Looking for the best ways to earn extra money? Many people think that the only way to build wealth is with a job. While it’s a great way to make more money, it’s definitely not the only way. You must have heard it by now: you have to invest money to make money! There are many options for places to invest your money in like stocks, mutual funds, bonds, and real estate. While it can be overwhelming to find the best investment, experts and successful investors always encourage buying real estate properties. Real estate investing can be very lucrative – we’ve heard many stories of people from all over the world who have made millions by investing in real estate. Wondering how to make more money in real estate? Keep reading.
How to Make More Money by Investing in Real Estate
#1 Rental Income/Cash Flow
Many believe that the real power of real estate is in rental income. Making money in real estate through rental income is simple – anyone who ever played a game of Monopoly understands how the basics work. If you own a real estate property, you can charge people rent in exchange for allowing them to use or live in the property. In the real estate investing business, this is called rental income and it’s the source of cash flow. What is cash flow exactly?
When you invest in real estate rental properties, you’ll find yourself dealing with operating expenses that you need to pay in order to run your investment. These include (but are not limited to) maintenance, utilities, property management, property taxes, and property insurance. In addition, if you finance your investment property with a mortgage, you’ll also have to pay monthly mortgage payments. Real estate investors pay for these operating expenses with the rental income and what’s left is the cash flow.
This is a great way for how to make more money by investing, but experts advise property investors to estimate cash flow before buying an investment property. This is because you should never buy real estate property unless you’re sure that it’ll generate a rental income greater than the monthly expenses (positive cash flow). If an income property produces negative cash flow, where expenses exceed income, then it’s not a good investment to own. For example, when your rental income is $1,000 a month and your monthly expenses are $800, this leaves $200 cash flow in your pocket!
You can use our Investment Property Calculator to estimate the cash flow of rental property before buying it. Click here to start!
#2 Real Estate Appreciation
Another motivation to invest in real estate is the possibility of property appreciation. While real estate values may fluctuate in the short-term, investment properties almost always increase in value over the long-term with or above the rate of inflation of building materials, labor, and the shortage of land. Due to appreciation, real estate investors have a way to make money with properties over the long-term. So, it’s not a quick way of how to make more money, but it’s definitely a nice bonus that comes with buying real estate property.
For example, say you’ve decided to buy an investment property in 2019 for $200,000. After doing your research, you’ve calculated that the value of real estate properties in your area has historically risen an average of 4%. If you’re planning to hold the property for the next 15 years, follow this formula to estimate future growth:
Future growth = (1+ average annual appreciation rate) years
Future growth = (1+0.04)15 = 1.8%
Multiply that by your property’s value and you’ll get $360,000. This means that in 15 years, your $200,000 investment property will be worth $360,000. As a result, you’d earn $160,000 in profits from real estate appreciation over this time period! For more details, read: How to Calculate Real Estate Appreciation.
#3 Equity Build Up
Another way to make money in real estate investing is by building equity. There are two ways to go about this. The first way is if you buy an investment property with a mortgage. In this case, a real estate investor puts a down payment and finances the remainder with a loan. Basically, you’ll build equity in your real estate property each time you make a monthly payment on your mortgage. Better yet, you can rent it out and receive monthly rental income and use it pay for the mortgage. Meaning, your tenants will be paying off your loan and building your equity!
Another way to build equity is to invest in real estate properties below market value. Usually, these are distressed properties that need renovations. Additionally, they could be foreclosed homes that a bank wants to sell and will accept less than market value. After buying under-valued real estate, investors will make improvements to the property which allows them to build equity and sell at the market value or even for more money.
#4 Tax Benefits
Real estate investing offers a great tax-saving strategy called the 1031 exchange. Here’s a simple example of how this work. Say you started out buying a small multi-family rental property for $200,000 and after a few years you’re able to sell it for $400,000 – earning a capital gain of $200,000. Instead of paying the capital gains tax, you can reinvest this money in a new property tax-free!
This is not only another way of how to make more money by investing, but it’s also a great way to grow your real estate investment portfolio. With the power of leverage, you can repeat this process of buying, selling, and reinvesting until you’ve worked your way up and have several deals under your belt that are making you millions of dollars.
