When it comes to making money in real estate investing, there are only a handful of ways to do it. Though the concepts are simple to understand, don’t be fooled into thinking they can be easily implemented and executed. 

An understanding of the basics of real estate can help investors work to maximize their earnings. Real estate gives investors another portfolio asset class, increases diversification, and can limit risks if approached correctly.

There are three primary ways investors could potentially make money from real estate:

1. An increase in property value
2. Rental income collected by leasing out the property to tenants
3. Profits generated from business activity that depends upon the real estate

Of course, there are always other ways to directly or indirectly profit from real estate investing, such as learning to specialize in more esoteric areas like tax lien certificates.

However, the three items listed above account for a vast majority of the passive income—and ultimate fortunes—that have been made in the real estate industry, and we are going to discuss more on them.

• How to Make Money By Investing in Real Estate
• 10 Steps to Making Money in Real Estate
• How Long Does it Take to Make Money From Real Estate
• How do New Real Estate Agents Make Money Fast

How to Make Money By Investing in Real Estate

Real Estate Increase in Property Value

First, it’s important you understand that property values do not always increase. This lack of asset increase can become painfully evident during periods like the late 1980s and early 1990s, and the years 2007-2009 when the real estate market collapsed. 

In fact, in many cases, property values rarely beat inflation—the increase in average prices in an economy.

Read Also: How Can One Raise Money For Real Estate Investments

For example, if you own a $500,000 property and inflation is 3%, your property might sell for $515,000 ($500,000 x 1.03%), but you aren’t any richer than you were last year. 

That is, you can still buy the same amount of milk, bread, cheese, oil, gasoline, and other commodities (true, cheese may be down this year and gasoline up, but your standard of living would remain roughly the same). 

The reason is that the $15,000 gain wasn’t real. It was nominal and had no real impact because the increase was due to overall inflation.

Inflation and Real Estate Investing

When inflation happens, a dollar has less buying power. It happens because the government has to create—print—money when it spends more than it takes in through taxes. All else equal, over time, this results in each existing dollar losing value and becoming worth less than it was in the past.

One of the ways that the savviest real estate investors can make money in real estate is to take advantage of a situation that seems to crop up every few decades. They do this when inflation is projected to exceed the current interest rate of long-term debt.

During these times, you might find people willing to gamble by acquiring properties, borrowing money to finance the purchase, and then waiting for inflation to increase.

As inflation climbs, these investors can pay off the mortgages with dollars that are worth far less. This situation represents a transfer from savers to debtors. 

You saw a lot of real estate investors making money this way in the 1970s and early 1980s. Inflation was spiraling out of control until Paul Volcker Jr.—Federal Reserve president between 1979 and 1987—took a 2×4 to its back and brought it under control by drastically raising interest rates.

Cyclically Adjusted Cap Rate Purchases

The trick is to buy when cyclically adjusted cap rates—the rate of return on a real estate investment—are attractive. You buy when you think there is a specific reason that a particular piece of real estate will someday be worth more than the present cap rate alone indicates it should be.

For example, real estate developers can look at a project or development, the economic situation around that project, or the property’s price and determine a future rental income to support the current valuation.

The current value might otherwise appear too expensive based on present conditions surrounding the development. However, because they understand economics, market factors, and consumers, these investors can see future profitability.

You may have seen a terrible old hotel on a great piece of land get transformed into a bustling shopping center with office buildings pumping out considerable rents for the owner. 

Absent those cash flows, net present value, you are speculating to some degree or another, no matter what you tell yourself. You will require either substantial inflation in the nominal currency—if you’re using debt to finance the purchase—to bail you out. You could also depend on some sort of low probability event to work out in your favor.

Rental as a Real Estate Investment

Making money from collecting rent is so simple that every 6-year-old who has ever played a game of Monopoly understands on a visceral level how the basics work. 

If you own a house, apartment building, office building, hotel, or any other real estate investment, you can charge people rent to allow them to use the property or facility. 

Of course, simple and easy are not the same thing. If you own apartment buildings or rental houses, you might find yourself dealing with everything from broken toilets to tenants operating meth labs. If you own strip malls or office buildings, you might have to deal with a business that leased from you going bankrupt. 

If you own industrial warehouses, you might find yourself facing environmental investigations for the actions of the tenants who used your property. If you own storage units, theft could be a concern. Rental real estate investments are not the type you can phone in and expect everything to go well.

