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Making Money In Real Estate

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Learn how wealth is created through real estate. This article focuses on the basic ways that money is made through real estate. These haven’t changed in centuries, no matter how you spin it the basics have remained the same.

Appreciation
The most common source for real estate profit is the appreciation – the increase in the value – of the property in question. This is achieved in different ways for different types of real estate. And, most importantly, it is only realized through selling or refinancing. (For related information, be sure to check out Avoiding A Big Tax Bill On Real Estate Gains.)

Raw Land
The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land outside the limits becomes more and more valuable because of the potential for it to be purchased by developers. Then developers build houses that raise that value even further.

Appreciation in land can also come from discoveries of valuable minerals or materials, provided that the buyer holds the rights. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees and so on.

Residential Property
When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds and so on, the value climbs. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays.

Home improvements can also spur appreciation, and this is something a property owner can directly control. Putting in a new bathroom, upgrading to a heated garage and remodeling to an open concept kitchen are just some of the ways a property owner may try to increase the value of a home. Many of these techniques have been refined to high-return fixes by property flippers who specialize in adding value to a home in a short time.

Commercial Property
Commercial property gains value for the exact same reasons as the previous two types: location, development and improvements. The best commercial properties are in demand, and that drives the price up on them. (For related reading, see 7 Steps To A Hot Commercial Real Estate Deal.)

The Role of Inflation in Appreciation
Of course, there is one major factor we skipped in our summary – the economic impact of inflation. A 10% inflation of the dollar means that your dollar can only buy about 90% of the same good the following year, and that includes property. If a piece of land was worth $100,000 in 1970, and it sat dormant, undeveloped and unloved, it would still be worth many times more today. Because of runaway inflation throughout the ’70s and a steady pace since, it would likely take over $560,000 to purchase that land today – assuming $100,000 was fair market value at the time and all other factors remained constant.

So, inflation alone can cause appreciation in real estate, but it is a bit of a Pyrrhic victory. Even though you may get five times the money due to inflation, many other goods cost five times as much to buy now. (Learn more in 5 Tales Of Out-Of-Control Inflation.)

Income

Generally referred to as rent, income – or regular payments – from real estate can come in many forms.

Raw Land Income
Depending on your rights to the land, companies may pay royalties for any discoveries or regular payments for any structures they add. These include pump jacks, pipelines, gravel pits, access roads, cell towers and so on. Raw land can also be rented for production, typically agricultural production.

Residential Property Income
Although it’s possible to earn income from the installation of a cell tower or other structure, the vast majority of residential property income comes from basic rent. Your tenants pay a fixed amount per month – and this will go up with inflation and demand – and you take out your costs from it and claim the remaining portion as rental income. While it’s true you will get an insurance payout if your tenants burn down the place, the payout only covers the cost of replacing what is lost and is not income in a real sense.

Commercial Property Income
Commercial properties can produce income from the aforementioned sources – with basic rent being the most common – but it can also add one more in the form of option income. Many commercial tenants will pay fees for contractual options like the right of first refusal on the office next door. These are essentially options that tenants pay a premium to hold, whether they exercise them or not. Options income is sometimes used for raw land and even residential property, but they are not common.

What About REITs or MICs?
Real estate investment trusts (REIT) and Mortgage Investment Corporations (MIC) are typically considered to be great ways of earning income from real estate. This is true, but only in the sense that real estate is the underlying security. With a REIT, the owner of multiple commercial properties sells shares to investors – usually to fund the purchase of more properties – and then passes on the rental income in the form of distribution. The REIT is the landlord for the tenants (who pay rent), but the owners of the REIT get the income once the expenses of running the buildings and the REIT are taken out.

MICs are even further removed, as they invest in private mortgages rather than the underlying properties. MICs are different from MBSs in that they hold entire mortgages and pass on the interest from payments to investors, rather than securitizing the interest streams independent of the original mortgage. Still, they are not so much real estate investments as they are debt investments, and thus outside of our area of interest. (Learn more in How To Assess A REIT.)

Similar to securities with real estate underlying the investment, most alternativesare merely a layer on top of these two basic steams of income.

