How To Make Money In Real Estate

By January 18, 2012 INVEST
Apartment in Brittania-Youngstown, Edmonton

 

There aren’t many ways to make money in the world. You can invest and you can trade time for money, but beyond winning the lottery, there isn’t much else. Real estate is no different – but you don’t need a ton of options to make a lot of money. Land and housing have always been a staple of investment. Part of the reason for this is that the supply of land is inherently limited; as the old saying goes, ‘they just aren’t making any more of it’.

So how can you make money investing in real estate? When we’re talking about residential and commercial real estate, there’s really only three ways: riding the market, renting it out and/or improving it – also known as appreciation, income and sweat equity.

The supply of land is inherently limited; as the old saying goes, ‘they just aren’t making any more of it’

Appreciate Your Property

Appreciation is the most lucrative way to make money in real estate and the most common way money is made from property. It occurs when the value of a piece of land increases over time. Historically, this has happened fairly consistently, although perhaps with a few blips.

Let’s take a look at an apartment-style condo in west Edmonton. It has sold a few times over the years:

In 1985, it sold for: $32,000
In 1989, it sold again for: $45,900
And again in 1992 for: $56,000
And again in 2000 for: $60,000
Then finally it sold in 2006 for: $127,500

That is appreciation – a 398% return over 20 years. I bet the people who own it now wished they could have bought it in 1985…

Unfortunately, you can’t just buy a property and expect steady price appreciation. The real estate market also reacts to supply and demand over the short term, which can cause prices to drop. However, over the long term, real estate has proved to be a very safe place to put money. That said, making money through appreciation is no get-rich-quick scheme. Property rarely increases in value overnight, so be prepared to hold on to it for many years to see a return.

Appreciation is the most lucrative way to make money in real estate

Where Is My Rent Cheque?

Rent is the only form of cash flow a residential or commercial property can generate – but it’s even less secure than appreciation. Rent is usually paid monthly by a tenant who occupies the property. Sometimes, rent is not substantial enough to cover the costs of the mortgage, taxes and maintenance that the landlord has to pay. If this is the case, the property has negative cash flow. The goal in real estate investment is to have all your costs as a landlord covered by rent – even if you only manage to break even. This allows you to make your money on appreciation. If you are able to find a property that has a positive cash flow immediately, then you’re off to a great start because you’re actually making money every month on your property. When it comes to real estate, rent is a crucial factor in how well an investor does on an investment. This means that if a property is left vacant for too long, the investment becomes unviable. You might make more money over the long term with the appreciation of the property, but if you don’t rent it out, it’s just not going to work.

Rent is the only form of cash flow a residential or commercial property can generate

Don’t depend on cash flow to make you rich. You’ll make a little bit of money here and there, and as you pay down the mortgage on the property, it will become more substantial, but this is akin to a dividend in the stock market. You may make a few bucks on your investment by keeping it in your account, but you would need millions of dollars to actually live off of that dividend. You can’t usually live off of the cash flow from property investment. It’s an important part of the investment puzzle, but it’s no get rich quick scheme.

Sweat Equity: Work It!

There is another way you can make money in real estate that many people forget. It’s an investment of time and materials in your property. Renovating capitalizes on the work an owner does on the property so that it is worth more after the work is done. But a property can be fixed up over the long term as well, and that will increase its value over the long term too.

Development is another way to improve a property and cash in, but it’s a lot more complicated than putting in hardwood floors and a new kitchen. It usually entails building structures on land that was previously bare, or knocking down old structures and replacing them with new ones. This is best done by professionals, but it can be very lucrative if you know what you’re doing. There are many houses out there that have lost enough value that it becomes worthwhile to buy the property based on the value of the lot, then knock down the house to build a new one.

Other methods rely on purchasing larger parcels of land and splitting them up into smaller ones. The work that is being done in this case is legal work, such as rezoning the properties, titling them, and sometimes working to bring utilities into the properties for future development. Because this requires time and special knowledge, someone with the inclination and know-how could make money this way as well – but it’s certainly not for the personal real estate investor.

Keep It Simple

For most real estate investors, there are three key methods of making money to be considered along with all the factors a buyer would use to choose a property (See What To Look For When Shopping For A Home). The goal is to buy a property that will be easy to rent out, that will increase in value over time and that can be fixed up a bit so that you can capitalize on the improvements yourself. If you look for these three factors, you’ll be on the right track to making money in real estate.


 

by +Alan F Macdonald REALTOR® | Copyright © – gimme-shelter.com

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Alan F Macdonald

Author Alan F Macdonald

Alan F Macdonald is a real estate agent with Maxwell Challenge Realty in Edmonton, Alberta.

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