Using Cap Rate to Compare Investments

The good news is that there are tools available that make comparisons between potential real estate investments easier. One of these, which will become invaluable to you on your quest to make money from real estate is a special financial ratio called the capitalization rate (cap rate).

Cap rates show the rate of return on a commercial real estate investment. It takes its basis from the net income the property will produce.

If a property earns $100,000 per year and sells for $1,000,000, you would divide the earnings ($100,000) by the price tag ($1,000,000) and get 0.1, or 10%. That means the cap rate of the property is 10%, or that you would earn an expected 10% on your investment if you paid for the real estate entirely in cash and no debt.

Just as a stock is ultimately only worth the net present value of its discounted cash flows, a real estate is ultimately worth a combination of:

• The utility the property generates for its owner
• The net present cash flows it generates—relative to the price paid

Rental Income as a Margin of Safety

Rental income can be a margin of safety that protects you during economic downturns or collapses. Certain types of real estate investments may be better suited for this purpose. Leases and rents can be relatively safe income.

To go back to our earlier discussion—about the challenges of making money from real estate—office buildings can provide one illustration. Typically these properties involve long, multi-year leases. 

Buy one at the right price, at the right time, and with the right tenant and lease maturity, and you could sail through a real estate collapse.

You would collect above-average rental checks that the companies leasing from you have to provide still—due to the lease agreement they signed—even when lower rates are available elsewhere. Get it wrong, though, and you could be locked in at sub-par returns long after the market has recovered.

Money From Real Estate Business Operations

The final way of making money from real estate investments involves special services and business activities. If you own a hotel, you might sell on-demand movies to your guests. 

If you own an office building, you might make money from vending machines and parking garages. If you own a car wash, you might make money from time-controlled vacuum cleaners. 

These investments almost always require sub-specialty knowledge. As an example, some people spend their entire career specializing in designing, building, owning, and operating car washes. 

For those who rise to the top of their field and understand the intricacies of a particular market, the opportunity to make money can be endless.

Other Real Estate Investment Ideas

Still, other investment opportunities exist in real estate. You can invest in real estate investment trusts (REITs). Publicly Traded REITs issue shares and are traded on an exchange, while privately held REITs or non-traded REITs are not available on any exchange.

All types of REITs will focus on particular sectors of the real estate market, such as nursing homes or shopping malls.

There are also several exchange-traded funds (ETFs) and mutual funds that target the real estate investor by investing in REITs and other investments in the real-estate sector.

10 Steps to Making Money in Real Estate

One of the earliest lessons that you must keep in mind about making money in real estate is that patience and timing is crucial.

You cannot lose patience and neither should you be in a hurry.

So we decided to make the task even simpler for you with our easy list of how to make money in real estate market.

1. Buy Low

If you want to make money in real estate, you need to keep a hawk’s eye on the overall pricing element. Most importantly, you must be mindful of the price that you buy the real estate property at.

Just like in stock market investment, the key to profit is buying low. Don’t wait for the price to appreciate before you begin to buy the real estate of your choice.

Once you have undertaken a thorough research of the real estate market that you are targeting, you must then begin to pay attention to the buying price.

If the fundamentals and prospects of the property are clear, you must look at the prospect of buying it at the lowest possible price.

Don’t wait for demand to rise so much that you have to pay a premium.

If you want to make money in real estate market, you have to go for the cheapest bargain and then patiently wait for the price to rise.

Appreciation is undeniably one of the easiest and quickest sources of profit in the real estate market.

Whether you are looking at refinancing or selling your real estate property eventually, your extent of profit is directly dependent on the type of rate that you can make your initial investment.

Once you can ensure that you have bought the real estate property of your choice at a significantly discounted rate, and then every bit of appreciation in the price becomes your profit.

Whether you want to sell the property or put it up for rent, appreciation becomes your key armory to maximize profit.

2. Selling at a Higher Rate

Almost by the same logic that buying low helps in the real estate market, you can take advantage of selling higher.

If you are trying to analyze how to make money in real estate market, this becomes the most basic and pertinent lesson to master.

In terms of analogy, think about how you make a commodity or a stock market trade. You always buy when the price is at a discount and when the price appreciates a lot higher, you decide to sell.

This makes sure that you can earn the maximum possible profit from the investment. The same principle comes to play when you consider a real estate investment.

