Making Money From Real Estate

In the early 2000s, the secret to making money from real estate was this: buy a house. Keep hold of house. Sell house. The value of houses was frankly, ridiculous - prices could rise by as much as 40% in a year, which is why there were so many investors and so many people making money in real estate. Banks were giving people 100% mortgages, which meant that they didn't have to put any money down in order to buy their house. This was all well and good, but these huge loans - and the vast quantity of loans that were being passed every day - was one of the major factors in the financial crisis and the subsequent recessions that occurred all over the world. Keeping hold of the house was dependent upon one thing: being able to keep up with the mortgage repayments. That was all well and good if people had tenants who were able to pay rent. But if they didn't, and they were relying on their own money to keep up with repayments, things were liable to go wrong. And they did. As people lost their jobs left right and center, while house prices plummeted and insurance rates rocketed, it was little surprise that those real estate investors ended up in a bit of a pickle.

 

 

Over the last few years, the housing market has drastically improved. Although you won't become a millionaire overnight, there is still plenty of money to be made in real estate. You just have to be a little more canny about it and remember - you might find it a little trickier than you expected but the payoff will be a huge sense of accomplishment plus a hefty boost to your bank account.

Flipping Houses

Some people think that this is the easy option, and although it's fairly simple in the sense that if you buy the house for the right price and can afford to hang onto it for a little while, you're basically making money without lifting a finger, if you buy the house at the wrong price and/or underestimate the repairs involved, the market in your local area, the neighborhood that you bought the house in, you could lose some money. When flipping houses, it's really, really important that you do your research and if you do need to put any money down, find a hard money lender - they'll provide you with the capital you need to get the house fixed up and you'll pay them back when you sell the house. Ideally, you'll buy the house for 70% of the ARV - providing you with a decent profit even if you end up selling the house for a little less than you'd like.

Development and Commercial

Depending upon the amount of money you have behind you - and whether or not you're on good terms with a friendly hard money lender, it might also be an option for you to go into development and commercial real estate. Say you find an empty patch of land just ripe for development. If your credit history is clear and you have a decent deposit, you'd be able to buy the land, then get a loan for the development. Commercial real estate works in much the same way, but the main consideration with both of these methods is that you need to know the local area. There's no point building a high end designer outlet in a town with little money - nor will a development of high rise apartments in a luxurious neighborhood really be tolerated. It's important to research the area and find out what they want and what they need and how you can provide that for them.

Letting Houses

One of the best ways to make money in the long term - for example, if you want to put money aside for your retirement or if you'd be happier with a steady residual income each month rather than a large payout from flipping houses every few months - is to let houses. But the key to making letting houses work for you is to come up with the perfect monthly rental price. You'll need to take into account three figures: how much money you need to cover the mortgage each month, how much money you need to cover any reasonable expenses associated with each house (including rent insurance - more on that in a bit) and how much money you need to give you a reasonable profit each month. What you define as a reasonable profit really depends on your needs and expectations. Once you have those figures, you can come up with a monthly rental figure. It has to be something realistic, though. Usually, brokers would recommend that the average annual rental income be approximately 120% of the annual mortgage costs. That 20% should cover your expenses, plus your rent insurance. Although you might not think that rent insurance is really not that much of a big deal, it really is. In the event that your tenants don't pay the rent when they're supposed to, the insurance will pay out for you - which means that you won't be stuck trying to cover the costs of a mortgage that you shouldn't have to be paying for. It'll cost you, of course, but the more tenants you have the more valuable that insurance will be, so don't just ignore it. Ask your broker to look around for you for the cheapest rate. Finally, after that, you should still have some money left over. If not, you're banking on the fact that when you do decide to sell the house that it'll be worth more than what you paid for it. Otherwise, the whole thing is a bit pointless - buying a house, letting it along with all of the hassle that goes along with letting a house, then selling it and breaking even is an awful lot of hard work for no return. Make sure that those figures add up, otherwise you'll be doing yourself out of a significant profit.

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