Are you ready to invest? Do you have a passion for real estate? Maybe you just want to diversify your portfolio and adding a new property is the answer. The first question you need to ask yourself is how do you want to make money on your investment? Depending on your answer, you have a few different options.
Real Estate Appreciation
Some properties make money merely through appreciation. Sit it on the shelf for a couple of decades and wait on the market. As Joshua Kennon explained, “This is when the property increases in value due to a change in the real estate market, the land around your property becoming scarcer or busier like when a major shopping center is built next door, or upgrades you put into your real estate investment to make it more attractive to potential buyers or renters.” If you can afford to cover the ancillary expenses on your own, be it a mortgage or taxes, then for some this becomes the best option due to the eliminated hassle of handling leases or tenants.
That being said, the initial process of finding the right property can be more tedious. You need to understand whether the area around the property has potential to increase in value or whether your renovations won’t cost so much that the price becomes too high for potential buyers in the area.
The main alternative to the appreciation approach is the cash flow income model that pertains to income based on rentals and leasing your property. As Ali Boone explained, “Cash flow refers to the profits you collect each month from the property. The way it works is you collect the rent from the tenant (a.k.a. gross income) and subtract your expenses (mortgage, taxes, insurance, repairs, management fees, vacancies, etc.) and that leaves you with your cash flow(a.k.a. net income).” To be successful with this model, you again need to do some research and identify whether the building actually has the potential to bring in enough rental income to cover all of your expenses as well as make you money. If you aren’t confident in your personal property prowess, consult a realtor or fellow investor. In time, as you begin to invest more it becomes easier to identify a smart project.
Some investments offer additional payouts via collateral income too. For an office, you may also install a vending machine for small dividends over time. The same can be done with an apartment complex laundry system.
Nowadays, investment opportunities don’t require you to take on the brunt of capital if you’re willing to purchase via an investment group or investment trust (REIT). These make great opportunities for investors who know they want real estate, but don’t know in what capacity. Groups and trusts assume some of the risk and create an infrastructure to also handle a lot of the hassle associated with property management etcetera. Whereas investment groups act similarly to a mutual fund, REITs are the equivalent of buying stocks in a real estate project.