You must always target selling at a higher rate.

Not only should your selling price be higher than the buying price but this price should also help you recover the associated expenses.

For example, buying a real estate involves a lot of associated expenses like registration costs, transactions charges and legal expenses.

So when you are selling the property, you have to make sure that you get a price which covers all these expenses and still manages to book a decent profit for you.

This is the cardinal principle of a great investment strategy and one of the most primary pre-conditions that you must keep in mind in understanding how to make money in real estate.

Selling higher confirms to another primary aspect of real estate market investment, it reflects the premium that your investment commands.

It is a key indicator of the scalability extent of the property you have invested in. If you get a significantly higher selling price, the profit prospect also rises a lot higher.

It also confirms your mettle in identifying profitable opportunities.

3. Rental Income

If you are keen about mastering how to make money in real estate market, one of the simplest solutions is to lease out your property or put it up for rent.

In fact, whether you are planning to invest in a residential or a commercial rental property, the revenue inflow is assured.

However, there are some basic calculations that you must keep in mind to realize maximum value from your rental investment.

The first and foremost aspect of investing in any real estate is location.

The location is often the primary factor that decides the future price appreciation or depreciation of a specific property.

This becomes particularly relevant if you are buying a rental.

Your primary target while investing in this type of real estate is to make money. So in the absence of a suitable and strategic location, you will not be able to command a great rate for the property.

Forget about selling it eventually, if you cannot get a significantly adequate rent, you will not be able to recover your cost.

So whenever you are calculating your income prospect, you must always look at the difference between your initial cost, the daily maintenance and the maximum rent that you can get at any given point of time.

This will, after all, identify the exact extent of profit that you can hope to earn. If you want to make money from real estate, there is another factor to remember while investing in rental properties.

It is the maintenance cost.

You must, on principle, avoid real estate that needs intensive maintenance. This is because the recurrent expenses will eat into your profit from the rent income.

You can almost liken it to transaction charges in the case of stock market dealings.

If your transaction charges are too high, then your relative profit decreases and you would consider this as a bad trade.

Now you must apply the same principle while deciding on an investment in the real estate market. You have to effectively target a rental property that is

1. Available for a bargain
2. Has the potential to command a high rental
3. Is strategically located to make sure you can charge a premium
4. Needs negligible maintenance to maximize profit and limit losses

Therefore, when you are trying to earn profit from a rental investment in real estate market, the profit potential is always maximized by a healthy balance between returns and expenses.

4. Renting in Parts

Now renting real estate also has many dynamics to make it a more profitable deal. One of the easiest options to make money in real estate is by renting out your property in parts.

For example, let’s say you have a duplex; the rent that you can get by leasing it out to a single family will always be less than the amount you can recover by dividing the house into two separate floors and renting them individually.

Another interesting aspect of this kind of real estate rental is that you are able to realize better value for your property.

For example, if you invested $100,000 in the property and have a mortgage payment of $500, a duplex apartment can yield you a rent of $700-800 on an average.

But the moment you convert them to individual floors, you get the flexibility to charge lesser and charge double. So instead of $700-800 for the entire house, you can now charge anywhere between $500-600 per floor.

So on an annualized basis, you get to earn a cool $3000 extra, without any additional investment. Therefore, renting in parts increases the overall returns in the real estate market.

Of course, the location yet again plays a crucial role in determining how much you can optimize the return prospects.

Supposing you have a property close to a college area or a workplace with lots of youngsters looking out for residential options.

Here, of course, you will able to make more money from the same real estate property.

Now compare this with the potential prospects of a residential property in a predominantly business area.

It will undoubtedly have much lesser demand, and the relative rate that you can get from that rental will also be significantly lesser.

5. Increasing Your Net Worth

When you look at how to make money in real estate market, it is, in general, a vanilla concept of how much money you are putting in and how much you can realize from it.

When you put in a lower amount and sell it at a higher amount, you earn a straightforward property.

But what if you do not have the cash required to buy the property? How can you increase your equity even when you decide to invest in a real estate property using a loan?

Here your initial expenses include not just the price of the real estate property but also the financial charges that your incur.

So you can increase your net worth in this case by simply investing actively in rental properties.

The rental should be such that the rent should cover the maximum mortgage payout and it should still offer you a decent profit.

In this case, you generate some extra cash from investing a set amount. This extra amount that you generate can be used for making further investment in real estate.

