There are four main ways you can make money as a real estate investor. Most involve owning real estate, but even that is not a necessity.
For example, you could be doing assignments (essentially operating as a middleman), joint ventures (partnering with somebody else providing capital), or sandwich lease options (renting property and leasing it to somebody else).
But typically, money is earned through one or more of the following four ways:
1. Cash Flow
In real estate investing, cash flow is the difference between your monthly income and expenses. Monthly income is usually rent, but could include income from things such as parking spaces and laundry facilities.
Expenses are the costs associated with owning the property. Common expenses are mortgage payments, insurance, taxes, maintenance, and management fees.
The two types of real estate investment strategies that make money from cash flow are rentals and lease options.
2. Price appreciation
When you purchase a property at a certain price and then sell it a higher price, the difference between the two prices is the price appreciation.
Renovation costs should be added to the purchase price to get the total acquisition price so that you can calculate the actual gain. The types of real estate investment strategies that might make money from price appreciation are lease options, flips, and possibly rentals, that is, if you ever decide to sell the rental property.
The reason I said “might make money” is that you may not be able to sell the property at a higher price. Or perhaps the fix-up costs on the flip increased the costs of the house too much.
Also, keep in mind that you never want to purchase a property for the long term if price appreciation is your only money-making strategy. You should always make sure that your rentals and lease options have a positive cash flow income.
3. Principal Pay Down
When you buy a property, you need to either pay cash or obtain a loan from a bank or other lender. The usual arrangement is to repay the loan in monthly instalments.
These instalments are usually made up of principal and interest amounts, with the principal portion of the monthly payment increasing over time.
The paying down of principal increases the equity and represents profit to the investor. However, the true value of this principal pay down is realized only if the owner sells the property or decides to refinance the property and “pull” some of that earned equity out of the deal.
For example, if over time, the mortgage is paid down by $30,000, the investor could refinance at about 80 percent of the value and take out $24,000 without having to sell.
The two types of real estate investment strategies that might make money from principal pay down are lease options and rentals.
4. Earned Money
Without owning any property yourself, you can make money in real estate by helping other investors and receiving either a monthly payment or a fee for service.
The main difference between this strategy and other strategies is that you don’t actually get involved in the “day-to-day” management of the property.
The types of real estate investment strategies that might make earned money are “bird-dogging” and providing financing (mortgages).
Bird-dogging refers to the service of finding good investment deals for another real estate investor, whether it is a rental, a lease option, or a flip. You can either present the deal to the investor in exchange for a “referral fee,” or enter into the deal under a contract yourself and then assign the deal to another investor for a fee.
Providing financing refers to an arrangement in which a lending investor acts like a bank and lends money to a purchasing investor to assist him or her in purchasing a property. The lending investor thus earns interest on the loan. A lawyer registers the mortgage(s) on the title to the property.
The loan is secured by a mortgage where the lending investor is the mortgage owner and receives monthly payments from the purchasing investor.
Jim Pellerin has been investing in real estate for over 25 years. He is the author of “7 Steps to Real Estate Riches.” Check out his blog at www.jimpellerin.com.
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