To some, the real estate business seems like a lucrative opportunity to turn a significant profit. But, when property costs rise from steep to steeper, how do investors make money in real estate? Below are three primary ways that real estate investors can use their properties to turn a profit.
Rent and Cash Flow
Real estate investors make money off of the rent their tenants pay on their property. Whether you own an apartment or office building or a house, tenants pay a monthly fee to lease the space.
Unfortunately, profiting from this kind of property is not as simple as cashing a tenant’s check. Even though real estate investors make money from people who lease their property, they also incur costs to manage the property. These include insurance and property tax, janitorial staff, and maintenance responsibilities like fixing plumbing and servicing appliances.
When we deduct maintenance costs of a property from the total rent paid by tenants, we are left with the cash flow. Cash flow is a number that summarizes the net gain obtained from a given property.
Cash flow is the short-term method by which real estate investors make money from the properties they own. If your cash flow is positive, you are making money on your property. But cash flow is not the only way to be a profitable real estate investor.
Real estate investors often factor in the potential for appreciation in their property before they purchase it. This appreciation happens when a property’s value increases due to demand and location.
For instance, property in Manhattan has more potential for appreciation over time than property in a rural community. Because Manhattan is more densely populated, the demand for property is higher. Likewise, because Manhattan has so many people, properties are limited, so there is a higher demand.
A rural community is less densely populated than Manhattan, so your property is not in high demand and less lucrative.
Owning a high-demand property means that, over time, the value of your property will increase. When the value increases, you can charge more for rent or ask a higher selling price. Real estate investors make much more money when their property appreciates.
Even natural inflation can cause property appreciation with no extra work from the real estate investor. Because the U.S. dollar inflates an average of 10% annually, properties are worth more years after you bought them. This is true even if those properties have remained vacant since you purchased them.
That being said, inflation applies to everything, so items you decide to buy after selling will also have inflated. And, properties can also depreciate if an area becomes less popular and the demand for property falls. In that case, a real estate investor may lose money.
Development of Property
Almost any property’s value can be increased through development, which requires building onto the property or renovating existing structures.
As many homeowners know, a property with updated fixtures is worth more than a house with dated technologies. The process of updating home fixtures, appliances, and even floor plan is a kind of development.
Though development requires the investor pay upfront costs, the payoffs can be extraordinary when reselling or charging rent. Depending on the property, development efforts can nearly double the value of the property.
Make Money in Real Estate
Hopefully, you can now see how investors make money in real estate. A property with high cash flow that appreciates over time and is developed by the investor can bring major returns. It is now important that you choose the best property for your investment goals!