Real estate and investments in these have for an incredibly long time been used by the world’s richest people to build up huge fortunes. It is thus one of the most ultimate investments you can make.
I therefore understand that you also of course want the opportunity to make money on real estate (who does not want that as well?), So therefore I will go through how you do in this guide.
You will get a few basic tips when it comes to investing in real estate, and what the pros and cons are.
But I will also show you how to get started, as well as what return you should be able to expect on your real estate investments.
So, how do you build wealth in real estate?
The best way to build wealth in real estate is to buy your own properties. This is the most common method you refer to when talking about making money on real estate – simply buying your own real estate. This method can in turn be divided into two subcategories which I will go through below.
Some tips before you start buying your own properties: be clear about the types of properties you want to buy, do a proper and thorough research of the real estate market, build a good relationship with your bank, get help from lawyers and inspectors when you well found a property you want to buy, and last but not least: read carefully and stay updated about the market.
The two subcategories:
Rental properties – You simply buy one or more properties that you rent out, either to companies or private individuals. It can e.g. be a warehouse or shop, or why not a regular tenancy that someone can move into.
You thus keep the properties and choose to manage them on your own, in order to get a stable cash flow every month.
Buy, renovate, sell – You buy one or more properties where you intend to sell them later. Before you sell them, it may be a good idea to carry out some renovations (if needed) to increase the value of the property.
This requires good knowledge of what price level you should be able to expect, both in terms of purchase price but also when selling.
Top 4 ways to make money on real estate
If you want to get started making money on real estate, there are several ways you can go about it.
A very common misconception is that you need a huge amount of capital to start making money, but this is not true if you ask me.
Even those who have smaller amounts to spare can start making big money, but of course a good start-up capital is still required. How much you will need, however, depends on what approach you choose.
1. Buy shares in real estate companies
This is one of the absolute easiest ways to gain exposure to the real estate industry as a private person, ie. make money on real estate without owning any.
Among the real estate companies, there are several stable dividend companies that each year distribute part of their profits to the shareholders. Example of this is Realty Income Corp.
The advantage of real estate companies is that they generally have stable income and cash flows, involve a limited risk and are partly cyclically insensitive.
We always need somewhere to live! However, the corona pandemic, for example, has meant that several real estate companies with a focus on office premises have found it a little tougher when more and more people work from home.
The future will probably mean that more people want to work from home to a greater extent, but it feels unlikely that companies will no longer need office space.
As with all investments, it is important to think about diversification.
When it comes to real estate companies, you spread the risks by buying companies with different types of focus (housing, offices, warehouses, hotels, etc.) and geographical spread (Washington, Florida, Idaho, Tennessee, etc.).
2. Invest in real estate projects with others
Should it be the case that you do not find any of these approaches attractive, I can also advise you on crowdfunding. Crowdfunding means that you team up with other investors to buy a property together.
In this way, you will be able to own a smaller part of the property, but you will not have to spend the large amounts that would be required if you had bought it on your own.
At Tessin.com, you can find and select real estate projects in which you want to invest your capital.
When you have found a project you like, you choose how much money you want to invest. Then you get ongoing information from Tessin about how the real estate project is going.
When the real estate project is finished, you will receive an interest paid and your money back to your account.
According to Tessin, the interest rate has been 7-13% per year, depending on which project you choose.
3. Real estate arbitrage
This is something that most people are not very familiar with. In short, it means that you rent out an object without owning it yourself. Of course you need to cooperate with the owner of the rental property. It can happen in different ways.
If you know of someone for example owns a summer cottage, spends long periods abroad, etc., you can offer to, for a certain% of the income, take on the assignment as a landlord.
This means that you handle the marketing, the contracts with the customers, all the practicalities such as cleaning, key handover, accounting etc.
Exactly what tasks you and the owner should perform, you can come to a common conclusion.
Since both you and the owner make money from this, it will be a win win situation!
Another way is that you rent an object from someone yourself, but it is clear when you sign an agreement that you intend to rent it out periodically.
It is of course of the utmost importance that the person you rent from approves this. But in the same way as in the example above, the landlord makes money regardless.
4. Buy funds that invest in real estate
This method is similar to where you buy shares in real estate companies, but it also differs slightly. Here it is possible to get started with as little as $10.
There are funds that invest directly in own properties, but also the funds that invest in shares in real estate companies that are listed on the stock exchange.
Benefits of investing in real estate
There are lots of benefits to investing in real estate. Without any mutual ranking, I have listed here some of the main arguments:
1. Protection against inflation
Inflation is one of the biggest dangers for an investor.
