8 Proven Ways to Make Money in Real Estate
1. Long-term residential rentals
One of the most popular methods for making money in real estate is to leverage long-term buy-and-hold residential rentals. People will always require a place to live, and that means getting affiliated with rental properties. You need to do the adequate amount of due diligence to source your property by keeping a core principle in your mind: location, location, location.
Yes, you’ve heard it before, but location is everything when it comes to real estate. Not only does this apply for actually an increased asset value over time, but also in your skill to swiftly rent that property to a long-term tenant. When you’re thinking long-term residential rentals, look for a spectacular location. That’s more critical than the current state of the property itself. In fact, run-down homes in great locations are one of the best, and money-smart investments you can make. This includes a more traditional way to making money in the real estate market. It means purchasing a property with some cash on hand to make a down payment and then holding that property for many years.
Depending on your personal financial situation, you can easily grab that property for a very low or even no down payment. That’s especially true if this is a pre-existing, income-producing property. If there’s positive cash flow in a residential rental, then it could be a great investment. However, you’ll likely not find that too easily, unless the current owner is selling for personal reasons due to a divorce or other need to liquidate that property that necessitates having some cash on hand.
2. Lease options
Lease options can be a great way to get involved in real estate without having to spend a significant amount of capital or even have great credit at the start. You’re leasing with an option to buy. This tends to work well when the real estate market is rising because you’re setting a pre-set price at which you can later buy the property. If, for example, the property market rises substantially, you can buy that property at a discount. You could also potentially turn around and sell your rights for that purchase to someone else. The clear bet here is on the bull market in real estate. As long as this is an option you can exercise and not something set in stone that says you have to purchase at the end of the lease regardless, then you could very well turn a profit.
3. Home-renovation flips
The fix-and-flip culture has taken-off. Credit to the increased popularity of home renovation shows, we’re experiencing a massive boom in the traditional renovation flip market. While there can truly be a lot of money to be made here, navigating these waters from the start can be a bit tricky. When you lack the knowledge or the experience, you may find yourself on the losing end if you don’t select the right home.
Matt Larson has flipped more than 2,000 homes in Iowa and Illinois. Over the course of that time, he’s learned some lessons on what to look for and what not to look for when flipping a home with a renovation. His advice? Go after the ugliest homes in the nicest neighborhoods. That’s where the real value is. The other difficulty here is not only finding those hidden gems when you’re not well-networked with real estate agents, but also understanding your after-repair value. How much will the home be worth once you’ve invested in fixes and repairs?
To accurately determine that, you need a strong relationship with a general contractor and an on-site tour of the property. While buying site-unseen at an auction might seem alluring, unless you really know what you’re doing, you may probably lose money. However, making money on a home-renovation flip can be rather straightforward — as long as you understand the underlying costs and potential value. John and Julie Wakefield, a husband-and-wife flipping team who’ve done hundreds of flips, say something similar. They advise not to bite off more than you can chew, and more importantly, you should look for creative ways to help others. Success as a real estate investor has as much to do with how creatively you can solve problems as it does how well you can crunch the numbers.
4. Contract flipping
One way that you can make a profit from real estate without having to put up very much capital or credit is to flip contracts. All you have to do is find a distressed seller and a substantially motivated buyer, then bring them together. While finding a distressed seller might seem difficult, Clothier has systemized the entire process for doing this. The trick with contract flipping is to locate the distressed seller and locate a ready-to-go buyer.
By bringing these two parties together, you’ve gotten rid of the need to go hunting for a buyer after you’ve entered a contract. That situation presents more risk. Instead, by finding the sellers and the buyers beforehand, you can easily enter into a contract with the confidence that you won’t get stuck having to close escrow on the property. To do this, you have to be able to identify either vacant homes or homes that are behind on their mortgages. That’s the hard part. You’re effectively trying to find distressed sellers, but homes that are already vacant are primed for an opportunity like this.
5. Short sales
Short sales occur when the current owner of their home is late on their mortgage but the property hasn’t yet entered into foreclosure. In order for this to happen, all parties have to agree to the transaction since the property is being sold off for less than is owed on the existing mortgages. This can be a terrific opportunity to make a quick and easy profit without investing into lengthy renovations. However, succeeding with short sales or any other default-type auctions is often tricky.
You typically need to pay for the homes outright in cash, and some cases that has to go site-unseen. Short sales are better than auctions because you get a chance to check out the home and enter into a negotiation process. Unless you’re a seasoned investor, jumping in without an inspection and complete review could be risky. Short sales take time, but they can be well worth the wait. The potential return on a short sale can be instantaneous. Thousands of dollars can materialize as soon as the property purchase goes through because the bank is engulfed in a bad investment. But don’t plan on getting the property for a steal — you’ll still have to delegate for a relatively fair price. Depending on how badly the bank wants to unload that property, it could sit around and wait for another buyer, so don’t try to low-ball too far.
6. Vacation rentals
Vacation rentals can present a lucrative path to profits in the real estate marketplace. Not only can you make some side hustle income from vacation rentals, but you could potentially make a significant amount of money and build up a substantial passive income stream if you’re in a highly-trafficked tourist locale. Places like Los Angles, Miami and other tourist hotbeds are well known for having high demand for these short-term rentals.
I’ve long been a firm believer in the vacation rental market. The best part? You don’t even need to own the properties to make money. Some of the world’s most successful property management companies that specialize in vacation rentals don’t actually own the homes but do provide a high-end consumer experience. How do you participate? Leverage existing relationships with owners in your area. Network with others. Build bonds. Create systems. Ensure the upmost satisfaction. Go above and beyond for anyone staying at the homes you manage. And see how you can help to take some of the time and stress off of the present owners’ existing rental businesses. If you have a property, list it on a site like Airbnb, HomeAway or FlipKey before managing vacation rentals for other owners.
7. Hard-money lending
Hard-money lenders provide short-term loans to people who normally wouldn’t qualify for those loans. In order to participate in hard-money lending, you’ll need some capital behind you. These are loans that are often at high interest rates because they’re for very brief periods. To close your first deal, you could turn to a hard money lender. If you have what you feel is a “sure thing” but lack the capital, this could be your best bet.
You could also become a hard money lender, but you’ll need some capital. This likely isn’t going to be the first way you start out making money in real estate, but as you build your network, capital and a solid portfolio of deals, you could provide these bridge loans and make a great rate of return. Even if you lack an enormous amount of capital, as long as you can successful identify the right deals, provide a small amount of money and generate a high success rate, you can likely find investors to come on board without much difficulty. The interest rates here make sense. There’s more risk but also more reward. It can be a way to keep your cash fairly liquid and generate a nice profit in the short term without having to wait years and years for those returns to materialize.
8. Commercial real estate
One of the great opportunities in real estate for making a considerable amount of money is to invest in commercial real estate. Commercial real estate developers focus not only on flipping properties but also on developing them, adding value to properties in order to increase their net incomes through renovations and upgrades. They also consult on projects that might take more seasoned real estate investors to see to fruition. Ali Safavid, founder of 5209 Investments, says commercial real estate is one of the most lucrative sources for both income and profits in the real estate market. As long as you can find ways to add value to the exchange, investing in commercial real estate can be one of the largest income generators you’ll find. People always need office space and retail to run their businesses. These physical locations are bread and butter in the real estate niche. As you grow, you can find ways to open up shopping malls, develop large scale buildings and more. But you have to start somewhere.