There are many ways to make money on real estate. Here are a few examples:
- Owning residential real estate and renting it out. Keep in mind that there are many different types of living accommodations, e.g. classic family homes, student housing, small but high-end apartments for single professionals, comfortable flats for senior citizens, etc. Try to find the niche that suits you best.
- Owning commercial real estate and renting it out. Commercial real estate come in many shapes and forms, from the basement pub and the high rise office building to the parking garage and the artisan workspace.
- Renting out a part of a building, while using the rest for your own needs (residential or commercial). In some situations, it is beneficial to buy “too much” real estate to accommodate your commercial or residential needs, and rent out the surplus.
- Flipping properties, i.e. buying real estate and resell it fairly soon thereafter (usually after improving it in one way or another). Unlike real estate that is rented out, flipped real estate will not provide you with a steady stream of income. Instead, the idea it is to tie up capital for a short period of time and then sell, pocketing the difference
- Owning real estate long-term, where the chief objective is to make money from a long-term increase in real estate value. (Often combined with renting out all the real estate or part of it.)
Real estate that provides a steady stream of income, e.g. rent, is often referred to as income property. If you decide to invest in income property, it is a good idea to also have a plan for how to use the money that comes flowing in. While part of it will be needed to cover things such as property tax, upkeep, renovations, administration, paying down debt etc there might also be some money that can be invested. Your task is now to decide if you want to invest it in real estate, or if you prefer to diversify.
Some owners of income property elect to spend all the money generated by their property rather than re-investing it, but doing so means that your only long-term gain from the property will be the increase (if any) in property market value.
Unlike many other forms of investments, owning real estate will come with a host of responsibilities. Before you invest directly in real estate, it is important to take a look at what your responsibilities would be in that specific jurisdiction. Who is responsible if an icicle falls down from the roof of the building, injuring a pedestrian below?
For some people, other types of investments are more suitable than real estate, e.g. buying a few shares in several corporations or keeping gold bars in a safety deposit box.
It is quite common to use a mortgage loan to finance at least a part of the real estate purchase, even in situations where the real estate is purchased as an investment rather than just a place to live in. This is because the buyer hopes that the interest (and other costs) associated with the loan will be lower than the increase in value of the real estate over time. When you have real estate to use as collateral, you can usually get a low-interest long-term mortgage loan from a bank or other financial institution.
In some cases it might be worth to have both a mortgage and a downpayment loan from start, especially if the investment is an apartment building with rents that finance all loans and also give a small profit. In these cases the investment is a three way win.
- You make a small profit from rents
- The more you pay off from your loans, the more you own and the more profit you make
- The value of the building hopefully increases and becomes a long term investment.