Proven ways you can make money in real estate

Some people think residential rentals do not attract tenants. However, a residential rental in the right location will earn you big. Photo by Ismail Kezaala

What you need to know:

  • Anyone can make it big in real estate. All you need is knowledge of opportunities and how to seize them. We share tips on how you can mint money from real estate even when you are not a billionaire.

Real estate may have produced more wealth than any other industry, but people still remain skeptical about entering into the fray. Most think they need to start with some sort of capital, but that is not always the case.

If you know what you are doing, you can make money in real estate even if you are just starting out.

Don’t think so? Take the story of Kent Clothier (founder and CEO of Real Estate Worldwide), for example. Clothier opened his first escrow for $500 (about Shs1.8m). All he did was find a distressed home and a motivated buyer and brought them together.

Today, he flips over 1,000 properties and manages 5,000 through his company. The point? You do not need a lot of starting capital to make money in the real estate industry. But you do need the knowledge and the know-how.

Most people think it is easier to make money online than it is to make a serious coin in real estate. But both are difficult if you do not know what you are doing. When you get the lay of the land and understand the path forward, you can make strides.

When it comes to real estate income, there are two ways to generate cash. You can generate passive income by buying and holding, while you can generate an active income by flipping contracts, doing renovations or adding value in another area -- such as putting together property development deals. It might seem overwhelming at first, but it will not be as intimidating once you gain experience.

When most people think about making money in the real estate sector, they ask the following types of questions: How can I invest in real estate with no money? You can utilise a variety of methods that includes any of the following:
•Seller financing through lease options
•Trading fixed assets such as cars, jewellery and more
•Taking over someone else’s mortgage payments who might be in a distressed situation
•Bringing in an investment partner with cash
•Borrowing from a bank or getting a hard money loan
•Taking out a home equity line of credit
•Utilising a peer-to-peer lending network

That being said, there are eight primary strategies for generating a real income in real estate. Whether you can earn a passive income or active income depends on the strategy you implement.
One of the most common methods for making money in real estate is to leverage long-term buy-and-hold residential rentals. People will always need a place to live, and that means getting involved with rental properties.

You need to do the proper amount of due diligence to source your property by keeping three principles in your mind: location, location, location. Yes, you have heard it before, but location is everything when it comes to real estate. Not only does this apply for an increased asset value over time, but also in your ability to quickly rent that property to a long-term tenant.

When you are considering long-term residential rentals, look for a great location. That is more important than the current state of the property itself.

In fact, run-down homes in great locations are one of the best investments you can make. This involves a more traditional approach to making money in the real estate market. It means buying a property with some cash on hand to make a down payment and then holding that property for the long term.

Depending on your personal situation, you can easily grab that property for a very low or even no down payment. That is especially true if this is a pre-existing, income-producing property.

If there’s positive cash flow in a residential rental, then it could be a great investment. However, you will likely not find that too easily, unless the current owner is unloading for personal reasons due to a divorce or other need to liquidate that property that necessitates having some cash on hand.

You can either buy already built rentals, or build your own.

Lease options
Lease options can be a great way to get involved in real estate without having to put up a significant amount of capital or even have great credit at the outset.

You are leasing with an option to buy. This tends to work well when the real estate market is climbing because you are creating a pre-set price at which you can later purchase the property.
If, for example, the property market climbs substantially, you can buy that property at a discount. You could also potentially turn around and sell your rights for that purchase to someone else.

The clear bet here is on the bull market in real estate. As long as this is an option you can exercise and not something set in stone that says you have to purchase at the end of the lease regardless, then you could very well turn a profit.

Home-renovation flips
The fix-and-flip culture has exploded. There is a massive boom in the traditional renovation flip market. While there can certainly be a lot of money to be made here, navigating these waters in the beginning can be tricky.

When you lack the knowledge or the experience, you could find yourself on the losing end if you do not select the right home.

Matt Larson, an American real estate investor, who has flipped more than 2,000 homes, says he has learned some lessons on what to look for and what not to look for when flipping a home with a renovation. His advice?

Go after the ugliest homes in the nicest neighbourhoods. That is where the real value is. The other difficulty here is not only finding those homes when you are not well-networked with real estate agents, but also understanding your after-repair value.

How much will the home be worth once you have invested in fixes and repairs?
To accurately determine that, you need a strong relationship with a general contractor and an on-site tour of the property. While buying site-unseen at an auction might seem alluring, unless you really know what you are doing, you could lose money.

However, making money on a home-renovation flip can be rather straightforward -- as long as you understand the underlying costs and potential value.

