If your investment portfolio is looking a little stagnant, it might be time to turn to real estate for some additional diversification and cash flow. After all, didn’t Andrew Carnegie allegedly say that 90% of millionaires got their start in real estate? Here are a few ways to help anyone make money in real estate.
How real estate earns an investment return
Most simply, you can make money in real estate in three main ways:
- The value of a property you own — including your residence — can rise enough that you can sell it and make a profit.
- You can collect rent on property you own.
- You can receive dividends through non-physical real estate investments like real estate investment trusts, called REITs.
The first two ideas operate on an easy-to-understand but hard-to-follow concept: Don’t spend more than you make. Whether you’re remodeling a kitchen or collecting monthly rent, make sure your expenses are lower than your (potential) profit. The third allows anyone to invest in real estate without actually owning a property directly.
» Check your potential returns: Investment calculator
1. Increase the value of property you own
If you own property and hold on to it long enough, it will likely increase in value over time and you’ll make money when you sell it. That typically happens despite market dips — for example, after the most recent housing market crash in 2008, many properties not only regained their lost value but realized an increase. Here’s a look at median home sale prices over the last five decades:
If you already own a property
If you own a home, you’re invested in real estate. Aside from riding the rising housing market wave, there are a few things you can do to set yourself up to make money when it’s time to sell.
Remodel with a future sale in mind: You may want to take a sledgehammer to your ugly bathroom, but some renovations recoup less value than others — take full-tilt, upscale bathroom remodels, which recover just 56.6% of the cost on average, according to national data from Remodeling magazine’s 2020 Cost vs. Value Report.
The three home improvement projects that recover the most value, according to the data, are manufactured stone veneer (95.6%), garage door replacements (94.5%), and minor kitchen remodels (77.6%). If you really hate that bathroom, consider a minor upgrade, which tends to recover more of its cost than major, upscale changes.
DIY with caution: In addition to choosing your remodeling projects with care, keep in mind that DIY projects have their limits. A good one can save you money; a bad one can cut into the return on your real estate investment.
According to a NerdWallet analysis, a DIY bedroom addition/renovation can save homeowners a median of $21,000, if done correctly — but 43% of homeowners say they’ve messed up a DIY home project at least once.
43% of homeowners say they’ve messed up a DIY home project at least once.
Something as simple as a bad paint job can knock $1,700 off a home’s selling price, according to data collected by Opendoor from June 2018 to June 2019 about the most costly home value detractors. If you’re looking to increase your home’s value, make sure you know what you’re doing before you go HGTV-crazy.
If you’re in the market to buy
If you’re looking to purchase a home for yourself or as a rental property, be flexible. You may have a vision of what you want your home to look like, but you might save some money — or make a bigger return on your investment — if you let go of that white picket fence in your head.
Buy at the “wrong time”: Buying during the doldrums of winter or in the midst of a housing market downturn can be one of the best ways to make money in real estate. Sellers may be more open to negotiating in the offseason when buyers aren’t knocking down their door. Try to think of the “wrong” time as an offseason sale: No one is thinking about buying bathing suits in January — which is exactly why they’re cheaper.
Do all your homework: When you’re shopping for real estate, patience pays off, and asking a million questions during a walkthrough can save you thousands of dollars later on. Be sure to have a qualified home inspector thoroughly check the appliances, roof, sewer lines and anything else that has a shelf life. If they all need to be replaced within two years, do you have the funds to do it — and will you own the property long enough to recoup the cost? If you don’t, your real estate investment can end up costing you.
» Related: Understand different types of real estate investments
2. Collect rental income on property you own
If you have a spare room, you can use it to jump-start your real estate empire (or just earn enough to take a vacation next year). Regardless of your time frame, you’ll need to ensure that your rental income is more than your expenses in order to make a profit.
If you’re interested in renting, it’s important to think about your scope: Do you want to rent to long-term tenants or focus on short vacation rentals?
Long-term rentals can provide consistent income if there is a healthy market of renters in your area. Keep an eye on local listings, Facebook marketplace and Craigslist to get a sense of how often people are looking for rentals like yours, and how much similar listings are charging. Think of how your mortgage, insurance, property taxes, utilities and maintenance will stack up to rent you collect — in addition to how much of your time will be spent maintaining a property.
» Which is better? Real estate vs. stocks
If your area is a popular vacation spot, targeting short-term renters through Airbnb (or other platforms, like Vrbo and FlipKey) may be your best bet. According to a study conducted by student loan company Earnest, nearly half of Airbnb hosts make more than $500 a month. Short-term rentals can turn a profit quickly, as long as your maintenance, cleaning fees, platform fees (Airbnb charges hosts a flat 3% per reservation) and any local taxes you may have to pay total less than what you bring in.
Whether you’re thinking of renting long-term or short-term, it’s helpful to have an emergency fund just for your rental property. This fund will allow you to continue to make mortgage payments if a tenant leaves you short or the water heater dies. According to NerdWallet’s 2018 Home Improvement Report, 44% of those who purchased a home experienced their first unexpected repair within the first year.
3. Go digital with REITs
If midnight phone calls and unclogging toilets dissuade you from investing in real estate by owning property directly, you can try some digital investment options.
REITs are companies that own and operate real estate — think shopping malls, apartment complexes and hotels. By purchasing shares of stock in a REIT, you can invest in real estate without owning properties.
You can easily invest in REITs through an online brokerage account, where you can buy and sell REITs just like stocks. REITs are required by law to pay 90% of their taxable income to shareholders, which means the dividends can be fairly substantial. If you need a brokerage account, check out a few of our favorites below, or read our roundup of the best brokers.
Crowdfunding real estate platforms
Real estate crowdfunding platforms are newer to the investing space, but they offer investors access to non-traded or private REITs, which are riskier than the publicly traded REITs you can buy through a brokerage account but can also offer higher returns.
Keep in mind, it’s never a good idea to fully invest in any one asset — REITs should be an addition to a diversified portfolio of stocks and bonds.