Perhaps the biggest benefit to investing in real estate is its potential for income. While the benefits of appreciation and depreciation are also very nice, cash is usually king in real estate investing.
In a good real estate deal, the income from a rental property is enough to cover the mortgage, taxes, insurance, and other expenses and then some. What’s left over is the ever coveted cash flow.
Different Ways to Make Income Through Real Estate
There are a few different strategies for bringing in income through real estate. All of them focus on making cash immediately, and each has its own drawbacks and benefits. Whatever the strategy, each can be used to contribute towards an additional revenue stream that can be used towards achieving financial independence or other goals.
1. Long Term Rentals
The bread and butter of real estate investing: the buy-and-hold rental.
It’s just as it sounds; an investor buys a property and then rents it to tenants over the long haul. As time goes on, the mortgage on the property is paid down using the rental income as the investor enjoys any extra cash flow in the meantime.
Once the mortgage is paid off, cash flow can increase dramatically. More often than not, a mortgage payment is the biggest expense on a rental property. With buy-and-hold investing over the long run, you can watch your cash flow increase greatly as rent steadily grows and the debt is wiped away.
2. Short Term Rentals
A more popular option in hot markets is vacation or short-term rentals.
AirBnB is perhaps the most popular platform for short-term rentals. People can list rooms or even entire homes for as little as a day at a time, much like a hotel. With a successful vacation rental, an investor can make the monthly rent of a long-term rental landlord in a week or less depending on the market.
However, vacation rentals are usually one of the first sectors to decline during a recession. Many consumers hold back their spending or see a dramatic dip in their income, so less people take trips that would otherwise drive vacation rental demand. Be very careful when venturing into this space.
At the same time, the more renters you cycle through a property, the higher the likelihood is that one of them will mistreat the property or damage something. With platforms like AirBnB, you have far less control over who is renting your unit, which has its own risks.
Vacancy can also be a killer with short-term rentals. Even though you might make many times the typical monthly market rent with a full month of vacation bookings, the chances of that happening are very slim. You might only get the unit rented on the weekends, for example. Or maybe demand is only strong during one season. If the income from those limited bookings is not enough to meet expenses, you might be in for a rude awakening.
So long as you understand the risks associated with short-term rentals, they can be a wonderful opportunity to make significant income through real estate. Tread carefully and consult with a licensed professional if you are unsure!
3. Flipping
Flipping is buying real estate with the objective of selling it quickly for profit.
Most often, flippers buy properties under market value, spend money to update the property or remodel it, and then sell it to a new buyer. The difference between the purchase and resale price is their income.
Flipping is far less passive than typical buy-and-hold real estate investing, but it can be very lucrative. Flipping is also generally more vulnerable to market volatility, since a dip in the market can quickly wipe out profits. Even so, many investors make a living out of flipping real estate.
Regardless, flipping is another opportunity to earn income through real estate, potentially on a very large scale.
Rental Income Can Grow
Rents typically grow steadily with inflation over time. However, rent growth is not a given. Real estate is geographically variable, so while one area might be seeing 20 percent year-over-year rent growth, another might be seeing a 5 percent annual drop in market rents. Be conscious of market conditions before investing in a particular area.
That said, rent can also be increased by updating the property. A unit that has not been updated since the 1970s will probably rent for a lot less than a freshly renovated unit in the same building.
The best part is, even as rent increases, expenses usually stay about the same. With a fixed mortgage, your payment will not grow, which is a massive advantage over the long run.
Time and inflation are two allies for a leveraged real estate investor. As time goes on, rents should at least keep pace with inflation while it simultaneously eats away at the value of the fixed interest debt. You might see some sizable appreciation on the building as a whole during that same time.
Conclusion
Income is often considered the most powerful benefit to investing in real estate. Whether it be long-term buy-and-hold rentals or short-term vacation rentals or flips, there is plenty of income potential in real estate.
When combined with the other major benefits of real estate, namely appreciation and tax depreciation, it makes for a fantastic wealth building opportunity.