Property value increases and rental income are just two ways to profit. Whether you’re curious about the investment potential of real estate or you’re simply sick of infomercials promising little-known ways to “profit from your property,” it’s worth learning, for real, how real estate creates wealth. Rather than providing obscure strategies for investing in real estate or a primer on homeownership for first-time buyers, this article will focus on how to make money through real estate. It will cover both the basic methods that haven’t changed in centuries, no matter what kind of gloss the gurus of the moment try to put on them, and specific opportunities that have arisen relatively recently. KEY TAKEAWAYS The most common way to make money in real estate is through appreciation—an increase in the property’s value that is realized when you sell. Location, development, and improvements are the primary ways that residential and commercial real estate can appreciate in value. Inflation can also play a role in increasing a property’s value over time. You can also make money in the form of income from rents for both residential and commercial properties, and companies may pay you royalties on raw land—for example, for any discoveries, such as minerals or oil. Real estate investment trusts (REITs), mortgage-backed securities (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs) are investment alternatives within the real estate sector. Making money in real estate can depend on many factors: market conditions that affect remodeling costs, housing prices, interest rates, rental rates, and tenant availability. Real Estate Profits from Increasing Property Value The most common way that real estate offers a profit: It appreciates—that is, it increases in value. This is achieved in different ways for different types of property, but it is only realized in one way: through selling. However, you can increase your return on investment on a property in several ways. One way—if you borrowed money to buy the property—is to refinance the loan at lower interest. This will lower your cost basis for the property, thus increasing the amount that you clear from it. Emily Roberts © Investopedia 2019 The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land outside the limits becomes increasingly valuable because of the potential for it to be purchased by developers. Once developers build houses or commercial buildings, it raises that value even further. Appreciation in land can also come from discoveries of valuable minerals or other commodities—provided that the buyer holds the rights to them. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees, and other natural resources. When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds, and more, these changes cause the home’s value to climb. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays. Home improvements can also spur appreciation. Putting in an extra bathroom, heating a garage, and remodeling a kitchen with state-of-the-art appliances are just some of the ways that a property owner may try to increase the value of a home. Commercial property gains value for the same reasons as raw land and residential real estate: location, development, and improvements. The best commercial properties are perpetually in demand. The Role of Inflation in Property Values When considering appreciation, you have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your dollar can only buy about 90% of the same goods—including property—the following year. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it still would be worth many times more today. Because of runaway inflation throughout the 1970s and a steady pace since, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was fair market value at the time.1 Thus, inflation alone can lead to appreciation in real estate, but it is a bit of a Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods cost five times as much to buy, too, so purchasing power in your current environment is still a factor. Real Estate Profits from Income The second big way that real estate generates wealth is by providing regular payments of income. Generally referred to as rent, income from real estate can come in many forms. Raw Land Income Depending on your rights to the land, companies may pay you royalties for any discoveries or regular payments for any structures they add. For example, these include pump jacks, pipelines, gravel pits, access roads, and cell towers. Raw land also can be rented for production, usually agricultural production, and land tracts with trees may be valuable for the timber that can be periodically harvested. Residential Property Income The vast majority of residential property income comes in the form of basic rent. Your tenants pay a fixed amount per month—which will go up with inflation and demand—and you take out your costs from it, claiming the remaining portion as rental income. A desirable location is critically important to ensure that you can secure tenants easily. Commercial Property Income Commercial properties can produce income from the aforementioned sources, with basic rent again being the most common, but can also add one more in the form of option income. Many commercial tenants will pay fees for contractual options like the right of first refusal on the office next door. Tenants pay a premium to hold these options, whether they exercise them or not. Options income sometimes exists for raw land and even residential property, but they are not common. Residential Real Estate: Paths to Profits Here is a closer look at some of the many ways that you can earn income from residential properties. Buy and Hold This is one of the more traditional ways of earning income from real estate. There are a number of ways to accomplish this: You can buy a single-family home and rent it out; buy a multifamily home and live in one of the

