Real estate investing is the process of buying and selling property with the objective of making a profit. This may be through the rent you get from allowing tenants to use the property, or may be from selling the property for more money than you originally bought it for. The profit is any additional money you make after taking away the investment you put into it, as well as any other costs like tax or insurance.
When you invest in real estate, there are several ways you can make money:
Real Estate Appreciation
This is when the value of a property increases because of a change in the housing market on a macro level or a micro level. For example, for the majority of the 1970s through to the early 00s, real estate increased in value steadily year-on-year. This means that if someone was to buy a property, the value of it would have increased significantly even if no work had been done to the house. The second way you can increase your earnings in this way is on a more local scale. If you buy a home in an up and coming area, it may be that in five years, there will be much more demand for houses in the area, driving up the value of the property. Alternatively, it may be that a new large and attractive shopping center will be built near the area, or a new school that many people want their children to go to will open. If you can be aware of these changes in the local market, you can significantly increase the value of your house.
Cash Flow Income
This is another common model for getting a return on your investment, and comes in the form of monthly rent from the property, rather than a lump sum when you sell it. This is common for private houses where you get a monthly rent from someone living in the property, but can also be found when someone rents an office from you, a car wash, storage units, and more.
Real Estate-Related Income
This is income that’s generated by companies and specialists in the real estate industry, and might include real estate brokers or real estate managers. These both make their money from commissions in the process of buying a new property, and when they help a buyer and seller come together to make a sale, they will take a commission for their services. This may be seen as a loss to the others in the deal, but they are buying a necessary service that may cost them far more if they tried to coordinate the deal themselves. SoCal home buyers are a great example of a trusted homebuyer.
Ancillary Real Estate Investment Income
This isn’t as commonly thought about, but can be the source of a massive amount of profit. Ancillary profit is revenue not directly tied to the property, such as vending machines and ATMs. A commission will be paid out for every transaction made on a machine like this.