So let’s say that you used a mortgage to finance a commercial rental. Now you saved whatever additional income the rent generated every month.

At the end of a year or even two years, you used this amount to buy another rental real estate, be it commercial or residential.

The basic idea is, therefore, for the same amount of money, you can generate additional wealth or in other words, make money from the real estate investment that you are engaged in.

This is often considered the ideal kind of return that you can expect from the real estate market.

However, for this, you need to be very alert about identifying potential properties and observe financial discipline in reinvesting this amount effectively.

6. Leverage vs Returns

If you want to get higher returns, the real estate market can offer the most sustainable and relatively higher returns over the longer term.

What makes the deal even better is increasing your relative leverage in the entire investment.

Let us take an example to understand this point a lot better.

Let us assume you invested in a property worth $100,000.

For this, you are leveraged about 20%. However, when you are receiving the real estate value, you will get the entire 100% on the real estate property that you are invested in.

Let’s assume that you are able to generate a rent of $700-800 and have a mortgage payout of $500.

So the balance $200-300 becomes your absolute profit on the real estate. 20% leverage on a $100,000 property means, your initial investment is close to $20,000.

On the other hand, the relative annual return is close to $3000-3500.This means you are generating over 15% returns on the basis of a simple 20% leverage.

Now think of any other investment tool that can help you make money to this extent, given the leverage that you have in the market.

Additionally, given the long-term nature of the investment pattern in this market, you get much higher returns on a higher leveraged investment.

Also, this kind of investment pattern gives sufficient leeway to investors to leverage a relatively higher amount and optimize the overall profit that you can earn from the specific investment tool.

As an investor keen to understand how to make money in real estate market, the leverage -return balance is most evenly poised in case of the real estate world.

As an investor, you get a lot more opportunity and have a relatively limited risk, even while leveraging a higher amount.

7. Tax Liability

Real estate laws are different in every country, but on an average, every country provides some kind of rebate or tax advantage on potential real estate investment.

If you want to understand how to make money in real estate market, it is very important to gain a comprehensive understanding of the tax implications of real estate investment.

For example, you must understand the types of real estate investments that can yield maximum value.

If the government has a higher tax rebate for residential vs commercial properties, you need to fashion your investment accordingly.

Also, if you realize that in residential real estate investment, rentals have better return prospects but purely residential options have a higher tax advantage, you would again need to recalibrate your investment decision.

You have to take into account the various costs and income prospects, and then take a call on the possible real estate investment that gives you the best value for money deal.

Often an inaccurate understanding of tax liabilities can erode your profits significantly.

You might end up paying a lot more tax than the actual profit that you might earn from a specific investment that you might have made in the real estate market.

Proper and detailed study of the tax implications can easily help you counter that type of losses.

8. Profit from Refinancing Opportunity

When you look out to make money from real estate market, the possibilities are numerous.

The trick is how alert and vigilant you are in identifying these and capitalizing on them.

One of the best ways that you could try to make money from real estate is undeniably by taking advantage of the profit that you make once your refinance your real estate property.

In case your mortgage bill comes down significantly after refinancing the property, but the rent remains the same as before, the difference easily becomes your profit from refinancing your real estate investment.

What this essentially does, it generates a significantly large cash flow fro the same investment and irrespective of ups and downs in the real estate market, your profit remains constant in this case.

You can look to reinvest this profit back in the real estate market and expand your overall equity. Or else you could also look at preserving cash and increasing your cash flow in the market, depending on your preference.

The moot point is this becomes one of the most convenient ways to generate additional cash or make more money from real estate.

9. Commercial Property

So far most of our how to make more money from real estate was biased significantly towards residential real estate, both rentals as well as holding property.

However, commercial real estate remains one of the most under-utilized avenues of booking profit in the real estate market.

The billing rate and the profit parameters of commercial real estate are very different from residential.

This difference can enhance the profitability of this kind of investment in the real estate market.

You must understand that commercial properties gain value based on two primary factors, location and strategic importance.

So the cardinal rule while investing in commercial real estate is undeniably location.

Whatever you might consider and however cheap rates you might be getting for; it is never wise to invest in commercial property in an underdeveloped area with low prospects of business activity.

The problem that you would face is this type of real estate investment is that the rate of appreciation would be much slower and the average rate of a slump in rates will be higher in case the market sees a downturn.