Here’s how—from buying rental property to REITs and more. When looking for investment options, there are many choices for where to put your money. Stocks, bonds, exchange-traded funds, mutual funds, and real estate are all good investments no matter what level of experience you have; forex or cryptocurrency may be too volatile for beginning investors. Which option you choose will depend on how involved you want to be in your investment, how much money you have to start investing, and how much risk you are comfortable taking on. Buying and owning real estate is an investment strategy that can be both satisfying and lucrative. Unlike stock and bond investors, prospective real estate owners can use leverage to buy a property by paying a portion of the total cost upfront, then paying off the balance, plus interest, over time. What makes a good real estate investment? A good investment has a high chance of success, or return on your investment. If your investment involves a high level of risk, that risk should be balanced out by a high possible reward. Even if you choose investments with a high probability of success, though, that isn’t a guarantee. You shouldn’t put money into real estate—or any other investment—if you cannot afford to lose that money. Though a traditional mortgage generally requires a 20% to 25% down payment, in some cases, a 5% down payment is all it takes to purchase an entire property. This ability to control the asset the moment papers are signed emboldens both real estate flippers and landlords, who can, in turn, take out second mortgages on their homes in order to make down payments on additional properties. Here are five key ways investors can make money on real estate. KEY TAKEAWAYS Aspiring real estate owners can buy a property by using leverage, paying a portion of its total cost upfront, and paying off the balance over time. One of the primary ways in which investors can make money in real estate is to become the landlord of a rental property. People who are flippers, buying up undervalued real estate, fixing it up, and selling it, can also earn income. Real estate investment groups are a more hands-off way to make money in real estate. Real estate investment trusts (REITs) are basically dividend-paying stocks. 1. Rental Properties Owning rental properties can be a great opportunity for individuals who have do-it-yourself (DIY) renovation skills and the patience to manage tenants. Properties can be local, or there may be good out-of-state opportunities. This investing strategy does require substantial capital to finance upfront maintenance costs and to cover periods when the property is empty or when tenants do not pay their rent. Pros Provides regular income and properties can appreciate Maximizes capital through leverage Many tax-deductible associated expenses Cons Managing tenants can be tedious Potentially damage property from tenants Reduced income from potential vacancies According to U.S. Census Bureau data, the sales prices of new homes (a rough indicator for real estate values) consistently increased in value from the 1960s to 2007, before dipping during the financial crisis.1 Subsequently, sales prices resumed their ascent, even surpassing pre-crisis levels.23 The long-term effects of the coronavirus pandemic on real estate values remain to be seen. Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau or with the U.S. Department of Housing and Urban Development (HUD).4 2. Real Estate Investment Groups (REIGs) Real estate investment groups (REIGs) are ideal for people who want to own rental real estate without the hassles of running it. Investing in REIGs requires a capital cushion and access to financing. REIGs are like small mutual funds that invest in rental properties.5 In a typical real estate investment group, a company buys or builds a set of apartment blocks or condos, then allows investors to purchase them through the company, thereby joining the group. A single investor can own one or multiple units of self-contained living space, but the company operating the investment group collectively manages all of the units, handling maintenance, advertising vacancies, and interviewing tenants. In exchange for conducting these management tasks, the company takes a percentage of the monthly rent. A standard real estate investment group lease is in the investor’s name, and all of the units pool a portion of the rent to guard against vacancies. To this end, you’ll receive some income even if your unit is empty. As long as the vacancy rate for the pooled units doesn’t spike too high, there should be enough to cover costs. Pros More hands-off than owning rentals Provides income and appreciation Cons Vacancy risks Fees similar to those associated with mutual funds Susceptible to unscrupulous managers 3. House Flipping House flipping is for people with significant experience in real estate valuation, marketing, and renovation. House flipping requires capital and the ability to do, or oversee, repairs as needed. This is the proverbial “wild side” of real estate investing. Just as day trading is different from buy-and-hold investing, real estate flippers are distinct from buy-and-rent landlords. Case in point—real estate flippers often look to profitably sell the undervalued properties they buy in less than six months. Pure property flippers often don’t invest in improving properties. Therefore, the investment must already have the intrinsic value needed to turn a profit without any alterations, or they’ll eliminate the property from contention. Flippers who are unable to swiftly unload a property may find themselves in trouble because they typically don’t keep enough uncommitted cash on hand to pay the mortgage on a property over the long term. This can lead to continued, snowballing losses. There is another kind of flipper who makes money by buying reasonably priced properties and adding value by renovating them. This can be a longer-term investment, and investors may only be able to take on one or two properties at a time. Pros Ties up capital for a shorter time period Can offer significant returns Cons Requires a deeper market knowledge Hot markets cooling