When you invest in real estate, your goal is to put money to work today and make it grow so you have moremoney in the future. You have to make enough profit, or "return", to cover the risk you take, taxes you pay, and the costs of owning the real estate investment such as utilities and insurance.
In other words, once you understand the basics of the game, real estate investing really can be as conceptually simple as playing monopoly.
Your goal is to buy properties, avoid bankruptcy, and generate rent so that you can buy even more properties. But "simple" doesn't mean "easy". If you make a mistake, you could find yourself broke or worse.
The 4 Ways Real Estate Investors Make Money
When you invest in real estate, there are several ways you can make money:
- Real Estate Appreciation: This is when the property becomes more valuable due to a change in the real estate market, the land around your property becoming scarcer or busier such as a major shopping center going in next door, or upgrades you put into your real estate investment to make it more attractive to potential buyers or renters. Real estate appreciation is a tricky game and is riskier than investing for cash flow income.
- Cash Flow Income: This type of real estate investment focuses on buying a real estate property, such as an apartment building, and operating it so you collect a stream of cash from rent, which is the money a tenant pays you to use your property for a specific amount of time. Cash flow income can be generated from well-run storage units, car washes, apartment buildings, office buildings, rental houses, and more.
- Real Estate Related Income: This is income generated by "specialists" in the real estate industry such as real estate brokers, who make money through commissions from buying and selling property, or real estate management companies who get to keep a percentage of rents in exchange for running the day-to-day operations of a property. For example, a hotel management company gets to keep 5% of a hotel's sales for taking care of the day-to-day operations such as hiring maids, running the front desk, mowing the lawn, and washing the towels.
- Ancillary Real Estate Investment Income: For some real estate investments, this can be a huge source of profit. Ancillary real estate investment income includes things like vending machines in office buildings or laundry facilities in low-rent apartments. In effect, they serve as mini-businesses within a bigger real estate investment, letting you make money from a semi-captive collection of customers.
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