With a bank account that, for example, gives 1 percent interest, you will lose money if inflation is 2 percent.
Real estate, on the other hand, is an excellent hedge against inflation.
When prices rise (that is, when there is inflation), rents and the value of the property also rise. In addition: as the cost of living increases, so does your cash flow as a real estate investor.
2. A good cash flow
Being rich is not the same as having access to a lot of money. Many of the investments that exist provide no or very little cash flow.
The money is tied up in the investment and you cannot use it until you sell your holding. The problem then is that selling becomes the same as stepping off your investment.
By investing in real estate, you can in some cases get around this dilemma. The tenants pay a rent, often monthly, which gives you a stable and relatively secure cash flow.
You can use the money for your own expenses or to invest in new projects. Your properties “work” for you while you sleep.
A wise investor diversifies his holdings.
An equity portfolio should, for example, contain shares from different industries, but it can also be an idea to diversify between different asset classes.
In addition to investing in gold, you can diversify your portfolio by owning real estate.
A diversified portfolio is less sensitive to fluctuations in the economy.
The market risk will be lower. As a result, the volatility of your holdings decreases.
4. Lower risk
Of course, it can be turbulent in the real estate market and prices can fall sharply. We last saw it during the financial crisis of 2008-2009 in the USA.
Nevertheless, there is generally a lower risk of investing in real estate than in shares.
There are several reasons. First, the price falls that sometimes occur on the stock exchange are usually much larger than the corresponding falls in the real estate markets.
In other words: real estate prices are less volatile than the stock market.
Second, the real estate market is less liquid than the stock market.
If you want, you can buy and sell shares for thousands of dollars with a few mouse clicks. This makes it easy to react emotionally with stock market investments, something that is rarely good for returns.
For properties, there is a much longer lead time before you can sell. This gives you time to think through your decisions. You do not make an hasty decision as easily.
A third factor that makes the risk less in properties is that you have a cash flow from the rents. You use this money to repay the loan, which means that the risk in the real estate investment is reduced in the long run.
With stocks, the risk is the same all the time.
5. Leverage your investments
Most people who buy real estate take out a bank loan to finance part of the property’s price.
This means that you borrow money to invest, which in practice gives you a nice leverage effect, given that the value of the property increases.
For example, if you mortgage a property with 50 percent and it increases in value by 10 percent over a given period of time, this means that the increase in value of the money you paid yourself will be 20 percent instead of 10.
This is called leverage.
It is possible to get leverage on all types of investments, including shares.
What makes investing in real estate so special in this regard is that it is possible to get very large loans in relation to how much money you yourself invest.
It will therefore be a great leverage effect.
In addition, the interest rate on real estate loans is generally much lower than the interest rate on other types of investment loans because the bank has the entire property as collateral.
Disadvantages of investing in real estate
As with all investments, there are of course also some disadvantages to investing in real estate, but it depends a lot on what kind of investment you intend to make.
If you are planning to invest directly in a particular property, it can be good to know that it can be a little more difficult to get a bank loan than if you are going to buy your own apartment.
The bank may also require you to provide a personal guarantee for your first property purchase.
If you own a property, it is very convenient to take into account.
If you have staff who take care of the practicalities, there may not be much to think about.
Otherwise, you can count on tenants also calling evenings and weekends, for example if the elevator does not work or if there is a blockage in the drain.
There are also risks.
If you have high mortgage on the property and the real estate market is hit by a crisis, you can quickly become over-mortgaged.
The bank can then demand that you repay part of the loan so that the property is not forcibly sold at a price that is unfavorable to you.
There is also always the risk that tenants – both private individuals and companies – are late in paying the rent or do not pay at all.
One problem with investing directly in real estate is that the margins are seldom particularly large for individual investments.
It costs time and money to take care of all the administration and maintenance of a property.
The big gains usually come only when you have reached a certain scale in the investment and own several properties.
Finally, we have the disadvantage that a large amount of capital is required to invest directly in real estate. It often takes between 50 and 100 thousand in capital to be able to make a sensible investment.
However, this disadvantage can be overcome by, for example, investing in real estate by buying shares.
How much can you earn on real estate?
Historically, it has been seen that investments in real estate have given a relatively good return.
It is roughly in line with the stock market, but with minor fluctuations over time.
You should therefore be able to expect around 7-12% per year. But keep in mind that it can vary greatly depending on how you do it and which method you use.
So it can be both less than that, but also more than that.