How to get rich in real estate?
That is a question that we hear too often from real estate enthusiasts and fresh graduates who are looking to pave their ways to the riches.
It is very easy to see the attraction of investing in real estate when reading about or seeing people who actually know how to get rich in real estate. After all, investing in real estate is indeed one of the best ways to get rich.
So, how to get rich in real estate? This article could be a good starting point. Learn about the different investing strategies that exist within the real estate market, choose one that is suitable for you, and start learning more about it.
If you do your due diligence of research and learning, you will find that the answer to “How to get rich in real estate?” is simpler and closer than you have ever thought.
How to Get Rich in Real Estate?
There are several answers to the question of how to get rich in real estate.
Real estate is one of the oldest and most enduring industries that have existed for thousands of years. What makes this industry survive is the constant need of people for new homes to live in, new buildings to work in, and new facilities to provide services. The real estate industry is a massive one, especially when you include all of the different sectors within this industry, such as commercial and industrial real estate.
But the question remains: How to get rich in real estate?
Investing in real estate is one of the most common, if not the single most common, methods used for getting rich in our modern times. With a bit of research, you will find that over 90% of all rich people in the world have invested and/or have current investments in real estate. But investing in real estate can seem like an intimidating and daunting quest that requires a lot of time and effort to be invested in it, not to mention the great amount of knowledge that real estate investors need in order to pull off their real estate investments and make the most profits out of it.
There are, however, a few answers to the question “how to get rich in real estate” that are simpler than most people think, and that anyone can use to become a real estate investor by utilizing his/her skills and doing some research.
Below are some of the most common answers to the question of how to get rich in real estate.
How to Get Rich in Real Estate: Fix-and-Flip
One of the most common real estate investing strategies is called fix-and-flip. As the name implies, this strategy relies on purchasing an investment property, fixing it, and then selling it for a profit.
For a real estate investor to use the fix-and-flip investing strategy and make the most profit, a few skills are required. A real estate investor will first need to identify one or a few investment properties that are appropriate for a fix-and-flip investing strategy. These properties should meet a few conditions in order for them to be profitable.
First, the investment property should be in a bad condition. While this might throw some real estate investors off, in reality, investment properties that are in a bad condition are often priced at a much lower price point than investment properties that are in a good condition. Typically, the worse the condition that a real estate property is in, the cheaper its price will be. The low price of a fix-and-flip property is its biggest attraction, and most real estate investors will have enough cash on them to purchase the property or to obtain a mortgage to finance their purchase.
The second condition in order for the fix-and-flip investing strategy to be profitable is that the costs of renovating or fixing the property should not be too high. To make it more logical, think about it this way: A real estate investor who wants to make money investing in a fix-and-flip should keep in mind that the costs of purchasing the property and renovating it, when combined, should not be higher than the price at which he/she intends to sell it. The difference between the combined costs and the selling price is the actual margin of profit that the real estate investor will be making from selling the property after renovating it.
Advantages: The biggest advantage of the fix-and-flip investing strategy is the short amount of time that it requires to complete the investment. Additionally, fix-and-flips have the advantage of having their own type of properties that most other strategies wouldn’t utilize: properties that are in a bad condition. This includes most foreclosed properties, which gives a fixer-upper real estate investor an advantage of not having to compete with all other real estate investors in the market.
Disadvantage: Although the cost of purchasing a real estate property that is in a bad condition is lower than average, when combined with the costs of renovation, the expenses add up. For this reason, fix-and-flip investment strategies typically require a large amount of cash to be available in order to cover all the costs and expenses.
How to Get Rich in Real Estate: Become a Landlord
Perhaps the most common investment strategy in real estate and one of the most common answers to the question of how to get rich in real estate, becoming a landlord is a very simple real estate investing strategy that requires more time to be invested in than most other investing strategies.
