As the old saying goes, you have to spend money to make money. Never has that statement been truer when it comes to real estate. One of the most common questions aspiring real estate investors ask is how do investors make money in real estate if they’re always spending and are in debt? Since this is a two-part question, here’s a two-part answer.
How Does Spending Help Investors Make Money in Real Estate?
Spending money means losing money, right? How is it that investors make money in real estate by spending so much? To get straight to the point, the answer is positive cash flow. Positive cash flow is when an investor earns more than what they spend. So, by spending a lot of money on improving properties, investors try to maximize their potential cash flow.
Cash flow is the most important thing when it comes to renting a property. When investors try to improve or spend on the property, they try to increase their positive cash flow.
Spending on a property usually breaks down in a couple of ways. The first is expenses. Expenses cover taxes, inspections, management, closing costs, appraisal fees, insurance, property associations, and utilities. For the most part, these expenses are downright necessary for a property to succeed. Another way spending helps make money in real estate is through property renovation. By renovating a property, you can increase the rent, which increases cash flow. Also, the property’s value increases, which can help investors make money in real estate if they decide to sell the property.
How Does Debt Help Investors Make Money in Real estate?
But what about debt? How does being in debt help investors make money in real estate? The most common source of debt for real estate investors is through mortgage. But this kind of debt isn’t all too bad. In fact, mortgage makes it easier for investors to buy properties without having the full payment in cash. If an investor pays back mortgage debt, regularly, that is, monthly, then there is nothing to worry about. In fact, mortgage interest is deductible through tax, so there is an additional benefit to the investor.
Mortgage is pretty much essential for purchasing a rental property. Unlike other forms of debt, like student loan debt, mortgage debt has been more appealing throughout the years. In the 1980s, the interest rate was somewhere around 18-19%. Today, mortgage rates are around 4-6%, which is one of the reasons why many are opting to buy properties.
Paying mortgage can actually improve cash flow, if the mortgage is paid off early. By paying the mortgage in full early, you will have less monthly payments to deal with. This in turn increases cash flow. Paying off early also improves your debt-to-income ratio. To mortgage lenders, this ratio is an indicator that you are a strong borrower, which helps you buy more properties faster in the long run.
Different Ways Investors Make Money in Real Estate
Now that you know how spending and debt could help make money in real estate, here are some ways to invest in real estate.
Invest in Traditional Real Estate
The most common way to make money in real estate is through renting. Traditional real estate is renting to tenants for periods of time. There are many ways to rent in traditional real estate. Investing in single-family homes or condos is a great way to get positive cash flow. You could also decide to rent to college students for consistent rent. Heck, you can even rent out a single room or part of your house traditionally.
Renting through Airbnb
Another option is to rent through Airbnb. Renting through Airbnb means renting to traveling guests through the platform, Airbnb. Investors tend to earn more by renting through Airbnb. An investor is also able to control the rent price. Still, it comes with hard work, as traditional real estate does. Expenses, vacancies, and management are details you have to deal with.
Invest in REIT
A REIT, or Real Estate Investment Trust, is a company that owns different kinds of properties. As an investor, you will take part in the investment. Investing in REITs are in for high yields. Tax rules are also not as complex when investing in REITs. It all comes with a risk depending on the company you are investing in.
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All in all, investors still make money in real estate, even by spending a lot and being in debt. These two actions are not bad, as long as you make more money by doing them. For more on ways to make money in real estate, check us out at Mashvisor.