How to Make Money Investing in Real Estate

What is Investment Real Estate vs. Appreciating Real Estate:

If you want to make money investing in real estate, then this article is for you. Real estate can be a great investment for everyone, even everyday homeowners! No need to be an investor mogul in order to make your money work for you. Really, that’s the point of buying versus renting. Renters’ terms are subject to change, generally, increasing over time. When you buy a property, it is no longer subject to the negative side of inflation or interest increases. Your loan payments, or your hard cash, are locked into a time capsule so long as you hold onto that property.

Primary Residence

Firstly, let’s make a distinction between the definition between a primary residence and investment property. A Primary Residence is a place where you live for at least two years. It can definitely be a safe investment, but it’s different from a property with the sole purpose of investing. The main benefit of using your primary residence as an appreciating asset is that there isn’t much risk involved. This is important, especially if you are first getting started with investing because you could be putting all or most of your money into it. However, you can hold onto the property for as little or as long as you need to. There’s always a chance the market could drop, but you would be protected so long as you hold on through the low period. Generally speaking, most property values will continue to rise gradually over time.

If desired, you could even jump to a new property every two years to avoid the capital gains tax that applies to investment properties. That way you build your assets by taking advantage of appreciating areas. Of course, your primary residence could also be a long-term investment.

Investment Property

Alternatively, the other side of real estate investing (REI) is Investment Property. An Investment Property is a property that is not your primary residence, or that you didn’t live at for more than two years. Its main purpose is for generating income. For instance, rental properties, property flips, multi-family homes, and building complexes fall into this category.

Real Assets Protect You:

In an increasingly uncertain world, physical assets are more important than ever. Long-term, liquid money is subject to inflation, meaning it can quickly lose value. Even if inflation doubled, which happens about every thirty years, the property would also double in value while the mortgage stays the same. This is why you should make sure your loan terms are fixed and not variable. A lender might try to talk you into a variable interest rate because it can look deceptively low. However, it’s better to have the security of knowing that your loan terms will never change.

Physical assets are safer over time than liquid cash. Plus, you still have the option of accessing liquid cash from the property via equity loans. Equity loans typically offer lower interest than other types of loans, such as credit cards. In practice, it’s wise to have a balance of both real assets and liquid cash because there is still some risk involved in borrowing against your property.

Three Simple Ways to Make Money Investing in Real Estate:

Owning Rental Property

There are many different options for owning rental properties such as single-family homes, vacation rentals, Airbnbs, shared residences, duplexes, and apartments. You can choose whatever setup is ideal for your personal scenario. For instance, a vacation rental could be the best option to produce rental income if the house is located in a popular seasonal area. Rather, maybe you would prefer a duplex or a shared residence to offset your own mortgage. Do keep in mind that most municipalities have laws in place to prevent you from renting without meeting permitting and zoning regulations. So, be sure to consult with a real estate attorney or your local building department if you are interested in taking this path to financial freedom.

Appreciation

Appreciation is an increase in property value. When you buy and hold property, it has the potential to produce a profit when it appreciates in value. Both rentals and primary residences can experience appreciation that will help you make money investing in real estate. Most properties that are properly maintained and located in sought-after areas will appreciate because real estate is a limited resource. Therefore, demand increases along with the population. Particularly, that’s why it’s ideal to choose an area experiencing growth and development. For example, I bought a property in Santa Barbara many years ago before it became highly esteemed. I had a good feeling that it was only a matter of time because that town was in a prime location right on the water. Appreciation doesn’t have to be that extreme, though. It can also occur in an area that is experiencing steady development or that’s near desirable features. Start by doing research on the historical property values in that area. These kinds of records are publicly available through the US Census or other researchers.

Flipping and Remodeling

Improving a property is another way to increase its value. There are many different avenues to accomplish this, depending on your time and financial restraints. Many Americans have the “HGTV” bug, but quick flips are not the only way to make a profit. You can just as easily work on your property at your own pace, on whatever scale feels right to you. Some people are quite handy or may know how to get a good deal on remodeling work. Something as simple as new paint and flooring has the potential to give you a nice return on investment. Most buyers avoid homes that need minor cosmetic work because they want something move-in ready. Luckily, they will pay a pretty penny to get that, usually more than the work costs. Where others see work is where you can find worth.

