How Do Real Estate Investors Make Money?
Real estate investing can seem like something of a black art to the uninitiated. Even people who want to get into investing via real estate can be a little confused when it comes to how the larger companies and more successful investors really make money.
That may be because the path to financial success when it comes to real investing can vary from person to person. Some investors may be active property buyers and sellers, while others may purchase property that they sit on for years waiting for prices to go up before selling.
While real estate investing can be confusing, you can learn the basics of how investors make money and begin to apply them to your work. Use this guide to learn more about real estate investing in today’s economy.
Holding vs. Flipping
There are a variety of ways to make money in the real estate world. If you’re going to be an investor though, you’ll likely want to decide on a clear strategy that you believe will work for you. That typically means choosing between holding properties for a long period of time or actively buying and flipping them for a profit.
Keep reading to learn more about these two different types of investing.
Investors that hold property as a strategy tend to buy in areas that seem like they have rising value. For example, a neighborhood may be on the upswing, but prices are still relatively low for the time being. A savvy investor may predict that these prices will rise considerably in the next five years, allowing them to cash in on their investment.
Investors who buy property to hold for sale later may also look for properties that seem undervalued in a certain area. Some of these properties may also need repairs that the investor is willing to take on knowing that they’ll turn a profit if they do the work correctly.
Holding property does tend to be more common in commercial areas, but plenty of investors do this type of speculative buying in residential neighborhoods as well. They can both be lucrative, so don’t be put off if you feel like this is your preferred strategy but you want to buy only residential property.
Many real estate investors that buy property with the goal of selling it down the road for a profit will choose to rent their property to residential or commercial customers to cover expenses.
Investors that flip property take a different approach than those that prefer to buy and hang on to property for a longer period of time. When you’re flipping residential or commercial property, that generally means buying and selling it within a year. For some properties, it could even mean 30 to 90 days.
In general, flipping property means buying buildings or homes that are in decent shape, though they might be considered “fixer-upper” spaces. By renovating the property with things like new flooring, paint and fixtures, investors can make a small amount of cash on a property fairly quickly.
On average, investors who buy and flip property quickly will make less on each property than those that tend to hold it. However, you’ll get a return on your investment much faster – often within the same calendar year.
It’s important to remember that there’s also considerably less risk when you’re buying and fixing a home to quickly turn it around for a profit. You may not make a large amount of money on each sale, but there’s little chance the market will turn on you or the neighborhood will go south before you’re able to sell.
That can be a concern if you’ve got a long-term plan of holding a property with the intent of watching it rise in value before putting it on the market.
Do Investors Combine Holding and Flipping?
Some investors have a more mixed strategy when it comes to turning a profit on property. While most will decide between holding property and flipping it quickly, others choose to do both depending on how they think they can maximize profits on each type of property.
One benefit of this strategy is that your flipped properties provide quick cash with minimal risk, which can help balance out the cost of property you plan to hold for a long period of time. Those quick sales can also cushion the blow of an investment loss if your held property doesn’t perform the way you think it will.
You can think of this mixed investing strategy as a way of diversifying your holdings. Note that investors who both hold and flip property tend to have serious working capital, since you could easily have three to five properties at one time.
Investors Know Their Preferred Property Type
Being a successful real estate investor means understanding at least one sector of the property market in your area. While there are property investors who buy both commercial and residential property, most focus on one variety or the other.
That’s because commercial and residential markets are quite different, and understanding one doesn’t mean you’ve got a grasp on the other. True commercial spaces often tend to be in different areas than residential properties, many of which are clustered together in residential-only neighborhoods.
Making repairs in commercial spaces versus residential spaces also tends to be quite different. Having a working knowledge of materials like commercial grade vinyl flooring is much different than understanding how to choose luxury hardwood for a high-end home.
Another factor here is cash or credit. On average, commercial property tends to cost more to buy, though it’s likely to be considerably less per square foot than residential property. You may need considerable assets, cash and a large loan from the bank to buy commercial property of real value.
Buying Distressed Property
Distressed property can have two meanings in the real estate world – foreclosures and property that needs considerable work to be considerable usable. Both are viable avenues to pursue for real estate investors.
With foreclosures, much of the work is finding properties that are in neighborhoods you understand and successfully bidding on them or buying them from the bank. Foreclosures can be somewhat risky though, as often times you can’t see the property first to see what kind of work needs to be done.
Homes or commercial properties that simply need a lot of work can be clearer when it comes to evaluation and your overall financial risk. If you’re capable of assessing these properties, or have associates who can, you can find buys that are undervalued considering the work that needs to be done.
Smart Improvements Make Investors Money
Whether you’re buying property to hold or flip right away, smart improvements can help you maximize your return on investment, or ROI. While the improvements you make will vary considerably depending on your property type and what the space needs, there are some options that tend to be wise choices.
Below you’ll find some of the best improvements that property investors can make when buying residential or commercial property.
Structural repairs are basically essential repairs that make a home or commercial space inhabitable. This could include everything from roofing and foundation repairs to replacing the subfloor of one or more rooms.
Other upgrades like replacing badly damaged or broken flooring materials and walls are also generally considered structural repairs.
One of the best picks to maximize your ROI, flooring upgrades like adding loose lay vinyl, vinyl planks or hardwood can help you make the most of any property. These upgrades are common in both fixer-upper properties and distressed properties.
It’s important to note that flooring upgrades can also benefit homes and commercial properties in good shape already. By updating and adding a more modern style to your space, you may be able to entice buyers to purchase at a higher price.
Luxury upgrades are something like the icing on the cake. This could include high-quality fixtures, durable, designer-inspired flooring or even things like appliances. You may even consider better landscaping to be a luxury upgrade.
When it comes to these types of upgrades, it’s important to note that some projects provide better ROI than others. For example, flooring and paint upgrades tend to offer more return than installing new appliances unless the older ones were extremely dated or damaged.
Luxury upgrades should always be chosen based on the market you’re working in. If you’re buying high-end homes, you’ll want your upgrades to match and conform to what other properties on the market have to offer.
Ready to start your journey into property investing or dig deeper to find that goldmine you’ve always been looking for? We can help you with the essentials you need to improve your properties like vinyl flooring, luxury vinyl flooring, vinyl plank, hardwood, ceramic and porcelain tile and natural stone. We can even help you find discount flooring for spaces where you need to make every penny you put in count.
Reach out to our trained representatives today to see how we can help you find the best flooring for your project. Not sure what to buy? We’ll send samples your way so you can see all of your choices in person.