8 Proven Ways to Make Money in Real Estate
Real estate has produced more wealth than any other industry in the history of time. However, people still remain skeptical about entering into the fray. Most think that they need to start with some sort of capital. That's clearly not true. The one magic power you do need is to be able to find the money. And we're often not talking much to open up escrow. If you know what you're doing, then you can make money in real estate even if you're just starting out.
Don't think so? Take the story of Kent Clothier for example. Clothier opened his first escrow for $500. All he did was find a distressed home and a motivated buyer and brought them together. Today, he flips over 1,000 properties and manages 5,000 through his company, Memphis Invest. Dean Graziosi, another one of the most successful real estate investors in the world, has a similar story.
Graziosi grew up in a trailer park. He lived in a bathroom for a year with his dad when he was 12-years old. He had no advantages. No startup capital. No help from anyone. But somehow, he managed to make money in real estate and owns well over 400 properties in his portfolio today. There are plenty of other examples of this as well. The point? You don't need a lot of starting capital to make money in the real estate industry. But you do need the knowledge and the know-how.
Most people think that it's easier to make money online than it is to make serious coin in real estate. Well, both are difficult if you don't know what you're doing. But when you get a lay of the land and you understand the path forward, you can make strides. Now, here's what you don't need to generate an income in the property market, which likely will shatter any limiting beliefs you might currently have about the subject.
You don't need credit: Even if you have poor credit, there are ways forward if you're committed enough. Several of the methods discussed in this piece don't rely on credit whatsoever. In fact, many successful real estate investors such as Justin Colby, Kent Clothier and Dean Graziosi, got rich in real estate while starting with no credit or even poor credit.
You don't need significant capital: You don't need capital to make money in real estate beyond a few hundred dollars to open escrow. Of course, this means going for the lower-priced homes or distressed properties and flipping contracts. It also means finding hard-money lenders or other investors that can help you push deals through. This could even apply for home renovations as long as you're good at finding the money.
You don't need major assets: There's another misconception that you need to put up major assets in order to secure a contract or purchase a piece of property. You don't need this either. You do need to understand how creative financing works. Most people simply stop dead in their tracks because they have this belief about what they need in order to get started.
How to make a living investing in real estate.
When it comes to real estate income, there are two ways to generate cash. You can generate passive income by buying and holding. And you can also generate an active income by flipping contracts, doing renovations or adding value in another area such as putting together property development deals. It might all seem overwhelming at first, but it's certainly not, especially when you get a lay of the land.
Now, when most people think about making money in the real estate sector, they ask the following types of questions:
How can I invest in real estate with no money? The answer? You can utilize a variety of methods that includes any of the following:
- Seller financing through lease options
- Trading fixed assets such as cars, jewelry and so on
- Taking over someone else's mortgage payments who might be in a distressed situation
- Bringing in an investment partner with cash
- Borrowing from a bank or getting a hard money loan
- Taking out a home equity line of credit
- Utilizing a peer-to-peer lending network
How does a real estate investment work? The answer? Real estate investing works on the concept of cash flow, which means that your income has to exceed your outgoing expenses. This is known as a positive cash flow. Now, this can work for both long-term residential and commercial rentals just as well as it will work for short-term vacation rentals.
Is it good to invest in real estate? Absolutely. This is one of the sources (aside from being a business owner) that has generated the most wealth in our history.
What is a wholesale deal in real estate? Wholesale is akin to flipping properties. Except, you never take ownership of the home when you flip real estate contracts. You can learn the specific strategies for doing this from REWW, one of the largest data aggregators for the wholesale flipping market.
With that being said, there are 8 primary strategies for generating a real income in real estate. Whether you can earn a passive income or active income depends on the strategy that you implement.
1. Long-term residential rentals
One of the most common methods for making money in real estate is to leverage long-term buy-and-hold residential rentals. People will always need a place to live. Plain and simple. This means getting involved with rental properties. You need to do the proper amount of due diligence to source your property by keeping three principles in your mind: location, location, location.
Yes, you've heard it before, but location is everything when it comes to real estate. Not only does this apply for actually an increased asset value over time, but also in your ability to quickly rent that property to a long-term tenant. When you're considering long-term residential rentals, look for a great location. That's more important than the current state of the property itself. In fact, run-down homes in great locations are one of the best investments you can make.
This involves a more traditional approach to making money in the real estate market. It means buying a property with some cash on hand to make a down payment, and actually holding that property for the long term. Now, depending on your personal situation, you can easily grab that property for a very low down payment or even no down payment. That's especially true if this is a pre-existing, income-producing property.
If there's positive cash flow in a residential rental, then it makes a great investment. However, you'll likely not find that too easily, unless the current owner is unloading for personal reasons due to a divorce or other need to liquidate that property that necessitates having some cash on hand.
2. Lease options
Lease options are a great way to get involved in real estate without having to put up a significant amount of capital or even have great credit at the outset. You're leasing with an option to buy. This tends to work well when the real estate market is climbing because you're creating a pre-set price that you can later purchase the property at.
If, for example, the property market climbs substantially, you can buy that property at a discount. You could also potentially turn around and sell your rights for that purchase to someone else. The clear bet here is on the bull market in real estate. As long as this is an option you can exercise and not something set in stone that says you have to purchase at the end of the lease regardless, then you can just about guarantee you'll turn a profit.
3. Home-renovation flips
The fix-and-flip culture has exploded. Thanks to the popularity of home renovation shows, we're now experiencing a massive boom in the traditional renovation flip market. While there's certainly a lot of money to be made here, navigating these waters in the beginning can be tricky. When you lack the knowledge or the experience, you could find yourself on the losing end if you don't select the right home.
