with our easy list of how to make money in real estate market.
1. Buy Low
If you want to make money in real estate, you need to keep a hawk’s eye on the overall pricing element.
Most importantly, you must be mindful of the price that you buy the real estate property at.
Just like in stock market investment, the key to profit is buying low.
Don’t wait for the price to appreciate before you begin to buy the real estate of your choice.
Once you have undertaken a thorough research of the real estate market that you are targeting, you must then begin to pay attention to the buying price.
If the fundamentals and prospects of the property are clear, you must look at the prospect of buying it at the lowest possible price.
Don’t wait for demand to rise so much that you have to pay a premium.
If you want to make money in real estate market, you have to go for the cheapest bargain and then patiently wait for the price to rise.
Appreciation is undeniably one of the easiest and quickest sources of profit in the real estate market.
Whether you are looking at refinancing or selling your real estate property eventually, your extent of profit is directly dependent on the type of rate that you can make your initial investment.
Once you can ensure that you have bought the real estate property of your choice at a significantly discounted rate, and then every bit of appreciation in the price becomes your profit.
Whether you want to sell the property or put it up for rent, appreciation becomes your key armory to maximize profit.
2. Selling at a Higher Rate
Almost by the same logic that buying low helps in the real estate market, you can take advantage of selling higher.
If you are trying to analyze how to make money in real estate market, this becomes the most basic and pertinent lesson to master.
In terms of analogy, think about how you make a commodity or a stock market trade.
You always buy when the price is at a discount and when the price appreciates a lot higher, you decide to sell.
This makes sure that you can earn the maximum possible profit from the investment.
The same principle comes to play when you consider a real estate investment.
You must always target selling at a higher rate.
Not only should your selling price be higher than the buying price but this price should also help you recover the associated expenses.
For example, buying a real estate involves a lot of associated expenses like registration costs, transactions charges and legal expenses.
So when you are selling the property, you have to make sure that you get a price which covers all these expenses and still manages to book a decent profit for you.
This is the cardinal principle of a great investment strategy and one of the most primary pre-conditions that you must keep in mind in understanding how to make money in real estate.
Selling higher confirms to another primary aspect of real estate market investment, it reflects the premium that your investment commands.
It is a key indicator of the scalability extent of the property you have invested in.
If you get a significantly higher selling price, the profit prospect also rises a lot higher.
It also confirms your mettle in identifying profitable opportunities.
3. Rental Income
If you are keen about mastering how to make money in real estate market, one of the simplest solutions is to lease out your property or put it up for rent.
In fact, whether you are planning to invest in a residential or a commercial rental property, the revenue inflow is assured.
However, there are some basic calculations that you must keep in mind to realize maximum value from your rental investment.
The first and foremost aspect of investing in any real estate is location.
The location is often the primary factor that decides the future price appreciation or depreciation of a specific property.
This becomes particularly relevant if you are buying a rental.
Your primary target while investing in this type of real estate is to make money.
So in the absence of a suitable and strategic location, you will not be able to command a great rate for the property.
Forget about selling it eventually, if you cannot get a significantly adequate rent, you will not be able to recover your cost.
So whenever you are calculating your income prospect, you must always look at the difference between your initial cost, the daily maintenance and the maximum rent that you can get at any given point of time.
This will, after all, identify the exact extent of profit that you can hope to earn.
If you want to make money from real estate, there is another factor to remember while investing in rental properties.
It is the maintenance cost.
You must, on principle, avoid real estate that needs intensive maintenance.
This is because the recurrent expenses will eat into your profit from the rent income.
You can almost liken it to transaction charges in the case of stock market dealings.
If your transaction charges are too high, then your relative profit decreases and you would consider this as a bad trade.
Now you must apply the same principle while deciding on an investment in the real estate market. You have to effectively target a rental property that is
- Available for a bargain
- Has the potential to command a high rental
- Is strategically located to make sure you can charge a premium
- Needs negligible maintenance to maximize profit and limit losses
Therefore, when you are trying to earn profit from a rental investment in real estate market, the profit potential is always maximized by a healthy balance between returns and expenses.
4. Renting in Parts
Now renting real estate also has many dynamics to make it a more profitable deal.
One of the easiest options to make money in real estate is by renting out your property in parts.
For example, let’s say you have a duplex; the rent that you can get by leasing it out to a single family will always be less than the amount you can recover by dividing the house into two separate floors and renting them individually.
Another interesting aspect of this kind of real estate rental is that you are able to realize better value for your property.
For example, if you invested $100,000 in the property and have a mortgage payment of $500, a duplex apartment can yield you a rent of $700-800 on an average.
But the moment you convert them to individual floors, you get the flexibility to charge lesser and charge double.
