There two very effective ways that people grow significant wealth in the U.S. today. The first is the hardest, takes the most work and resources, and has the most risk – starting and growing a business. The second takes work and effort, but can be even more rewarding – real estate. Land and property have long been the means by which people are able to leverage significant gains in personal wealth, and it’s not surprising that most modern millionaires have a significant amount of real estate activity in their portfolios. However, making money in real estate isn’t as simple as going to get a home loan, buying a home, and then reselling in the next month. That’s how a lot of folks lose their shirts. It takes a lot more work and strategy. Here are seven ways real income can be made in real estate without the downside.
Invest in Long-Term Multi-Units
Otherwise known as apartments or condominiums, investing in long-term rentals tends to be very lucrative over a 10- or 20-year period. However, one needs to be on the ball with maintenance and controlling operating costs, always keeping the rental income at a point that’s higher than the cost to maintain the property. Also, keep in mind, rental income is taxable as business income, which means you pay taxes on it annually versus only when you sell the property as a capital gains. Rental income taxes are higher as well. So that’s a cost to consider as well that eats into profit. Many landlords have made very good income on rental properties once they got their approach down to a system as well finding the right tenants who take care of the property. That said, being a landlord is not a hands-off affair; it takes a lot of attention and regular involvement unless you hire a property management company to do the same, which in turn cuts into profits.
Similar to renting multi-unit properties, leasing involves securing a long-term tenant in a property so that the tenant is paying the cost of the mortgage and operation versus you as the property owner. Good tenant vetting, background checks and profile review count a lot here to make sure the tenant is a high-quality candidate. When leasing works out, it’s a great way to enjoy property value appreciation as well as make a monthly net income after costs and mortgage payments. Note that the lease income earned is also taxable annually as business income versus property capital gain.
Flipping a Home Renovation
The most popular approach to real estate income because it’s popularized on TV channels tends to be home flipping. This approach typically involves finding a property with a serious fixer-upper need that sells at a discount due to damage. The new owner then puts in a lot of cash, effort, and time to restore the home to a very livable, new condition. The approach has to be efficient, effective, and timely. The owner is carrying the cost of the renovation, the mortgage, and the cost to resell. So, the longer things take, the more likely the renovation turns into a loss, no matter how well it sells. Then the home is sold on the market again, the seller repeats the process with a new home. The financing is often done with a typical home loan and minimal cash, with the full intention of selling the home as quickly as possible. The difference in gain between purchase and costs and sale is the profit, which can be sizable in a successful job.
Another variation of flipping tends to be referred to as “contract flipping.” In this scenario, one works to find a seller who needs to move a home quickly at a sale price and a buyer who really wants to get into a home in a given location. You work as a middleman connecting the two and making a profit off the difference between sell and buy. However, this is a tricky approach because you have to work through real estate agents and brokers for the actual paperwork unless you have your own license. Otherwise, you could lose a lot of the profit in fees or be sued for practicing real estate without a license, a serious penalty.
Short Sale Hunting
Similar to contract flipping, the entrepreneur here is looking for distressed sellers, folks who need to sell a home fast. In a short sale, the original owner is trying to avoid foreclosure. Selling the home protects their credit and gets out of a home loan situation that can’t be met. Short sales can typically produce very good opportunities, but the bank or lender involved needs to be cooperative as well as have the ownership interest in making as much as possible to get their money back. Sometimes banks can be uncooperative, thinking a foreclosure is a better deal, so short sales can be hit or miss. However, if a hit, the profit potential can be sizable by reselling the home again at market value.
If a property is located in a prime vacation location, like Siesta Key, Florida or coastal Texas, a lot can be made on vacation properties, even without buying the home outright. The purchase approach is straightforward; buy the property, then list and rent it out on short-term commitments during the vacation season in the area. The non-purchase approach adds a few steps. Instead, you lease the property, and then in turn rent it out short-term to vacationers who pay you for the opportunity to stay at your rented spot, which you rent from the owner. You will need a lease contract that allows you to sub-lease to be safe, otherwise the real owner can cancel your lease for violation of the terms barring sub-tenancy. Your revenue will also be business income, taxable every year, in either situation of you leasing or owning. So, these costs need to be considered as well. Hot locations do make a big profit, however, and many find really good income renting to vacationers by the week during the high season.
Hard-Money or Private Lending
Considered very high risk but the profit potential can be huge, a private person becomes a lender to homebuyers who otherwise can’t qualify normally for a home loan. In short, you put up your cash to finance a home buy for someone with poor credit. The risk, of course, is that the homebuyer doesn’t pay you back or bails out on the loan, in which case the property is your only recourse. However, given how many people want to be in a home, there is a high demand for poor credit home-lending in every region. You just have to be very careful with your candidate selection before committing.
Halfway Housing or Sober Living Facilities
Not typically on real estate get-rich lists, assistance housing can be a very lucrative method of real estate income. The buyer focuses on finding a property that makes an idea home for multiple persons who would go through a transition program. The buyer then converts the home to meet the need, obtains the necessary licensing and neighborhood clearances, and then begins the program with enrollees. The government typically pays for the enrollees to participate, addressing the property owner’s costs to run the program from the home. The value here is a dedicated income stream which might even have tax deductions or special tax credits for helping community needs in rehabilitation.
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