John and Julie Wakefield, a husband-and-wife flipping team who have done hundreds of flips, say something similar. They advise not to bite off more than you can chew, and more importantly, you should look for creative ways to help others. Success as a real estate investor has as much to do with how creatively you can solve problems as it does how well you can crunch the numbers.

Contract flipping
One way that you can make money from real estate without having to put up very much capital or credit is to flip contracts. All you have to do is find a distressed seller and a motivated buyer, then bring them together.

While locating a distressed seller might seem difficult, Clothier has systemized the entire process for doing this. The trick with contract flipping is to identify the distressed seller and locate a ready-to-go buyer.

By bringing these parties together, you’ve cut out the need to go hunting for a buyer after you’ve entered a contract. That situation presents more risk. Instead, by locating the sellers and the buyers beforehand, you can easily enter into a contract with the confidence that you won’t get stuck having to close escrow on the property.

To do this, you have to be able to identify either vacant homes or homes that are behind on their mortgages. That’s the tricky part. Youre effectively trying to find distressed sellers, but homes that are already vacant are primed for an opportunity like this.

Short sales
Short sales occur when the current owner of their home is behind on their mortgage but the property has not yet entered into foreclosure.

In order for this to happen, all parties have to agree to the transaction since the property is being sold off for less than is owed on the existing mortgages. This can be a great opportunity to make a quick profit without investing into lengthy renovations.

However, succeeding with short sales or any other default-type auctions is often tricky. You usually need to pay for the homes outright in cash, and sometimes that has to happen site-unseen.
Short sales are better than auctions because you get a chance to check out the home and enter into a negotiation process. Unless you are a seasoned investor, jumping in without an inspection and complete review could be risky.

Short sales take time, but they can be well worth the wait. The potential return on a short sale can be instantaneous.

Tens of thousands to hundreds of thousands of dollars can materialize as soon as the property purchase goes through because the bank is engulfed in a bad investment. But don’t expect to get the property for a steal you will still have to negotiate a relatively fair price.

Depending on how badly the bank wants to unload that property, it could sit around and wait for another buyer, so don’t try to low-ball too far.

Vacation rentals
Vacation rentals can present a lucrative path to profits in the real estate marketplace. Not only can you make some side hustle income from vacation rentals, but you could potentially make a significant amount of money and build up a substantial passive income stream if you are in a highly-trafficked tourist locale. Tourist hotbeds are well known for having high demand for these short-term rentals.

I have long been a firm believer in the vacation rental market. The best part? You do not even need to own the properties to make money. Some of the world’s most successful property management companies that specialise in vacation rentals do not actually own the homes but do provide a high-end consumer experience.

How do you participate? Leverage existing relationships with owners in your area. Network with others. Build bonds. Create systems. Ensure the upmost satisfaction. Go above and beyond for anyone staying at the homes you manage. And see how you can help to take some of the time and stress off of the present owners’ existing rental businesses.

Hard-money lending
Hard-money lenders provide short-term loans to people who normally would not qualify for those loans. In order to participate in hard-money lending, you will need some capital behind you.
These are loans that are often at high interest rates because they are for very brief periods. To close your first deal, you could turn to a hard money lender. If you have what you feel is a “sure thing” but lack the capital, this could be your best bet.

You could also become a hard money lender, but you will need some capital. This likely isn’t going to be the first way you start out making money in real estate, but as you build your network, capital and a solid portfolio of deals, you could provide these bridge loans and make a great rate of return.

Even if you lack an enormous amount of capital, as long as you can successful identify the right deals, provide a small amount of money and generate a high success rate, you can likely find investors to come on board without much difficulty. The interest rates here make sense.

There is more risk but also more reward. It can be a way to keep your cash fairly liquid and generate a nice profit in the short term without having to wait years and years for those returns to materialise.

Commercial real estate
One of the great opportunities in real estate for making a considerable amount of money is to invest in commercial real estate.

Commercial real estate developers focus not only on flipping properties, but also on developing them, adding value to properties in order to increase their net incomes through renovations and upgrades. They also consult on projects that might take more seasoned real estate investors to see to fruition.

Ali Safavid, founder of 5209 Investments, says commercial real estate is one of the most lucrative sources for both income and profits in the real estate market. As long as you can find ways to add value to the exchange, investing in commercial real estate can be one of the largest income generators you’ll find.

People always need office space and retail to run their businesses. These physical locations are bread and butter in the real estate niche. As you grow, you can find ways to open up shopping malls, develop large scale buildings and more. But you have to start somewhere.

Adapted from Entrepreneur