Before getting into the real estate investment business, be sure you understand all of the potential profit possibilities. Here we look at the primary three.
One appeal about real estate investing is that it’s mostly a passive income stream. That allows you to learn the ropes while keeping your day job. You gain a second income stream and keep your primary income stream until you’re confident you can make it full time as a real estate investor.
Most beginning investors start in the residential sector. Only a few move on to the highly profitable commercial sector. I encourage you to learn about both before deciding which direction to take your investment business.
3 Or More Profits Streams for Your Real Estate Investment Business
Whether it’s the commercial or residential sector, your primary goal is having tenants repay the financing for your investments. That’s the first of three primary ways to profit by investing in real estate. With the tenants repaying the financing, you are building equity. Each payment includes part of the loan principal that converts into your equity. Second, your equity increases as the property appreciates in value.
Third, the monthly rent needs to be more than just enough to cover the financing. There needs to be a profit margin that goes directly into your bank account. Typically, this is the only “cash” profit you earn until you sell to take the equity out. However, another potential profit stream is refinancing to pull part of the equity out without selling the property – and let the tenants repay the refinancing through higher rents.
There can be other profit streams as well. Your real estate investment business can receive income from a paid laundry facility in a four-plex. Or if you own a small strip mall, you can open your own retail shop in one of the units to create another profit stream. The truth is, real estate investing offers multiple income streams to creative investors.
The Commercial Sector Has Many Opportunities
Almost everyone in commercial real estate specializes because each category has its own unique challenges. Commercial real estate is generally divided into these major categories:
- Multifamily or apartments
- Office space
- Industrial and warehouses
- Land development
- Specialty use
Often apartment buildings are a good place to start in commercial real estate because they have reliable profit margins and enough tenants that a few vacancies still leaves the property profitable. Better yet, today’s vacancy rates are extremely low in many local markets. Also, apartment buildings are a natural stepping-stone up from owning single-family homes.
Hotels are the most volatile because when the economy sours, families stop taking vacations and businesses cut travel budgets. Renting rooms on a day-to-day basis is volatile.
The other major categories fall somewhere in-between. You’ll want to educate yourself about each sector before moving into a specific commercial real estate category.
Both residential and commercial real estate are always a very local proposition. While a broad knowledge about real estate is always good, it boils down to understanding your local market. The mantra of real estate is always – location, location, location.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.