Especially if you’ve got a team of contractors and the desire to handle large projects, then more power to you! In fact, I had a team of people whom I did several property flips with at one point. It was a great experience that made sense to me since I already had a close relationship with real estate. Having a group of people you can rely on is the safest way to make fast cash on larger remodeling projects. Contractors have to stay focused, and the investors must remain communicative.

Tax Benefits:

As always, you should verify your local municipal and state incentives for property ownership. You will likely find a variety of incentive programs available near you. Listed below are a few of the most common examples that can assist you to make money investing in real estate.

Business and Rental Properties

Certainly, there are many tax benefits available to take advantage of if you own a business or rental property. Firstly, you can write off expenses spent on investment properties as business expenses. Secondly, you can claim tax depreciation. Depreciation is the wear and tear features within a home experience as they age. Take for example appliances, equipment, roofs, and permanent fixtures. You can actually claim any loss in value as a tax deduction.

Avoiding Capital Gains

Yes, you can even avoid capital gains taxes if you know how to play your cards right. One well-kept secret is known as the 1031 Exchange. This Tax break can apply when you swap one real estate investment property for another. Another option is rehabilitating properties within “Opportunity Zones.” Qualified Opportunity Zones are low-income and undercapitalized communities.

Mortgage Interest Deduction

There are also tax benefits that apply to residential properties. Every year you file taxes, you can deduct the interest you pay on your mortgage from the taxes you owe on mortgage loans up to $750,000 (filing jointly) or $350,000 (single person).

Historic Incentives

One example of tax benefits that most states offer is known as historic revitalization tax credits. In Maryland, there is a historical trust fund available for owners who rehabilitate all types of historic properties. You can earn state income tax credits for qualifying rehabilitation expenses.

Spotting Re-Sale Value:

When you are looking to buy a property, keep in mind that re-sale value will allow you to make money investing in real estate. Someday you will sell the property or pass it along as an inheritance. As such, you should know the desirable and undesirable attributes to keep an eye out for. Now, we will go over what factors make a property a good investment.

Location, Location, Location

Regardless of the type or style of home, location is essential. For investment purposes, you’ll want to stay away from busy roads and poorly rated school districts. Those factors might not necessarily be important to you as a homeowner, but they could be for future potential buyers. The property should be appealing to a large group of individuals, including families.

Also, take your time to explore the neighborhood when you go to property showings. Look for the positives and negatives the area may contribute to the value. What conveniences and parks does the area have to offer? Are there any plans for construction nearby (this can be a positive or a negative)? How well is the neighborhood kept up? What is the condition of neighboring properties? It doesn’t hurt to talk to some of the neighbors, either. Do your recon because it can become a nightmare trying to sell a property while one of your neighbors is hosting ragers every other weekend.

Find a Great Deal

Patience is a virtue when it comes to important decisions. Try to wait for a motivated seller. Typically, the longer a house has been on the market, the more room you have for negotiation. There could be an easily solvable problem that’s turning other buyers away, such as an occupied home filled with clutter. Either way, a home that’s grown stale on the market is likely to produce motivation and the seller.

Another way you can find out if the seller is motivated is by asking why the seller is listing their property. The listing agent may disclose the information if granted permission from the seller. A seller looking to make a quick move or experiencing hardship will be highly motivated to sell the property at a fair price. They may even write “motivated seller” in the property’s description.

Comparative Market Analysis

Once you are ready to submit an offer, it is wise to run a quick CMA beforehand. A Comparative Market Analysis is a report that breaks down the recent sale prices of comparable properties. Think of it as a pre-appraisal. Doing so will help to ensure that you are purchasing the property for a reasonable price. As an experienced agent, I do this for all my clients.

Why Choose an Investor-Friendly Realtor?:

Finding the right agent to help you with investment properties is imperative. As your realtor, you can rest assured that I have all the skills necessary to advise an investor, whether you’re a vet or a beginner. As an investor, you’ll be facing a lot of competition. Having a seasoned agent behind you gives you the competitive edge to set you apart from the rest.

Free Investing Advice from a Realtor

In closing thoughts, successful real estate investors know that timing is everything. Investors know how to buy low and sell high in order to make money investing in real estate. This involves thorough research and insight into the real estate market. I’ve been an agent since the early 2000s, which has given me the knowledge to know the signs of the market’s ebbs and flows. Pay close attention to market trends if you’re looking to make a successful real estate investment!