When you’re investing in stocks, bonds, or real estate, something you might ask yourself is: “how long until I can get returns?” “How can I make the most money investing in real estate?” This post is part of our Real Estate Investing Basics Series, and we’re here to tell you three ways to make the most money investing in real estate. For more posts in this series, check out:
- Best Property for a 1st Time Buyer- Real Estate Investing Basics
- Real Estate Investing Basics- How to Find the Best Realtor
- Real Estate Investing Basics- Buying Your 1st Property
Understanding The Importance of Cash Flow
Cash flow in real estate is amazing if you do it right. You have the possibility to replace the income you earn from your job. Say you’re making $2,000-$3,000/month. If you start getting into real estate investment, you could be making double your previous income from the cash flow of your rental properties.
It’s important to note that there are different ways you can make money from owning real estate.
When you invest in real estate, you’re getting physical land/property. There are a few ways to make money from real estate:
- You can lease out your property and collect rent, creating passive income through your cash flows from rent.
- The land/property can appreciate (due to location, development, or improvements), and you can sell for a profit.
We’re talking about the first way, making money through collecting rent.
What About Cash Flows from REITs?
Profits from REITs are not the same as passive income cash flows from owning a rental property.
A real estate investment trust (REIT) is a company that owns, operates, or finances properties. 90% of the profit from REITs must be distributed as dividends to shareholders, so they can be a good investment opportunity.
So when you invest in a REIT, you are investing in a real estate company. You do not own any of the properties, but you own a piece of the company which owns the properties.
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#1: Buying Real Estate Correctly
As mentioned before, you can make money through appreciation or cash flow. It all starts with buying the property. You want to be able to buy a property that will either have the opportunity for appreciation or to acquire positive cash flows.
Part of that is doing your research and finding a property in the right place at the right price. Ensure that you are not overpaying for your property because it can yield decreased returns from appreciation or your monthly rent cash flows will now outweigh your mortgage.
Buying correctly also means that you’re buying the right location. The condition, price, and size of a home- nearly everything about it- can be changed. But the one thing that can never change is the location.
School districts, neighborhood safety, proximity to city centers, are very hard things to change, which makes the location of the home very important.
When you buy right you give yourself a cushion for mistakes as a beginner. You have that wiggle room so you won’t be put underneath your house value. When you buy right, it allows you to compound that return you were going to get anyway.
What does it mean to buy right?
- looking for investment properties (think: multifamily duplexes)
- finding the best neighborhood for investments
- looking at sale comparables to get the right price
- doing your due diligence
#2: Using the Right Type of Money
When you go and buy your property, using the right type of money, finding the correct interest rates and amortization is key. What matters in real estate is the cash flow, and you don’t want to be in a loan that has too high of a monthly payment that drains your monthly rent cash flows.
You should be making money on the money you invested in- that’s the whole point!
What is mortgage amortization?
Mortgage amortization is basically the pay structure of how you pay back your home loan (called a mortgage.) The way that most mortgages are structured is so that your earlier payments are comprised mostly of interest and less debt, and then towards the later years, more of the monthly payments go to debt than interest.
The shift from mostly interest payments to mostly debt payments is a characteristic iconic to an amortized mortgage.
Note: this doesn’t mean that your monthly payments are different every month unless you plan on doing a balloon payment. Your monthly payments will be the same, just what percentage of it is interest vs debt will change.
If you want to invest in real estate for no money down, check out our series on this topic:
- How to Get Into Real Estate With No Money Down-Seller Financing
- How to Get Into Real Estate With No Money Down- Hard Money and Gift Money
- How to Buy Real Estate With Credit Cards
#3: Real Estate Appreciation
A property can appreciate due to a variety of factors, whether you improved the home, or the location that the home is at is more valuable. Homes in urban areas typically have higher rates of appreciation due to the migration to urban areas and the consequential higher demand.
You have to know what is driving appreciation to help form your investment strategy. Jobs will create appreciation in the market. Jobs bring people to the area which creates increased demand.
A prime example of this is when Tesla moved to Austin. Tesla, a giant company, brought along all their employees and their employees needed housing.
This move encouraged other Silicon Valley companies to move to Austin and the job and housing market exploded. There’s now a shortage of housing in the Austin market.
There’s a direct correlation between the job market in your city and the amount of return you’ll get from your investment. You may not be able to invest in the city, but you can invest in a suburb where people may want to live and commute from.
Don’t forget about the benefits that real estate will give you in reference to taxes. Writing off expenses, and depreciation can give you the returns you’re looking for.
To Wrap Everything Up…
To make the most from your invested time and money, be sure to follow the three tips mentioned earlier:
- Buy the right kind of home. Pay attention to the location, the opportunity for growth, and the price you pay.
- Finance your property purchase correctly. Leverage the purchase in the way that works best for you, and use debt strategically when you can.
- Understand the market to help capitalize on depreciation. Use the job market as a guide to finding future hot housing markets.
Investing in real estate will allow you the opportunity to have the financial freedom you deserve, but there are many barriers and challenges to real estate investment. The Orlando Academy created a “Real Estate for Beginners” course, based and designed around Orlando Miner’s 10+ years of real estate investing experience. With over $500,000,000 in transactions closed, the program has been proven to work over the last 15 years.