There are many ways to earn money from real estate.
When you buy a stock, the only way you can make money is if the stock appreciates in value, and you sell it at the good time. With real estate you can make money in many different methods.
- Rental income. Rental income is the main source of profit investors are going for when buying a rental.
- Buying below market value. Earn an instant profit buing a property for under market value. Think foreclosures, quick sales, and awesome negotiation skills.
- Selling high. Make extra money by staging the property to attract buyers over market value. With stocks, you always buy and sell at market value. With real estate, you can try to beat the market.
- Increasing equity. Take a mortgage to finance a rental and increasing equity with every mortgage payment. I put down 25% on my last rental and with mortgage repayments am around 33% equity at the moment, those 8% of the property value were paid by rents and are increasing my net worth every month.
- Leverage increases returns. If you put 20% down on a property, you will still receive rental income based on 100% of the property value, making it a great return for your 20%. Say your property is worth $100,000 and you charge $750 in rent with $500 in mortgage, taxes and fees. You have a $250 profit on $20,000 down. That is $3,000 a year, or a cool 15% return on your deposit.
- Leverage makes you profit on the full selling price. If that same $100,000 property you bought with $20,000 down sells for $120,000 a few years later, you get your $20,000 plus principal payments back, and a $20,000 profit. It is only a 20% profit over the full value of the property, but thanks to your leverage, you are making a profit of 100%, minus principal payments to the $80,000 mortgage. The higher the leverage, the larger the return.
- Renting smaller units. You can divide your family house into a duplex or a triplex and increase the rent. I rent three rooms by the room, to three tenants. I can charge more than if one family was renting the whole place.
Renting to businesses. Businesses are a different type of tenure and rents are generally higher. They are also safer if you choose a well-known business to rent to.
- Tax benefits on interest. You can often deduce the mortgage interest from the rental income, and create a tax-free profit.
- Tax benefits on improvements. You can also reduce the cost of the improvements from the rental income, while the added value to the property is yours to keep.
- Profit from a lump sum on a refinance. So you bought your $100,000 property, and put $10,000 worth of improvements, that the tenants paid back with rents. The property is now worth $125,000, you can refinance to get the $25,000 cash and put 25% down on your next $100,000 rental!
- Profit from extra cash flow on a refinance. If you are able to refinance a property to lower your mortgage payments while the rent stays the same, you are generating more cash flow every month. You can build a cushion for maintenance, save up for a deposit on a new rental, or have more passive income to live off.
There is less risk in real estate leverage than in stock leverage
Stocks are volatile. Penny stocks and currencies even more so. Some trading companies will allow you to trade on leverage. That means if you buy 1,000,000 shares of a penny stock valued at $0.05, the trading company will not require that you fund your account with the full $50,000, it will let you buy the shares with only $5,000, BUT if the share goes down to $0.045, which it almost certainly will, you will get a margin call and your whole account balance will be wiped out.
With real estate, you can put the same $5,000 as a deposit on a $50,000 or even a $100,000 house, and rent it. If you have a renter, you don’t really care about the ups and downs of the market, as you are able to meet your monthly repayments. If the property sits empty for a while, all you have to do to keep it is pay the mortgage yourself. It isn’t fun, but it is much better than seeing your whole trading account annihilated by a margin call.