When you invest in real estate, your goal is to put money to work today and so you will have more money in the future. You must 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.
Once you understand the basics of the game, real estate investing 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. However; simpledoesn’t mean easy. If you make a mistake, you could find yourself broke or worse.
Ways Real Estate Investors Make Money
When you invest in real estate, there are several ways you can make money:
- Real Estate Appreciation: The property becomes more valuable due to a change in the real estate market, the land around your property becoming scarcer or busier. This could be from a major shopping center going in next door, or upgrades you put into your 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 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 (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.
- Ancillary Real Estate Investment Income: For some real estate investors, 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 entry-level 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.
Considering Your Real Estate Investment Properties Purchase
There are several ways to buy your first real estate investment. If you are purchasing a property, you can use debt by taking a mortgage out against a property. This use of leverage attracts many real estate investors because it lets you acquire properties you otherwise could not afford. It can be dangerous because in a falling market, the interest expense and regular payments can drive you into bankruptcy if you aren’t careful.
You should NEVER purchase a real estate investment in your own name. Instead, for risk management reasons, you will want to consider holding real estate investments through special types of legal entities known as Limited Liability Companies (LLCs) or Limited Partnerships (LPs). You should consult with a qualified attorney for his or her opinion as to which ownership method is best for you and your circumstances. By taking these precautions, if the real estate investment goes bust or becomes involved in a lawsuit, you can protect your personal assets. With an LLC or LP, the worst that can happen is losing your investment. Setting up a solid LLC/LP keeps your 401k assets, Roth ira investment, and other retirement accounts should be out-of-reach.
Which Type of Real Estate Investment Should You Make?
When you are ready to start the process of real estate investing, start by deciding which of the real estate investment types is most appropriate for you. We can guide your through the process, and answer all of your questions. Having a great Real Estate Firm on your team is the key to building wealth in real estate. 713 614 3813