For example, there are informal residential real estate options where you pay a fee to have the right to buy a house at a given time, say after a month, for an agreed upon price. Then, you find investors who will pay more than your option price for the property. In this case, the premium you get is essentially a finder’s fee for matching a person looking for an investment with a person looking to sell – no different than a real estate agent. Although this is income, it doesn’t come from buying (i.e. holding the deed to) a piece of real estate.

Similarly, no money down or OPM deals are simply the financing aspect of the deal – it doesn’t change how the buyer is planning to make money in the long run.

The Summary
If someone is trying to sell you a new way to make money from real estate other than buying low and selling high or collecting rent, they’re probably trying to sell you on the process of real estate investing rather than a new mechanism for making profits. Whether the process is worth it or not is up to you, but know that it doesn’t change how money will be made (or lost).

Real Estate Is Your Smartest Investment

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Inflation is defined as, “a general increase in prices and fall in the purchasing value of money.” Your money doesn’t go as far — simple. The $30k you made at your job 10 years ago and lived comfortably with barely gets you by now. You can’t control inflation (the Federal Reserve does that) and the government has doubled their debt since 2008. It’s now at $18.3 trillion and grows every day.

The government cannot save you or your family, or ensure your financial freedom. Set your mind right about earning money. More cash = more freedom! Money itself won’t make you happy, but it will give you the ability to provide a better life for yourself and your loved ones. You must invest with income streams that give you positive cash flow, learn to leverage your debt, learn to handle inflation and take control of your physical assets.

Do you currently have commercial real estate assets in your investment portfolio? Are you scared to have your money in the stock market (like I am) but also fed up with almost no return on investment with your money at the bank? Do you instinctively like the idea of being invested in income producing real estate with results you can see?

Here are eight compelling reasons why investing income producing real estate is an excellent choice for protecting and growing your wealth:

Positive cash flow
One of the biggest benefits to income producing real estate investments is that leases generally secure the assets. This provides a regular income stream that is significantly higher than the typical stock dividend yields.

Using leverage to multiply asset value
Another important characteristic of commercial real estate investing is the ability to place debt on the asset, which is several times the original equity. This allows you to buy more assets with less money and significantly multiply asset value and increase equity as the loans are paid down.

Low-cost debt leveraged to multiply cash flow
Placing “positive leverage” on an asset allows for investors to effectively increase positive cash flow from operations by borrowing money at a lower cost than the property pays out. For example, if a property generating a 6 prcent cash-on-cash return were to have debt placed on it at 4 percent, the investors would be paid 6 percent on the equity portion and approximately 2 percent on the money borrowed, thereby leveraging debt.

Hedge on inflation
For each dollar that is created, there is a corresponding liability. Real estate investments have historically shown the highest correlation to inflation when compared to other asset classes, such as the S&P 500, 10-year Treasury notes and corporate bonds.

As countries around the world continue to print money to spur economic growth, it is important to recognize the benefits of owning income producing real estate as a hedge against inflation. Generally speaking, when inflation occurs, the price of real estate, particularly multi-tenant assets that have a high ratio of labor and replacement costs, will also rise.

Capitalize on the physical assets
Income-producing real estate is one of the few investment classes that, as a hard asset, has meaningful value. The property’s land has value, as does the structure itself, and the income it produces has value to future investors. Income producing real estate investments do not have red and green days, as does the stock market.

Maximizing tax benefits
The US Tax Code benefits real estate owners in a number of ways, including unlimited mortgage interest deductions and depreciation accelerations that can shield a portion of the positive cash flow generated and paid out to investors. At the time of sale, IRS allows investors a 1031 provision, allowing investors to exchange into a like-kind instrument and defer all taxable gains into the future. (See your tax advisor for full explanation.)

Asset value appreciation
Over time, more and more inflation has made it into the economy, drastically reducing purchasing power. However, income producing real estate investments have historically provided excellent appreciation in value that meet and exceed other investment types. Properties historically increase in value as the net operating income of the property improves through rent increases and more effective management of the asset.

