Like any other investment, you can use real estate to put money to work today so you can have more in the future. Your profit (or return) you make on your investments needs to be enough to cover the risk you’ll be taking on, the amount of taxes you’ll have to pay, and other costs associated with owning the property (such as utilities, maintenance, and insurance). Real estate investing can be as simple as playing a game of Monopoly. But you have to understand the basics of the investment, as well as the economics and risks involved. You buy properties, avoid going bankrupt, and build up your rental income so you can buy more properties. Yet “simple” doesn’t mean “easy.” And if you make a mistake, it can come with a wide range of consequences.
Pros and Cons of Real Estate Investing
Before you decide to play this game, you need to understand its pros and cons. Some of the advantages of real estate investing include:
- There’s less risk than investing in the stock market.
- It can be a good way to generate cash flow.
- It can come with a great deal of tax deductions.
- It can generate good long-term returns.
Despite its advantages, real estate has its drawbacks. Some of them include but may not be limited to:
- It doesn’t have as much potential for more aggressive returns.
- It requires a great deal of cash to get in.
- It has poor liquidity.
- It can be hard to deal with tenants and building issues.
Be sure to do more research before you decide to invest in real estate.
How You Can Make Money by Investing in Real Estate
Once you get into real estate investing, there are several ways you can make money:
- Real Estate Appreciation — This happens when a property goes up in value because of a change in the market. The surrounding land could become scarcer or busier (such as the building of a nearby shopping mall). You could also have done some major upgrades to the property that make it more attractive to prospective buyers. Real estate appreciation is a difficult game to play because it’s somewhat unpredictable, which is why it’s riskier than investing for cash flow income.
- Cash Flow Income — This type of real estate investing focuses on buying properties (such as apartment buildings) and operating it, so you can generate rental income from tenants. Cash flow income can also be generated by other types of real estate (such as storage units, office buildings, retail stores, and rental houses).
- Real Estate Related Income — This kind of income is made by specialists in the real estate industry (such as real estate brokers) who make money off of commissions on properties they have helped a client to buy or sell. Real estate management companies also get a percentage of rental income in exchange for running the everyday operations of a property. A hotel management company might take 15% off of hotel sales, so they can take care of its day-to-day activities (such as hiring maids, running the front desk, mowing the lawn, and taking care of the laundry).
- Ancillary Real Estate Investment Income — This can bring in a great deal of profit for some types of real estate investments. Ancillary real estate investment income can include things like vending machines in office buildings or laundry facilities inside an apartment complex. They serve as “mini businesses” operating within a larger real estate investment, which allows you to make money from a semi-captive group of customers.
Be sure to do more research on how you can make money from real estate investing.
Tips for Investing in Your First Property
There are several ways you can buy your first property. You can use debt by taking out a mortgage. This can be a great leverage tool, because it can allow you to purchase properties that you otherwise couldn’t afford. This can be a dangerous way to invest in real estate, because the mortgage payments and added income expense could cause you to go bankrupt (especially in a falling market). To manage this risk and to protect yourself, you should think about keeping your real estate investments inside certain legal entities (such as limited liability companies or limited partnerships) instead of in your own name.
You should speak to a qualified attorney for more information on what type of ownership method works best for you and your specific situation. If the investment goes bust or an accident happens on the property (which can lead to a lawsuit), setting up these legal entities can protect your personal assets. That way, you’ll only lose the money you’ve invested instead of putting your retirement accounts and other assets at risk.
For more information on how you can get started in real estate investing, be sure to get in touch with Trevor Shakiba at Shakiba Capital.