Moreover, commercial properties are interesting real estate investments for the kind of value that they encompass.

However, in the absence of a suitable locality, this value gets eroded significantly, and you might even reach a state where you would try hard to get rid of it even at a loss.

This type of eventuality can be avoided, and you sure can make more money from your real estate investment if you are careful about choosing the location of the commercial property, and at the same time, able to gauge the business prospect of the area accurately.

10. Investing in Real Estate Land

Perhaps when you talk about how to make money in real estate market, this is one aspect of real estate investment that absolutely escapes your attention.

Yes, we are talking about investing in a land where you can build real estate. But then again in case of land too, the same prospects lead to price gain or depreciation in value.

It is possible to buy under-developed land and then sell it at a premium when the area and the land get developed.

Your basic principle of buying low and selling high comes into play in this context.

Once the real estate developers start raising buildings- residential/commercial, depending on the need, the value starts rising, and you can hope for sizeable returns on your initial investment.

You could also consider investing in agricultural land or mineral rich land.

Depending on the mining activity that is undertaken or the agri-initiatives by the landowner, the relative value of the land could shoot up rather high.

Here again, locality and the prospect of the growth play a crucial role in determining how much money you can make from this type of investment.

How Long Does it Take to Make Money From Real Estate

The first thing you have to do if you want to sell houses is get your real estate license. Go to the website for your state’s Department of Real Estate or Bureau of Real Estate and find a list of approved online or in-person real estate courses.

Some people prefer the flexibility of online classes where others focus better out of the house in a classroom. Either way, you can count on studying for at least several months and up to year.

Once you’ve finished the classes you can take the state’s official test to become a licensed real estate salesperson. The test isn’t cheap, so be sure to study hard before signing up (in California, for example, it’s $60 for the test and $245 for the license).

Before you invest significant time and money on a Realtor course, you might take an introductory course on Udemy on selling or investing in real estate. Courses range from free to about $35. They won’t count towards licensure, but are an inexpensive way to test the waters.

The hardest part of building your real estate business is developing clients. It takes a long time. If you dive into real estate full-time — putting up all the money for training and start-up necessities — you may find it takes six months to sell your first house.

How do New Real Estate Agents Make Money Fast

While getting a real estate license might not be that challenging — it’s a lot easier than going to law or medical school, for instance — getting started in the business is hard.

Read Also: Starting Real Estate Investing With Just $500

Many new real estate agents find out very quickly; just because they have a license, doesn’t mean they know how to make money in the business.

Furthermore, the commission-only nature of most real estate agency businesses means you’ll go a while without a paycheck since you have to wait for a deal to close before you can get paid.

Choose an Office

The first step in making money in real estate quickly is to choose a good office. In a good office, you’ll have a brand that can help open doors for you, as well as a head broker that can help guide you in the business.

If you can find a mentor that will give you some training — and maybe throw you an occasional lead — that’s even better. Finding a place that will help you get the knowledge and the mindset that you need to succeed will help you propel yourself to earnings.

Work an Open House

Whether or not open houses are useful for selling listings is a matter of debate in the industry. What isn’t debated is they can be a good place to meet prospective buyers.

See if another agent will let you help her work her open house and, if she will, you’ll be in a position to meet any buyer that comes through the door. If he isn’t already working with someone, you can take him as a client. While not every person that goes to an open house is a motivated buyer, many are.

Use Your Connections

Successful agents make their money, to a large extent, off of referrals. Since you’re new, you can’t lean on previous clients to help you make a living. You can, however, use people that you already know as a source of opportunity.

Working your network to see if anyone you know is thinking of selling or, if not, if anyone you know knows of someone that is ready to transact, you may be able to turn that connection into a relatively quick paycheck.

Find Cash Investors

If you can find all-cash investors that are actively buying properties, they might be your best path to fast cash. Investors are typically knowledgeable and resolute.

While some might write low offers that are hard to get accepted, their ability to close with cash brings the seller the certainty of not having to wait for a bank to approve the loan.

It can also get you to the closing table more quickly — meaning you get paid. To attract these investors, you may need to be able to bring them an advantage.

One example is to bring them properties that hit your listing service before anyone else does. If you have off-market properties to show them, it may also be a way to draw them in.

Finally

Making money in real estate takes the right systems and a little determination. But if you put in the work, you stand to make a good amount of cash while diversifying your portfolio.