Last Updated on November 17, 2023 by Kimberly Crawford
There are several proven methods to make substantial income as an entrepreneur. One of the most fulfilling is becoming a real estate entrepreneur specializing in new home developments. Despite the help from trusted resources like NewHomesMate, this career path comes with its share of challenges and risks.
However, with a thorough understanding of different real estate business tactics and careful planning, execution, and ongoing evaluation, you can achieve significant gains. The first thing you should determine is how to earn from real estate.
Ways to Earn In Real Estate
There are many approaches that you can use to profit from real estate. In this article, we’ll describe the following methods:
- Renting out houses or apartments;
- Flipping homes for a profit;
- Upgrading properties to boost their market value;
- Dealing with mortgage notes.
Each method usually requires you to set clear goals and understand the market. Then, you select the right property and figure out the finances to purchase it. Then, you can settle with the rental income or sell the property for more than its purchase price.
Real estate entrepreneurs often determine the return on investment to decide if a property is a good investment.
Understanding ROI in Real Estate
ROI, or Return on Investment1, is a crucial measure in real estate that helps investors understand the profitability of their investments. There are a few ways to calculate ROI, with the basic formula being:
- ROI = (Gain from Investment – Cost of Investment) / Cost of Investment. However, this simple equation might not cover all expenses or consider changes in property value.
- The Cost Method ROI = Equity / Costs of Purchase and Improvements. This method considers anticipated equity changes, whereas another approach is:
- The Out-of-Pocket Method ROI = Equity / (Costs of Purchase and Improvements + Loan-Related Costs). Many investors prefer the Out-of-Pocket Method because it includes financing costs.
But remember, these calculations are just a starting point. They don’t factor in the time spent on repairs or dealing with tenants. Also, keep in mind the potential drops in market prices, challenges in selling the property, and other unexpected events that can impact the investment’s outcome.
Earning from Residential Real Estate
The residential real estate market offers various avenues for making money, such as home improvements, house flipping, owning and renting out properties, investing in residential real estate, and dealing in mortgage notes.
Improving Homes
Real estate pros often enhance homes to raise their market value. This approach is particularly common in house flipping. Investors sometimes target problematic properties, like those with legal issues or needing major repairs.
The houses of this type are often called fixer-uppers. Careful evaluation of these properties before purchase is essential to ensure profitability.
Flipping Houses
Flipping houses is another popular strategy. It involves purchasing a property below its market value, improving it, and then selling it at a higher price. The goal is to get an appraisal much higher than the purchase and repair costs, then sell for a gain.
This process often aims for a quick turnaround, typically no longer than 30 to 60 days. However, getting a mortgage for a non-primary residence can be tough, making house flipping a somewhat risky move.
Investing in Rising Markets
Investors may also buy homes in areas where property prices are climbing, hoping to sell them at even higher prices. This can be risky, as it resembles speculating on an asset bubble.
Only, in this case, it is a real estate bubble. If the bubble pops, it’s possible for investors to end up losing more than their initial investment.
Renting Out Properties
A common path in real estate entrepreneurship is acquiring residential properties to rent out. This comes with various costs, like closing fees, maintenance, property taxes, debts, and sometimes difficult tenants.
This approach is financially viable when the property generates more rental income than its expenses, creating what’s called a positive cash flow.
Holding Residential Real Estate
Some investors hold onto multiple properties for appreciation and rental income. In the U.S., property prices have tended to go up over the years. Some experts, like Bespoke Investment Group, believe this trend will continue worldwide.
Entrepreneurs buy properties expecting their value to increase significantly over a long period of time, like 15 to 30 years. They will then sell the property for profit, or renovate it first to get a much better cost evaluation.
Long-term strategies often involve property upgrades and hiring property managers or firms to handle the day-to-day landlord duties. The goal is to have a portfolio where the rental income exceeds all expenses, including property management.
Dealing in Mortgage Notes
There are also those who invest in mortgage notes, trading them with other investors, banks, or financial institutions. If you own a mortgage note, you’re entitled to the mortgage payments that would typically go to a bank or mortgage lender.
Keeping Up with Market Movements in Real Estate
If you plan on using real estate to make profits, you must stay informed about these key economic indicators that impact the market:
- interest rates, which influence the cost of borrowing money;
- homeownership rates, which reflect the demand for homes;
- rental vacancy rates, which indicate the demand for rental properties;
- geo-demographic shifts, showing population movements to and from certain areas.
These or other factors might influence your investment, but understanding how these major trends affect your target market is essential.
Your Real Estate Game Plan
Stepping into the real estate ring can be quite an adventure. It’s not just about the cash; it’s about the chase and satisfaction of a smart investment. Whether you’re flipping homes or collecting keys to multiple rentals, it’s all about playing it smart and keeping it real. You’ll hit some bumps, that’s for sure, but that’s just part of the ride.
So focus on your objectives, adapt to challenges, and let every challenge teach you a little more about the game. After all, the best players in real estate are the ones who enjoy the process as much as the rewards.
Additional sources:
- Investopia. “How to Find Your Return on Investment (ROI) in Real Estate, https://www.investopedia.com/articles/basics/11/calculate-roi-real-estate-investments.asp” ↩︎