Feeling the pride of ownership
The right property in the right location with the right tenants and ownership mindset can produce a tremendous pride of ownership factor that is highest among all asset classes. Homeownership is out of reach for most people. Imagine owning thousands of multi-family housing units instead?

No one can guarantee the future of rental of income properties’ values, but this asset class seems positioned to continue to benefit from many other socio-economic issues that I will save for another time.

Invest in Self-Storage Real Estate

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Invest in Self-Storage Real Estate
Self-storage is an individual asset class. It typically provides comparatively high yields and has also proven to be fairly recession proof due to its lower declines and default ratios verses other asset classes. Self-storage REITs have been a strong sector in recent years providing high dividends along with increasing stock prices. The self-storage industry is considered by many stock analysts to be “recession proof” based off of the sectors performance during the last economic recession. This article outlines the self-storage asset class, discussed recent changes and thoughts on how to use this information to make informed investment decisions.

According to the research, there are over 54,000 storage facilities across the U.S. with 2014 – 2016 estimated revenues as follows:
2014 (estimate): $29.8 billion
2015 (estimate): $31.6 billion
2016 (forecast): $32.7 billion

Self-storage can be categorized as one of three resource classes (the other two being inns and senior lodging) that are basically working organizations joined to land. This clearly puts more accentuation on the aptitudes of the administrator and, on account of self-storage, it has deciphered into considerable opportunity to get better in operational efficiencies. In its initial years, the industry was to a great extent been commanded by mother and-pop administrators and, even today, is still very divided. As self-storage picked up footing, extensive marked chains, for example, Public Storage, CubeSmart and StorQuest, entered the business sector and raised business hones, nature of land and working effectiveness.

Today self-storage is less of the well-kept mystery it once was because of developing institutional possession and open reporting necessities of those substances. Traded on an open market self-storage REITs have been one of the top performing divisions as of late with a decent reputation of conveying profits and stock appreciation. Truth be told, the industry has been considered by Wall Street investigators to be “subsidence safe” in light of its execution amid the last financial retreat.

In this article, we will give a benefit class outline, highlight late changes being used, talk about low-least alternatives for putting resources into self-storage, and finish up with considerations on how financial specialists can utilize this data to settle on educated speculation choices.

Resource Class Overview

Self-storage offices change in size, quality and development. A few properties have been planned and manufactured particularly for self-storage, while others have been changed over from an earlier utilize, for example, a stockroom, auto dealership or empty huge box retail. Properties can be one-story with drive-up access and additionally multi-story that offer access through lifts and inside corridors. Storage properties rent units, regularly in various size designs, on a month-to-month or transient premise.

Drive Up/Outdoor Bay: The original of self-storage activities were solely this write, which highlight columns of storage structures with open air move up entryways that are gotten to by vehicle. They offer negligible security other than locks and on-premises camcorders, and are constantly one story in tallness. In return, they are normally the minimum costly to lease.

Atmosphere controlled: Facilities that offer atmosphere controlled and moistness controlled space in all or some portion of properties have turned out to be progressively mainstream over the previous decade. Individuals would prefer not to store things just to come back to attire or furniture that is smelly and rotten or reports that have been decimated by buildup, and they will pay a premium to ensure their possessions.

Claim to fame storage: Properties can oblige strength storage needs inside all or part of an office, for example, water crafts, autos, reports, wine and workmanship.

Blended use: Storage-offices may help pay by joining an assortment of different uses, for example, including retail or office space for lease. Properties likewise may work reciprocal organizations at the same property, for example, truck-rentals or a pack-and-ship establishment.

Request Drivers

Populace development: Self-storage offices are a goal property, implying that it is not a drive stop where offices require a prominent area. Be that as it may, clients additionally like comfort. Since populace development is a sensible driver of storage interest, self-storage engineers are taking a gander at land all the more deliberately and finding nearer to their client bases as they attempt to defeat their opposition. Storage wells in thickly populated ranges, and in addition showcases that are encountering populace and occupation development.

American consumerism: People purchase a great deal of stuff and have a characteristic hesitance to toss anything out. Rural carports top off rapidly with an assortment of memorabilia and toys from skateboards and skis to vessels and snowmobiles.

