Though the concepts are simple to understand, don’t be fooled into thinking they can be easily implemented and executed. This will help you to understand the basics of real estate and how successful real estate investors work to maximise their earnings.
The Three Primary Ways to Make Money from Real Estate Investments
There are three primary ways investors make money from real estate:
An increase in the property value.
Rental income collected by leasing out the property to tenants.
Profits generated from business activity that depends upon the real estate.
Increase In the Property Value of Your Real Estate Investments
Sometimes, property values do not always increase. This can become painfully evident during periods like the late 1980s and early 1990s, and the 2007-2009 real estate collapse. This happens because the government has to create money when it spends more than it takes in through taxes. All else equal, over time, this results in each existing dollar losing value and becoming worth less than it was in the past. The trick is to buy when cyclically adjusted cap rates are attractive or when you think there is a specific reason that a particular piece of real estate will someday be worth more than the present cap rate alone indicates it should be. For example, talented real estate developers can look at the right project, at the right time, at the right price, and quite literally create the future rental income to support a valuation that might otherwise appear rich based on present conditions because they understand economics, market factors, and consumers.
Rental Income Generated by Real Estate Investments
Making money from collecting rents is so simple for who has ever played a game of Monopoly understands on a visceral level how the basics work. If you own a house, apartment building, office building, hotel, or any other real estate investment, you can charge people rent in exchange for allowing them to use the property or facility. Of course, simple and easy are not the same thing. If you own apartment buildings or rental houses, you might find yourself dealing with everything from broken toilets, unwanted painiting from tenants. The good news is that there are tools available that make comparisons between potential real estate investments easier. One of these, which will become invaluable to you on your quest to make money from real estate is a special financial ratio called the cap rate, which is short for “capitalization rate.” If a property earns $100,000 per year and sells for $1,000,000, you would divide the earnings ($100,000) by the price tag ($1,000,000) and get 0.1, or 10%. That means the cap rate of the property is 10%, or that you would earn an expected 10% on your investment if you paid for the real estate entirely in cash and no debt.
Money from Real Estate Business Operations