To become a landlord, a real estate investor has to purchase an investment property and turn it into an income property, or a rental property. A real estate investor who owns one or more rental properties will make money by renting the property out to tenants. Of course, to make a profit, the costs of owning and maintaining the rental property should be lower than the amount of rental income that the property is generating. When a rental property is generating more money than its expenses, the property will have what is called a positive cash flow. The cash flow of a rental property is the actual amount of money that it is making (positive cash flow) or losing (negative cash flow). A positive cash flow rental property is gaining money, while a negative cash flow means that it’s losing money.
There are a few metrics that are used to analyze a rental property and determine its profitability or return on investment:
- Cap Rate
- Cash on Cash Return
The cap rate of a rental property is the amount of money that it will generate in relation to its current market value, while the cash on cash return is the amount of money that it generates in relation to the amount of cash invested in it.
Here are the formulas that are used to calculate these metrics:
Cap Rate = NOI (Net Operating Income)/Current Market Value x 100
Cash on Cash Return: NOI /Cash Invested x 100
Advantages: One of the biggest advantages of being a landlord or owning a rental property is the passive income. Rental properties will generate a cash flow on a regular basis. This rental income can be used to pay off the mortgage of the property and other expenses related to it. What this means is that the tenant whom you lease the property to will be paying off the mortgage and other expenses for you. Once the mortgage is fully paid off, the rental property’s cash flow will increase, and most of the rental income will turn into pure profit.
Additionally, rental properties are meant to be owned for extended periods of time in order to make the most out of them. This means that a rental property will keep generating a rental income while also appreciating in value over time, so you can eventually sell the property for a big profit.
Disadvantages: Being a landlord is not an easy task, and it is not made for everyone. Rental properties require a large amount of time and effort to be invested in them. A landlord has to tend to the tenants and to keep the property occupied and in a good shape at all times. If the occupancy rate of the property drops, its rental income will be drastically reduced, and you might end up with a rental property that is costing you more money than it is generating.
How to Get Rich in Real Estate: Buy and Hold
The simplest answer to “How to get rich in real estate?” is the buy and hold investment strategy. This investing strategy is very simple; you purchase an investment property, and you just hold ownership over it for a period of time until it appreciates in value, and then you can sell it for a profit. Most people who know how to get rich in real estate own at least a few investment properties that they just hold to sell in the future. This is perhaps one of the most beautiful aspects of real estate investing in general: owning a property and not having to do anything with it but to wait for its value to increase.
Advantages: This is the easiest investing strategy to implement as it requires no time or effort while holding the property. Additionally, the owner of a buy and hold investment property has complete control over the costs of the property. If the owner intends to rent the investment property out, he/she can do that. If the owner intends to use it as a primary or secondary home, he/she can also do that. In the end, what matters is for the property’s value to appreciate so that the owner can eventually sell it for a profit.
Disadvantages: A buy and hold investing strategy requires a lot of time before it can be profitable. A real estate investor who owns an investment property will have to wait for appreciation to happen. The tricky part is that appreciation is really hard, and perhaps even impossible, to predict.
How to Get Rich in Real Estate: Invest in REITs
REITs (Real Estate Investments Trusts) are the best answer to the question of “how to get rich in real estate” for real estate investors who are not interested in getting involved in their investment but would like to make money passively through investing in real estate.
Investing in REITs is very similar to investing in stocks: A real estate investor contributes a certain amount of money to a REIT, and the trust will allocate this money to one or more real estate investments. Typically, investing in a real estate property through a REIT means that you’re sharing ownership with a large number of other real estate investors who have also invested their money in this REIT.
There are multiple types of REITs, and most of them specialize in investing in certain types of real estate properties. Some REITs might specialize in constructing shopping malls, while others might specialize in apartment buildings.
After investing in a REIT, the real estate investor will receive a portion of the profits that the real estate property/properties make in the form of dividends.
Advantages: Investing in a REIT is a form of passive real estate investing strategy. It requires no time or effort from the investor’s side. Also, it is possible to invest in multiple projects at once through a REIT, allowing real estate investors to diversify their investments across multiple sectors within the real estate industry, which can be very good for building an investment portfolio.
Disadvantages: Investing in a REIT means that you will have no control over your investment, but will have to put your trust in the REIT to manage your investment for you and make the most profit out of it.