Move: Self-storage gets an additional support popular from individuals who are on the move that may require an impermanent or significantly more term storage elective. For instance, self-storage in part profit by the retreat as individuals that were dislodged from their homes or migrated to new occupations made interest for storage. Numerous storage offices target areas close loft properties where there has a tendency to be a greater requirement for storage and a consistent rhythmic movement of individuals. Understudies and individuals from the military are both appealing target demographics.

Changes being used

The self storage industry has seen considerable change both as far as how areas are produced and utilized and also how they are worked. The accompanying are few of the highlights:

Area: previously, self-storage properties were situated on the fringe of a metro or concealed in the back of a modern park. Over the previous decade, self-storage properties have moved into urban focuses to be nearer to their clients. That movement has been pushed by the new pattern of urbanization as demographics, for example, Millenials and Empty Nesters are moving to urban areas just to find that their new urban homes neglect to offer adequate space to store their rigging. Storage offices are taking after the housetops.

Outline: Competition is one of the drivers that have lifted configuration guidelines. As storage administrators have pushed harder for retail stores that get them nearer to clients, they are finding that they need to update their picture to both draw in clients and fulfill city building and zoning necessities in those retail stores. Fundamentally, the “no nonsense” storage properties of the past are being supplanted with another era of offices that underscore upscale outlines and notwithstanding arranging that position themselves as a more retail-accommodating kind of utilization as opposed to a property that should be shrouded away in a mechanical park or distant country region.

Innovation: Operators are grasping innovation in all parts of their business. There is developing aggressive weight to offer offices that are spotless, sheltered and secure. In light of business sector requests, offices are consolidating innovation into observation and security extending from CCTV checking to key card access. Administrators additionally are using innovation to enhance efficiencies, for example, utilizing programming to track leaseholder history and issue alarms to late payers or send programmed warnings for rent increments.

Combining the Information

As a late Forbes article “How Humdrum Self-Storage Became The Hottest Way To Invest In Real Estate” talked about, financial specialists are perceiving self-storage as a lucrative property sort known for creating strong and stable money on-money comes back with an incline working procedure. When somebody leases a unit and moves in their things, they don’t visit it consistently, which deciphers into a lower need to enlist a considerable measure of staff to oversee properties.

Self-storage likewise has lower costs connected with inhabitant turnover as there are no expensive representative charges or occupant change dollars important to market units to new clients. Additionally, the quick reusability of a storage space is unmatched amongst other resource classes. Indeed, even mechanical clients frequently arrange little redesigns, for example, revived bathrooms or enhanced stacking when marking leases, which can both moderate the opportunity to re-lease and in addition increment turn costs.

While generally shortsighted in contrast with other resource classes, one component for financial specialists to consider when measuring self-storage speculation open doors is that new, present day offices have gotten to be much more costly to work than the past era of offices. Land costs alone in urban ranges can be as much as 50 percent of an aggregate venture cost, by Self Storage Association. That higher expense is vital to consider while surveying chances to put resources into new advancements. Will an undertaking have the capacity to charge sufficiently high leases to legitimize the development costs? Then again when purchasing a current property, a higher cost might be justified in light of the fact that the development costs make a hindrance to passage for rivalry entering the business sector. The main issue is that the business is developing quickly so you can’t utilize 10 years old technique for examination when taking a gander at the current focused scene.

One relieving element to rental rate danger is that the self storage offices ordinarily depend upon lower inhabitance levels in contrast with other resource classes. For instance, the breakeven inhabitance rate to administration typical obligation sums for a self storage office is normally 40% to 45% when contrasted with 65% or more for condo, retail and office. Therefore, once conveyed and balanced out, self storage offices tend to hold esteem preferable and recuperate quicker over different resources when land markets sharp. As indicated by information reported by NAREIT, self storage had the most astounding aggregate yearly returns more than 5-, 10-, and 15-year midpoints in an examination of five distinctive property areas from 1994 to 2011.

When you set up everything together, an advantage class that is known not subsidence safe yet offer stable income and, at a full scale level, is portrayed as a becoming yet uniting market, represents a generally convincing contention for consideration in an enhanced business land portfolio.