When it comes to investing in real estate, the overall goal is to make money. Your money should be working for you today and growing for the future. It’s really as simple as playing Monopoly … buy a property, generate an income (make a profit), buy more properties, eventually sell (at a profit) in the future.
Remember, simple is not the same as easy.
The aim is to make more money in the future. This means your property has to make enough income to cover the costs of running it, such as mortgage payments, taxes, insurance, maintenance, management and any repairs that need to be done.
Four Ways Real Estate Investors Make Money
Many people think that money is made in real estate when it is sold, or through its appreciation. In fact, there are four different ways to make money investing in real estate, and appreciation is probably not the best one:
- Appreciation – properties usually appreciate over time, but it is not always guaranteed. A gain in value of a property is capital appreciation, and is often caused by a change in the market that makes your property and the land it’s on more valuable. Appreciation is determined by the market, and there are times when a property’s value decreases, or depreciates. Investing solely for appreciation is much more difficult than investing for cash flow income.
- Cash Flow Income – when you buy a rental property, you earn income from the rents being paid by your tenants. Ideally, the property you own should make more money than you have to pay to run it. Not only is this easier to control, but it gives you a steady stream of income from your rent and your property appreciates at the same time.
- Real Estate-Related Income – this type of income is earned by professionals working in the real estate business. They may own properties, but they also earn income from working with property. Examples of professionals who fall into this category are Realtors who earn a commission when properties are bought and sold, and property managers who are paid based on the services they provide to the owners properties.
- Ancillary Real Estate Income – many apartment building owners generate this type of income on top of the rents being paid by their tenants. Coin-operated washers and dryers, vending machines and parking spots are all examples of incomes being produced due to the property and its tenants. These are really small businesses operating within your real estate business due to the fact that you are providing a service to your captive audience … your tenants.
When you are looking at properties to purchase, or even those you already own, it’s important to consider all income streams. In the cases above, some will be coming to you, but others you may be paying. Your goal is to earn as much money as you can from your real estate, so adding or subtracting some of these types of income may improve your bottom line.