At least 33 billionaires in the U.S. made their money from real estate, and many experts say it’s the best way to create real wealth and financial freedom, as Forbes reports. There are only a few ways to make real money investing in real estate. While it’s simple to understand how, it’s not as easy to implement and execute.
The simplest way to make a fortune in real estate is by collecting rent. It’s something that even a 5-year-old probably understands by now. You own a home, apartment, hotel, office building or other property and charge people rent in exchange for allowing them to use it. While the idea is simple, that doesn’t mean it’s easy. When you rent a house or apartment, you’re likely to have to deal with difficult tenants who don’t pay the rent on time and/or cause significant damage, and you will have to make repairs with everything from broken hot water heaters to overflowing toilets at 3 a.m.
If you own an office building or strip mall, you might have to deal with businesses that go bankrupt after leasing from you. Or, if you own an industrial warehouse, you could face environmental investigations for the actions of tenants who used the property. Making money means ensuring that you buy at the right price – it requires having equity in the home from the first day you buy it. That ensures having a margin of safety and that the property will at least break even or make money every month. The cost to acquire the property should be no more than around 80 percent of what it will be worth once it’s repaired. That means the total purchase price plus renovation expenses and closing costs will have to be 80 percent of less of the home’s market value.
Property values don’t always increase, something that many people became painfully aware of during the most recent collapse of the real estate market a decade ago. Property values don’t often beat the rate of inflation. Say you have a property you bought for $400,000 and inflation is 4%, it could sell for $416,000, but you aren’t really any wealthier. The reason behind that is the government must make more money if it spends more than taxes bring in. Over time, everything else equal will lose existing dollar value and won’t be worth as much as it was before.
If you’re a savvy real estate investor, you may be able to earn a fortune in real estate by taking advantage of certain situations that come up every 30 years or so. When inflation rates are projected to pass the rate for longer term debt, it can be possible to find people who are willing to take the risk by purchasing properties. They take out a loan, waiting for the rise of inflation so the mortgage can be paid off with dollars’ worth far less. The key is to make the purchase when you believe there’s a certain reason the real estate is going to be worth more than what the current cap rate reveals it should be. Or, when cyclically adjusted cap rates are attractive.
Another way to make a fortune investing in real estate if, for example, if you own an office building you could make money from parking garage fees or vending machines. If you own a home in Calgary you can provide access to nearby amenities. If you buy a hotel, you could sell on-demand movies to guests. Making these kinds of investments usually requires special knowledge of the particular industry, with a very good understanding of the market.