So instead of $700-800 for the entire house, you can now charge anywhere between $500-600 per floor.
So on an annualized basis, you get to earn a cool $3000 extra, without any additional investment.
Therefore, renting in parts increases the overall returns in the real estate market.
Of course, the location yet again plays a crucial role in determining how much you can optimize the return prospects.
Supposing you have a property close to a college area or a workplace with lots of youngsters looking out for residential options.
Here, of course, you will able to make more money from the same real estate property.
Now compare this with the potential prospects of a residential property in a predominantly business area.
It will undoubtedly have much lesser demand, and the relative rate that you can get from that rental will also be significantly lesser.
5. Increasing Your Net Worth
When you look at how to make money in real estate market, it is, in general, a vanilla concept of how much money you are putting in and how much you can realize from it.
When you put in a lower amount and sell it at a higher amount, you earn a straightforward property.
But what if you do not have the cash required to buy the property?
How can you increase your equity even when you decide to invest in a real estate property using a loan?
Here your initial expenses include not just the price of the real estate property but also the financial charges that your incur.
So you can increase your net worth in this case by simply investing actively in rental properties.
The rental should be such that the rent should cover the maximum mortgage payout and it should still offer you a decent profit.
In this case, you generate some extra cash from investing a set amount.
This extra amount that you generate can be used for making further investment in real estate.
So let’s say that you used a mortgage to finance a commercial rental.
Now you saved whatever additional income the rent generated every month.
At the end of a year or even two years, you used this amount to buy another rental real estate, be it commercial or residential.
The basic idea is, therefore, for the same amount of money, you can generate additional wealth or in other words, make money from the real estate investment that you are engaged in.
This is often considered the ideal kind of return that you can expect from the real estate market.
However, for this, you need to be very alert about identifying potential properties and observe financial discipline in reinvesting this amount effectively.
6. Leverage vs Returns
If you want to get higher returns, the real estate market can offer the most sustainable and relatively higher returns over the longer term.
What makes the deal even better is increasing your relative leverage in the entire investment.
Let us take an example to understand this point a lot better.
Let us assume you invested in a property worth $100,000.
For this, you are leveraged about 20%. However, when you are receiving the real estate value, you will get the entire 100% on the real estate property that you are invested in.
Let’s assume that you are able to generate a rent of $700-800 and have a mortgage payout of $500.
So the balance $200-300 becomes your absolute profit on the real estate. 20% leverage on a $100,000 property means, your initial investment is close to $20,000.
On the other hand, the relative annual return is close to $3000-3500.
This means you are generating over 15% returns on the basis of a simple 20% leverage.
Now think of any other investment tool that can help you make money to this extent, given the leverage that you have in the market.
Additionally, given the long-term nature of the investment pattern in this market, you get much higher returns on a higher leveraged investment.
Also, this kind of investment pattern gives sufficient leeway to investors to leverage a relatively higher amount and optimize the overall profit that you can earn from the specific investment tool.
As an investor keen to understand how to make money in real estate market, the leverage -return balance is most evenly poised in case of the real estate world.
As an investor, you get a lot more opportunity and have a relatively limited risk, even while leveraging a higher amount.
7. Tax Liability
Real estate laws are different in every country, but on an average, every country provides some kind of rebate or tax advantage on potential real estate investment.
If you want to understand how to make money in real estate market, it is very important to gain a comprehensive understanding of the tax implications of real estate investment.
For example, you must understand the types of real estate investments that can yield maximum value.
If the government has a higher tax rebate for residential vs commercial properties, you need to fashion your investment accordingly.
Also, if you realize that in residential real estate investment, rentals have better return prospects but purely residential options have a higher tax advantage, you would again need to recalibrate your investment decision.
You have to take into account the various costs and income prospects, and then take a call on the possible real estate investment that gives you the best value for money deal.
Often an inaccurate understanding of tax liabilities can erode your profits significantly.
You might end up paying a lot more tax than the actual profit that you might earn from a specific investment that you might have made in the real estate market.
Proper and detailed study of the tax implications can easily help you counter that type of losses.
8. Profit from Refinancing Opportunity
When you look out to make money from real estate market, the possibilities are numerous.
The trick is how alert and vigilant you are in identifying these and capitalizing on them.
One of the best ways that you could try to make money from real estate is undeniably by taking advantage of the profit that you make once your refinance your real estate property.
In case your mortgage bill comes down significantly after refinancing the property, but the rent remains the same as before, the difference easily becomes your profit from refinancing your real estate investment.
What this essentially does, it generates a significantly large cash flow fro the same investment and irrespective of ups and downs in the real estate market, your profit remains constant in this case.
You can look to reinvest this profit back in the real estate market and expand your overall equity.
