Passive income– It’s one of the big attractions to real estate investing.
The people who take action and become real estate investors are the ones making it happen.
They buy the real estate, then hold the real estate, sometimes for a few years, sometimes decades or even their lifetime. They do this because real estate investing offers you the ability to leave a financial legacy to your children after you leave this earth.
We are blessed here in the United States to have this opportunity to build financial wealth through real estate.
America is a big country—it covers a lot of ground and owning property has been one of our nation’s most appealing traditions.
There are many deals out there, and the fact you are reading this blog tells me your ambitions are higher than just owning your own house.
You want more of the American dream—multiple properties in your name that will increase your wealth, and thus, your family’s financial security.
Sounds fantastic, doesn’t it? However, action is required.
This post will look at three ways to make money in real estate investing…these three categories are pretty much standalone categories, although a little bit of overlap between them can occur.
Before going forward down these investment paths, it is a good idea to pause and think about your goals first. If you have a spouse, sit down with them talk about what you want to accomplish. It might be something like…
- Building up equity
- Covering all your expenses with real estate investing
- Buy a house to flip it later
Complete honesty with your goal setting is the way to go.
For example, make a list of all your expenses—mortgage, kids, car, taxes, everything. Whatever that total number is, that might be your goal—a monthly revenue stream through real estate investing that covers are of your expenses.
That sounds like financial freedom to me.
Alright, let’s look at the 3 ways to make money with real estate investing:
#1 Cash Flow
This one is certainly a noble goal. When you have money coming in each month from your tenants, that’s cash flow, and many investors have put themselves in the enviable position to have a cash flow coming in from rent checks that covers their personal expenses.
You can deconstruct this by looking at how quickly you can acquire rental property and then get the highest possible return on investment (ROI).
Figure out how you can get the highest amount of cash for the least amount of expenditures you will have to spend to obtain rental property.
Now let’s look at the second way to make money with rental property…
Do you recall what the real estate market was like in the 90’s and mid 00’s? People were selling properties super-fast. Back then, you could buy a property just about anywhere in America and then a month later sell that property and make a nice $50K profit, or sometimes more than that.
The was during an era where “phony” mortgages were driving up prices quickly. You could buy a house Seattle and then sell it 6 weeks later and make $100K.
Those days are over.
Today, equity is all keeping the property for a number of years, having some tenants during that time to provide cash flow, and then sell it later.
Equity is the second way to make money with real estate investing, and this way provides a few options as far as how you play this out.
- One way to leverage equity is to buy a property, and then pull some money out of the property. For example, you buy a property for $200K, but it’s worth $250K, you could go to a local bank and get a home equity line of credit on the property, or you could do a cash out refinance and pull some of that money back out. Making sure you are leveraging that money is one way equity could work.
- Flipping the property is another way to use equity to make money.
Keep in mind, you cannot normally get both high cash flow and high equity on a property.
If you are making a high RIO cash flow on a property, there’s a good chance you won’t have high equity. Because the more pay for the house, the more your ROI is going to drop.
It is when you can pay $40K to $50K for a house is when your ROI can rise high. The equity in this case is “okay”, but not out of this world. As you pay more for a house, what happens? The ROI drops in correlation to the equity. This is a trade off that you need to understand.
This one is last for a reason—appreciation isn’t the path to making money that it once was back before the financial collapse of 2008. It’s a nice thing to have, kinda like the cherry on top of your ice cream sundae.
Savvy investors today are not buying properties because they will “appreciate.” That mindset is dead. Again, you are not going to be able to buy a house today for $100K and then sell it for $200K four months later.
Today, appreciation has no teeth when it comes to cash flow. It’s a nice cherry on top. For example, you can buy a property for $60K and rehab it, make it look nice, and then a few years later you get it appraised for $75K or $80K, somewhere in that ballpark—great! Good for you. However, if you don ‘t leverage it, the fact it goes up or down in value doesn’t matter when it comes to your cash flow. When the property appreciates, you could instead of sit on it, go to a bank or private lender and pull that money out of the property.
Watching your numbers go up might feel good, but so what?
Cashflow is king.
Cashflow. Equity. Appreciate.
These are the three ways to make money in real estate.
I’m curious what strategies you use? Taxes are a part of the equation, I know.
Would love to hear what you’re doing down in the comments below.