2 Ways to Make Money from Real Estate Investments
Real estate investment is a common choice for those who are looking to invest in something more stable than the stock market. While stocks go up and down, most homes tend to steadily appreciate over time, and when there is a change in a housing market it’s typically gradual. Before you choose to invest in real estate, it’s important to understand how to make money from your real estate investment.
There are two primary ways to make money through a residential real estate investment:
- The property value increases, and the buyer sells the property for a profit.
- The buyer rents the property to tenants and collects rental income.
Additionally, if you choose to invest in commercial real estate, you could profit from business activity that takes place on the property. As a residential mortgage lender, we focus on buying to sell or buying to rent real estate investments, not commercial real estate.
Buy to Sell
When you’re buying a property with the intention of selling it for a profit later, it’s important to look at the historical data of the home and the neighborhood. Most homes tend to appreciate over time. When real estate appreciation exceeds the rate of inflation, that is when you really profit off of your investment. Buying a home in an area that is experiencing rapid redevelopment could increase your property’s appreciation faster than a neighborhood experiencing normal home price appreciation.
Another way to profit from the sale of a home, is to increase the home’s value through renovation or repair. Fixer-upper reality shows make this process look easier than it actually is. If you want to invest in a property in need of renovation and repair, it’s important to run all of the numbers in advance and determine whether or not you’ll be able to profit after you cover these expenses. The way you finance the home will also impact your budget. It’s best to talk with a loan officer ahead of time, especially if you have a specific property in mind. What seems like an inexpensive fixer-upper may easily turn into a financial disaster, depending on how you finance it.
Buy to Rent
The other major way to make money on a real estate investment is to buy a home to rent. This decision starts with researching the neighborhood’s housing trends. What does the rental market look like? Are most neighboring homes occupied by renters or owners? Are there any restrictions on renting? What are the average rental rates?
Once you’ve found a home you believe will be profitable as a rental property, you need to decide whether to act as the landlord yourself or hire a property manager. Hiring a property manager will cut into your rental profits, as you will have to pay their salary, but it could alleviate some of the burden of day-to-day operations. If you are experienced acting as a landlord, have the time to dedicate to the property, and live nearby, you could manage the property yourself.
Investing in real estate could have the potential to substantially grow your investment over time. If you have any questions about a residential real estate investment, please let me know.
Sources: The Balance