Or else you could also look at preserving cash and increasing your cash flow in the market, depending on your preference.
The moot point is this becomes one of the most convenient ways to generate additional cash or make more money from real estate.
9. Commercial Property
So far most of our how to make more money from real estate was biased significantly towards residential real estate, both rentals as well as holding property.
However, commercial real estate remains one of the most under-utilized avenues of booking profit in the real estate market.
The billing rate and the profit parameters of commercial real estate are very different from residential.
This difference can enhance the profitability of this kind of investment in the real estate market.
You must understand that commercial properties gain value based on two primary factors, location and strategic importance.
So the cardinal rule while investing in commercial real estate is undeniably location.
Whatever you might consider and however cheap rates you might be getting for; it is never wise to invest in commercial property in an underdeveloped area with low prospects of business activity.
The problem that you would face is this type of real estate investment is that the rate of appreciation would be much slower and the average rate of a slump in rates will be higher in case the market sees a downturn.
Moreover, commercial properties are interesting real estate investments for the kind of value that they encompass.
However, in the absence of a suitable locality, this value gets eroded significantly, and you might even reach a state where you would try hard to get rid of it even at a loss.
This type of eventuality can be avoided, and you sure can make more money from your real estate investment if you are careful about choosing the location of the commercial property, and at the same time, able to gauge the business prospect of the area accurately.
10. Investing in Real Estate Land
Perhaps when you talk about how to make money in real estate market, this is one aspect of real estate investment that absolutely escapes your attention.
Yes, I am talking about investing in a land where you can build real estate.
But then again in case of land too, the same prospects lead to price gain or depreciation in value.
It is possible to buy under-developed land and then sell it at a premium when the area and the land get developed.
Your basic principle of buying low and selling high comes into play in this context.
Once the real estate developers start raising buildings- residential/commercial, depending on the need, the value starts rising, and you can hope for sizeable returns on your initial investment.
You could also consider investing in agricultural land or mineral rich land.
Depending on the mining activity that is undertaken or the agri-initiatives by the landowner, the relative value of the land could shoot up rather high.
Here again, locality and the prospect of the growth play a crucial role in determining how much money you can make from this type of investment.
11. Real Estate Appreciation & Inflation
Well when we discuss ways to make money from real estate market, appreciation is often the keyword.
Appreciation decides the amount of profit you make to the relative premium you can get from these investments.
But here is a little bit of complexity that gets added to the simple mathematics of buy low-sell high and profit from the difference.
In very simple words, it is the impact of the ‘inflationary forces’.
The economic implication of inflation is in fact quite far reaching and pretty long-term.
So if in the five-year period that you invested in a specific real estate, the inflation rate rose by 10%, it means that the relative amount of good that $1 dollar could buy gets reduced by 10%.
Or for the same amount of service, you have to shell out 10% more.
This, therefore, needs to reflect in the rate at which your real estate investment appreciates as well.
Only then, you will, in reality, make more money with the same amount of investment.
Calculation of the inflation impact is particularly important when you are undertaking long-term deals in the real estate market and committing a rather large cash amount for it.
Let me help you understand this concept with an example for better understanding.
Let’s say you bought a house in 1980s for about $100,000.
Even if you did not invest any amount in decorating the house or doing it up, it would still be worth a lot more than the amount you invested simply because of the steady rise in inflation in the period in between.
Even if that property remained absolutely dormant with no development at all, you will still be able to realize a significantly large amount from the same investment just by virtue of upward rise in inflation.
Therefore when you are exploring how to make more money from real estate, the long-term strategy is often the crucial game changer in this context.
Given the pace at which the global economy is growing and the relative rise in inflationary trend, just by holding a real estate property for sufficiently long time can help you realize decent gains from it.
The inflation-appreciation link in real estate market also, therefore, seals the importance of long-term holdings in real estate world.
If patience is considered virtue, it does not reflect it as effectively anywhere as you would see it in real estate market.
In fact, you can often consider it the best place to take advantage of the positive up move in inflationary forces in many circumstances.
So… It Is Possible to Make Money in Real Estate
Therefore, we can conclude that if you are interested in how to make money in real estate market, the extent of opportunities is pretty varied.
As is the case in any other investment, this asset class sure has its ups and downs, but over the long-term, the real estate market often offers the best cushion against global economic turmoil.
Pretty much like gold, real estate investment often helps you preserve your capital better, offer a rate of returns and significantly reduce the losses in terms of a sudden downturn.
However, you must understand that while you can make money from real estate market, it is a rather illiquid (thin) asset class in terms of crisis.
So, it advisable to maintain alternate investment options as well and keep a steady cash flow.
Just like they say ‘never put all your eggs in one basket,’ it is better to diversify your investment as well.