Matt Larson has flipped more than 2,000 homes in Iowa and Illinois. Over the course of that time, he's learned some lessons on what to look for and what not to look for when flipping a home with a renovation. His advice? Go after the ugliest homes in the nicest neighborhoods. That's where the real value is. But the other difficulty here is not only finding those homes when you're not well-networked with real estate agents, but also understanding your after-repair value.
How much will the home be worth once you've invested in fixes and repairs? To accurately determine that you need a strong relationship with a general contractor and actually tour the property on-site. While buying site-unseen at an auction might seem alluring, unless you really know what you're doing, you could lose your shirt. But making money on a home-renovation flip, as long as you understand the underlying costs and potential value, is rather straightforward.
John and Julie Wakefield, a husband-and-wife flipping team who've done hundreds of flips, say something similar along the same lines. They advise not to bite off more than you can chew. And more importantly. You should look for creative ways to help others. Success as a real estate investor has as much to do with how creatively you can solve problems as it does how well you can crunch the numbers.
4. Contract flipping
One way that you can make money from real estate without having to put up very much capital or credit is to flip contracts. All you have to do is find a distressed seller and a motivated buyer and bring them all together. While locating a distressed seller might seem difficult, Clothier has systemized the entire process for doing this. The trick with contract flipping is to identify the distressed seller and locate a ready-to-go buyer.
By bringing these parties together, you've cut out the need to go hunting for a buyer after you've entered a contract. That situation presents more risk. Instead, by locating the sellers and the buyers beforehand, you can easily enter into a contract with the confidence that you won't get stuck having to close escrow on the property.
To do this, you have to be able to identify either vacant homes or homes that are behind on their mortgages. That's the tricky part. You're effectively trying to find distressed sellers. But homes that are already vacant are primed for an opportunity like this.
5. Short sales
Short sales occur when the current owner of their home is behind on their mortgage, but the property hasn't yet entered into foreclosure. In order for this to happen, all parties have to agree to the transaction since the property is being sold off for less than is owed on the existing mortgages. This is a great opportunity to make a quick profit without investing into lengthy renovations.
However, succeeding with short sales or any other default-type auctions, is often tricky. You usually need to pay for the homes outright in cash and sometimes that has to happen sight-unseen. Short sales are better than auctions because you get a chance to check out the home and enter into a negotiation process. Unless you're a seasoned investor, jumping in without an inspection and complete review could be risky.
Short sales take time. But, they can be well worth the wait. The potential return on a short sale can be instantaneous. Tens of thousands to hundreds of thousands of dollars can materialize as soon as the property purchase goes through. That's because the bank is engulfed in a bad investment. But don't expect to steal the property. You'll have to negotiate a relatively fair price. Depending on how badly the bank wants to unload that property, it could sit around and wait for another buyer, so don't try to low-ball too far.
6. Vacation rentals
Vacation rentals present a lucrative path to profits in the real estate marketplace. Not only can you make some side hustle income from vacation rentals, but you could potentially make a significant amount of money and build up a substantial passive income stream if you're in a highly-trafficked tourist locale. Places like Los Angles, Miami and other tourist hot-beds are well known for having high demand for these short-term rentals.
I've long been a firm believe in the vacation rental market. The best part? You don't even need to own the properties to make money. Two of the world's most successful property management companies that specialize vacation rentals like Joe Poulin's, Luxury Retreats or Michael Joseph's, Invited Home, don't actually own the homes. But they do provide a high-end consumer experience.
How do you participate? Leverage existing relationships with owners in your area. Network with others. Build bonds. Create systems. Ensure the upmost satisfaction and go above and beyond for anyone staying at the homes you'll manage. And see how you can help to take some of the time and stress off of the present owners' existing rental businesses. Or, if you have a property, list it on a site like AirBnB, HomeAway, or FlipKey before managing vacation rentals for other owners.
7. Hard-money lending
Hard-money lenders provide short-term loans to people that normally wouldn't qualify for those loans. Now, in order to participate in hard-money lending, you'll need some capital behind you. These are loans that are often at high interest rates because they're for very brief periods. To get your first deal done, you could turn to a hard money lender. If you have a "sure thing," and you lack the capital, this is your best bet.
However, you could also become a hard money lender. Now, that means you'll need some capital. And this likely isn't going to be the first way you start out making money in real estate. But as you build your network, your capital and a solid portfolio of deals, you could provide these bridge loans and make a great rate of return.
Even if you lack an enormous amount of capital, as long as you can successful identify the right deals, provide a small amount of money and generate a high success rate, you can easily find investors to come on board. The interest rates here make sense. There's more risk, but also far more reward. It's a way to keep your cash fairly liquid and generate a nice profit in the short term without having to wait years and years for those returns to materialize.
8. Commercial real estate
One of the great opportunities in real estate for making a considerable amount of money is to invest in commercial real estate. Commercial real estate developers focus not only on flipping properties, but also in developing them, adding value to them to increase their net incomes through rehab or renovation and upgrades, but also through consulting on projects that might take more seasoned real estate investors to see to fruition.
Ali Safavid, founder of 5209 Investments, one of the largest commercial real estate developers on the West Coast of the United States says that commercial real estate is one of the most lucrative sources for both income and profits in the real estate market. As long as you can find ways to add value to the exchange, investing in commercial real estate can be one of the largest income generators you'll find.
People always need office space and retail to run their businesses. These physical locations are bread and butter in the real estate niche. As you grow, you can find ways to open up shopping malls, develop large scale buildings, and more. But you have to start somewhere.