Lastly, another tax benefit of real estate investing is that the IRS allows property investors to deduct interest payments on loans, property taxes, and depreciation to reduce their taxable income. This will keep more money in your pocket.
How to Invest in Real Estate to Make Money
Of course, not everyone wants to be a full-time real estate investor or has enough capital to buy an investment property. Luckily, there are numerous ways to invest in real estate and at least one of them is bound to suit you. Here are the 5 best ways to make money in real estate to consider if you’re wondering how to make more money by investing:
1) Traditional Rentals
Traditional rental properties are those that real estate investors buy and lease out to long-term tenants. These investment properties could be single-family homes, multifamily homes (duplex, triplex, and fourplex) small apartment buildings (5-50 units) and large complex buildings. A real estate investor who owns a traditional rental property will get paid every month (rental income) and if you set up your investment right, you can live off this monthly rental income during retirement. For example, you need to do a rental market analysis to decide the best rental rate to charge tenants. Property investors also need to analyze the income property itself using a Rental Property Calculator to make sure it makes for a profitable investment.
Here are another 14 Things to Consider Before Buying Investment Properties in 2019!
2) Airbnb Rentals
This way of making money in real estate has become a popular choice among beginner property investors today. The basic way of following this investment strategy is: the investor buys a second home (or a vacation home) and lists it as a short-term rental on Airbnb. The great thing about Airbnb rentals is that you can be creative with them. For example, you can rent out your primary residence, basement, or just a room on Airbnb – meaning this is a great way of how to make more money from home!
Do you have a free Mashvisor account? Use our Property Finder to find lucrative Airbnb investment properties that match your criteria in a matter of minutes!
However, you need to check with the laws surrounding short-term rentals in your city before listing on Airbnb. Some cities will only allow you to rent out your primary residence, making Airbnb illegal for real estate investors who are not primary residents and are investing in Airbnb from out-of-state. There might also be Airbnb regulations that you need to follow if you don’t want to operate illegally.
3) House Hacking
If you already own a house and don’t have the means to buy an investment property, try hacking your house! House hacking works if you own a multi-unit property (duplex, triplex, or fourplex), live in one unit, and rent out the rest. Alternatively, you can use an FHA loan and purchase a small multi-family home for a low down payment (around 3.5%) and live in one unit.
The results: you make passive rental income and live in your house for free! This is also a great way to invest in real estate if you’re on a budget or you’re looking to learn more about being a landlord. Furthermore, many recommend house hacking as it allows for significant savings that you can later put down on the purchase of your first rental property.
Interested in hacking your house and learning how to make more money from home? Read The Ultimate Guide to House Hacking.
4) Real Estate Investment Trusts
Do you already invest in real estate properties but you’re looking for a way to diversify your portfolio? Consider real estate investment trusts. These are companies that pool investors’ funds to purchase large real estate properties like commercial properties, office buildings, or hotels. As an investor in a REIT, you get paid dividends and you’ll have minimal responsibilities. For example, you don’t have to worry about the typical responsibilities of a landlord like finding tenants, collecting rent, managing properties, etc. This makes it another passive income investment strategy to make money by investing.
5) Flipping Houses
As opposed to rental properties, flipping houses is a quicker way to make money in real estate. It allows real estate investors to make money through building equity since these are basically distressed properties that need renovations. While expert house flippers can reap big financial rewards, this is not an easy way to invest in real estate for beginners. Typically, you need to have a budget for home renovations and stick to a timeframe for completing and selling the property. If you end up investing over your budget or holding the property longer than you should, you could lose money instead of making money. Therefore, you need to be very careful and do your homework before starting a house flipping business.
The Bottom Line
If you’ve been thinking about how to make more money, investing in real estate is one way to do it. The wonderful thing about real estate is that there are countless ways to invest your money – even more than what’s mentioned in this blog. Thus, regardless of your investing preference, risk tolerance, or available cash, there is a way to invest in real estate that works for you!
Mashvisor will help you find and analyze investment opportunities that come your way using innovative tools that every investor needs. Whether you’re looking for traditional or Airbnb rentals, a house to hack, or cheap properties to flip, you can trust Mashvisor to make smart investment decisions. To start your 14-day free trial and subscribe to our services with a 20% discount after, click here!