Real estate is one of the most popular investments and for good reason: It can reward investors with high yields on their investments. Yet, buying any home or building won’t get you to your goal of making a significant profit. Instead, savvy decisions must be made and many angles must be considered. In general there are 3 main ways for an investor to earn a return on their real estate investment.
1 – Making Profit From an Increase in Property Value
The simplest way to make a profit from a real estate investment is to purchase property and then sell it for more than you purchased it for. This can be a tricky proposition because, as has been evidenced in recent years, homes do not always go up in value. This doesn’t mean that an investor should never buy a property but it does mean that there are a few factors that should be considered.
One way in which people make a profit from reselling a home for more than they paid for it is by what’s known as “flipping.” Essentially, a buyer takes a home, typically one that’s in distressed condition and often been foreclosed upon, improves the home, and then sells it for a profit. This can be rewarding but it can also be risky because there are so many unknown factors involved: the home could have structural or other serious issues you’re unaware of the time of purchase, the cost of renovation could higher than anticipated, the home could end up on the market for many months after renovation, and the home may not sell for as much as the investor anticipated.
2 – Making a Profit From Rental Income
Another simple way to make a profit is to purchase a building and rent it. It could be an apartment building with numerous tenants, a home with a single tenant, or an office building. There are a few possible disadvantages to this type of income, including the fact that if your building is not occupied then you won’t be making money. If it’s a building with a single tenant the vacancy could be devastating, while a building with numerous tenants would provide less pressure for full occupancy. There are the costs of maintenance, repairs, insurance, and potential liability issues to contend with.
A simple tool that can be used to determine how much profit you’ll make is called the capitalization rate, or “cap rate” for short. Essentially, you’d take the amount of money the property will earn in a year and divide this amount by the cost of the property. For example, if the property brought in $100,000 per year and it was purchased for $1,000,000, the cap rate would be 10% – which is the amount of profit you could expect to earn on the property. Keep in mind that the cap rate assumes the property was purchased in cash and that it carries no debt.
3 – Making a Profit From Real Estate Business Operations
Finally, some investors can make a profit from real estate business operations. For example, those who own an office building could make money from vending machines, hotel owners could make money from on-demand movies, or movie theater owners could make money from ticket sales. The key to this type of real estate investment is ensuring that the investor has the expertise to maximize profits in a specific sector.