How Do Real Estate Investors Make Money?

Ever think to yourself…how do people make money in real estate? Investing in real estate the right way can make you money in 5 different ways. The key is real estate knowledge, building the right team, and getting after it. Here are the 5 ways you can make money in real estate.  

1. Equity Capture
2. Cash Flow
3. Mortgage Reduction
4. Appreciation
5. Tax Advantages

Let’s go into the details of how people make money in real estate.

1) Equity Capture 

Equity capture is the first way savvy investors make money in real estate. It is said that you make your money when you buy. This means if you buy wisely, you will gain instant equity. Let’s say a house after repairs is worth $200,000, but you buy it for $160,000, put $30,000 for a down payment, your closing costs are $2,500 and repair costs are $7,500. The total investment is $170,000 (of which $40K is out of pocket) and instantly have $30,000 in equity capture!  That is a 75% return on the $40,000 cash out of pocket for the investment. It can become realized once you refinance or sell the property.  

The hardest part about real estate investing is finding good deals. If you want a free deal analysis spreadsheet to get started check out Birddogbot. This has powerful automation features that does the searching for you once it’s configured with your investment criteria.

2) Cash Flow 

When you lease the property, the rental income should be higher than all of your monthly expenses and mortgage note. The money left over is cash flow. If you do not have cash flow, do not get into the investment. The main expenses to cover are PITI (Principal, Interest, Tax, Insurance), and the home owner’s association fees. Include property management fees if you are not managing the property yourself. You should look at two aspects of the cash flow to know if it is a good deal. First the actual amount per month. On the purchase example above, you should look for at least $600 a month. This is because the cash you put into the deal was $40,000. $600 per month would be $7,200 per year making it an 18% cash on cash return!

You must analyze the deal correctly before you buy to ensure you will cash flow and be profitable. Both: Zilculator or DealCheck (20% off discount code: REWAY) are good options.

3) Mortgage Reduction 

Our tenant pays 100% of mortgage. So, unless you have an interest only loan the mortgage will be paid down every month. This seems small with one house in the first few years since most of the interest is up front but, with multiple houses and time you could have 10 houses each paying down $500/month. That is $60,000 per year in mortgage reduction alone. Compare that to a 401K that you must put your own money into every month. With real estate, other people put money into your retirement fund! 

4) Appreciation 

The most understood and talked about way to make money in real estate is through appreciation. This is because real estate typically increases in price at about 3% year over year.  People compare the appreciation of real estate to the stock market incorrectly. Even stock brokers will say you are only getting 3% of appreciation return every year. They would be wrong about this number because we use leverage with real estate. 

In the example above if they property appreciated 3%, you would actually have a 15% return. Why? That’s because your cash out of pocket to buy the asset was $40,000 and the property increased by $6,000 ($6K/$40K). If $40,000 out of pocket sounds like too much to put into a $200K real estate investment you are right. You can use a two-step process i.e hard money then refinance to a conventional loan. More on that in a coming blog. 

5) Tax Advantages 

You may have heard that real estate just like most businesses have many tax advantages and that is true. However, real estate has a super tax advantage compared to all other businesses. What is unique and most advantageous about real estate is phantom depreciation. This means that we can write down depreciation as an expense for tax reasons while the asset is really appreciating!  For the example we have been using if your annual cash flow is $7,200 (money that you put into your pocket), you could deduct $5,818 of that leaving only $1,382 to be exposed for taxes. In other words, $5,818 is tax free income! 

How Much Money Do Real Estate Investors Make?

The sky is the limit when it comes to real estate. But to give you some numbers for one single family house investment here is a case study from a recent transaction. 

The house was purchased for $95,000, closing costs was $9,795, the repairs were $33,500, the holding costs and marketing was $2,500, and the house after the repairs was valued at $207,000. Therefore, just in the Equity Capture there was $66,205!

The monthly cash flow was $704, and of course the tenants were paying down the mortgage monthly, the house appreciates yearly, and all of the cash flow was tax free/deferred. 

So how much money do real estate investors make? In this case the property was held for 2 years and the total return off of this single property was approximately $100,000 after taxes!

How Do People Make Money In Real Estate – Summary

Real estate done correct allows you to make money in 5 different ways every month, every year. Stay tuned to The Real Estate Way Pro to learn more.  

Now you know how real estate investors make money and you can do the same. Remember, you must conduct proper due diligence and analyze the deal correctly to buy correctly. Try: Zilculator or DealCheck to make sure you have a solid deal before investing your hard-earned money and precious time.

Passive Income = Financial Freedom

How do people make money in real estate?…See the video on 5 ways real estate makes you money.