How to Make Money in Real Estate: 8 Proven Ways You don't need an enormous amount of capital to find and execute lucrative deals.
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Real estate may have produced more wealth than any other industry, but people still remain skeptical about entering into the fray. Many misconceptions float around, and most think they need to start with some sort of capital, but that's not always the case.
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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, you can make money in real estate, even if you're just starting out.
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In this article, we've got everything you need to know about entering the real estate industry, including:
- What you don't need to generate income
- Ways to make a living in real estate
- Strategies for generating an income
- Some key terms and some success stories
A Real-Life Real Estate Success Story
Still skeptical? Take the true 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 bring them together. Today, he flips over 1,000 real estate properties and manages 5,000 through his company.
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. But both are difficult if you don't know what you're doing. When you get the lay of the land and understand the path forward, you can make strides.
Here's What You Don't Need To Generate an Income in the Property Market
1. 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 started with no credit or even poor credit.
2. 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 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 to home renovations as long as you're good at finding the money.
3. 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 to do this, but 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.
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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, while you can generate an active income by flipping contracts, doing renovations, or adding value in another area — such as putting together property development deals.
Passive income is income you can earn that basically runs itself. While it might not happen overnight, sticking with the right property can earn you some lucrative passive income. Active income is a more traditional way to make money, meaning that you perform a task and earn an income in a specific time frame. Neither type of income is better than the other — it's all about what you prefer. Another great aspect of real estate is that you can certainly earn a living on both types of income.
It might seem overwhelming at first, but it won't be as intimidating once you gain experience and better understand the various types of real estate. Read on for the FAQs most people have when they consider making money in the real estate industry.
1. How can I invest in real estate with no money?
You can utilize a variety of methods that includes any of the following:
- Seller financing through lease options
- Trading fixed assets
- Taking over someone else's mortgage payments which 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
- Real estate crowdfunding platforms
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2. How does a real estate investment work?
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. This can work for both long-term residential and commercial rentals, as well as it will work for short-term vacation rentals.
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3. 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 human history.
4. What is a wholesale deal in real estate?
Wholesale is akin to flipping properties, except flippers never take ownership of the home when you flip real estate contracts. You can learn the specific strategies for doing this from REWW and other data aggregators for the wholesaling market.
5. What are the most common types of real estate investment properties?
At the beginning of their real estate career, most people like to focus on one type of real estate to invest in. Then, once they've gotten the hang of it, they'll grow their investment portfolio.
If you aren't sure which type of property is right for you, consider these common types of investment properties:
- Single-family homes
- Multi-family homes
- Apartment buildings and complexes
- Office buildings
Continue reading for more information on why these options can make great investments.
8 Primary Strategies for Generating an Income From Real Estate
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, and that 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 mind: location, location, location.
Yes, you've heard it before, but the location is everything when it comes to real estate. Not only does this apply for actually an increased asset value over time, but also to 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 investment properties to acquire.
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 then holding that property for the long term. Depending on your personal situation, you can easily grab that property for a very low 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 could be 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 can be 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 housing market is climbing because you're creating a pre-set price at which you can later purchase the property.
If, for example, the property market climbs substantially, you can buy that property at a discount. You could also 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 could very well turn a profit.
3. Home-Renovation Flips
The culture of flipping houses has exploded. Thanks to the popularity of home renovation shows, we're experiencing a massive boom in the traditional renovation flip market. While there can certainly be 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. The purchase price is where the real property value is. 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 an on-site tour of the property. While buying site unseen at an auction might seem alluring, unless you really know what you're doing, you could lose money. However, making money on a home-renovation flip can be rather straightforward — as long as you understand the underlying costs and potential value.
John and Julie Wakefield, a husband-and-wife flipping team who've done hundreds of flips, say something similar. They advise you 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 with 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, then bring them together. While locating a distressed seller might seem complicated, 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 can be a great opportunity to make a quick profit without investing in 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 site-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 because the bank is engulfed in a bad investment. But don't expect to get the property for a steal -- you'll still 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 lowball too far.
6. Vacation Rentals
Rental income from vacation properties can 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 Angeles, Miami, and other tourist hotbeds are well known for having a high demand for these short-term rentals.
I've long been a firm believer in the vacation rental market. The best part? You don't even need to own the properties to make money. Some of the world's most successful property management companies specializing in vacation rentals don't own the homes but 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 utmost satisfaction. Go above and beyond for anyone staying at the homes you manage. And see how you can help to take some of the time and stress off of the present owners' existing rental businesses. 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 who normally wouldn't qualify for those loans. 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 close your first deal, you could turn to a hard money lender. If you have what you feel is a "sure thing" but lack the capital, this could be your best bet.
You could also become a hard money lender, but you'll need some capital. This likely isn't going to be the first way you start out making money in real estate, but as you build your network, 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 successfully identify the right deals, provide a small amount of money and generate a high success rate, you can likely find investors to come on board without much difficulty. The interest rates here make sense. There's more risk but also more reward. It can 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 on developing them and adding value to properties to increase their net incomes through renovations and upgrades. They also consult on projects that might take more seasoned real estate investors to see to fruition.
Ali Safavid, the founder of 5209 Investments, says commercial real estate is one of the most lucrative sources of 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.
People always need office space and retail to run their businesses. These physical locations are the bread and butter in the real estate niche. As you grow, you can find ways to open up shopping malls and develop large-scale buildings. But you have to start somewhere.
Looking for Even More Options? Consider REITs
If you've ever considered dabbling in the stock market or already love it and want to combine that love with your new interest in real estate, then REITs are worth the research.
REITs (Real Estate Investment Trusts) are publicly traded securities registered with the SEC. This type of investment is traded like stocks and is meant to result in income-producing real estate.
The other facts you need to know about publicly traded REITs are:
- They receive special tax considerations
- They're meant to offer investors high dividend yields
- You must invest in real estate assets like property rent and mortgage interest
- The REIT payout must be 90% of its annual taxable income in dividends
If REITs sound like something you want to know more about, consider their pros and cons below.
Pros of REITs
- Potential for higher yield
- Listed on national exchanges for accessibility
- More diverse than bond and stock market cycles
- Work against rising inflation rates
Cons of REITs
- Follow the same risks and fluctuation of the real estate market
- Sensitive to changes in interest rates
- Dependant on occupancy rates
- Can be limited by geographic region
While there is an understood amount of risk in any new business you enter, REITs can certainly be an investment strategy worth your time. REITs are another way to diversify your real estate investment portfolio.
While they might not be the ideal option for beginners, with avenues in commercial property, residential property, and more, look to REITs to bolster your future real estate career.
There are many misconceptions when it comes to the real estate industry. While real estate might be a hustle at the beginning of your career, it can prove to be a lucrative, self-running business once you get the hang of it.
Remember that you don't need credit, capital, or major assets to get through the door. There are so many options when it comes to lenders, crowdfunding, and partners. While you need to thoroughly research who you get into business with, having a partner or resource in the industry can be a great asset.
When you're ready to dive in, take some time to see which area of real estate you're most passionate about. It always helps to love what you do, even when it is a grind. Whether it's long-term residential rentals, vacation rentals, or house flipping, find the one that best matches your personality, interests, goals, and lifestyle.
There is room in the real estate business for you. Do your research, create a plan, and start your path toward making money in real estate.
Explore Entrepreneur's Real Estate resources here for more advice and information on the real estate business.