Sometimes it seems that everywhere you look, real estate is in the news. From double-digit home price increases and the soaring demand for rentals, to DIY home flippers and shows like Million Dollar Listing, people always seem to be making money in real estate.
Of course, making money in real estate requires education, patience, time and effort, a little bit of luck, and some capital. However, many people are surprised to learn that they don’t need a lot of cash to make money in real estate.
14 Ways to make money in real estate
Robert Kiyosaki, author of the best-selling book Rich Dad Poor Dad, once said that “Real estate investing, even on a very small scale, remains a tried and true means of building an individual’s cash flow and wealth.”
Here are 14 small and large ways to make money in real estate, including surprising and interesting techniques that you may have never thought of.
1. Single-family rentals
Buying a single-family rental (SFR) home and investing for the long term may be the most popular way to make money in real estate.
SFRs are everywhere, there are a wide variety of sources for financing a purchase, and tenants love renting single-family homes. In fact, as RENTCafé recently reported, the majority of homes are occupied by renters in more than 100 suburbs across the country.
2. Rent to own
Renting a home doesn’t mean giving up the dream of investing in real estate. Some real estate investors and developers of build-to-rent (BTR) subdivisions may offer tenants a rent to own option.
With a rent to own option, the landlord and tenant agree to apply a portion of the monthly rent payment toward the purchase price of the home. When the tenant has built up enough equity, they can apply for a loan and purchase the home, either as a primary residence or a rental.
3. Rent with option to buy
Under a rent with option to buy program, a tenant has the right – but not the obligation – to buy the home from the landlord after a certain point of time or if the home is listed for sale.
However, unlike a rent to own program, a portion of the monthly rent does not get applied to the purchase price, which means a tenant will need to come up with a down payment on their own.
4. House hacking
People that already own a home can get into the real estate rental business using a strategy known as “house hacking.” As the name implies, part of the home is hacked and used to generate rental income.
Two examples of house hacking are renting out a spare bedroom with an ensuite bathroom or converting a basement or attic into a studio apartment. The key to successful house hacking is to save the extra rental income for the down payment on another rental property, or to pay down the existing loan on the home faster before doing a cash out refinance.
5. Short-term rentals
Some people make money in real estate by using their entire home as a short-term rental. Homes in hot spots like San Francisco or Miami may be prime locations for short-term or vacation rentals or for business travelers looking for an alternative to a small and pricey hotel room.
One of the potential advantages of renting a home out for the short-term is that the rent price may be higher. However, tenants may also be more demanding and there can be a lot of work involved transitioning renters in and out, which makes owning a short-term rental more like being in the hospitality business than a landlord with a tenant on a long-term lease.
6. Home flipping
Buying low and selling high is the name of the home flipping game. Sometimes, owners don’t have the time or money to take good care of their property, and eventually the place falls into disrepair.
Real estate investors who are experts at fixing and flipping estimate the amount of repairs needed, and offer the owner a price that’s below market in exchange for a quick close with minimal contract contingencies.
If the offer gets accepted, the home flipper closes escrow, makes all the repairs as quickly as possible, then re-sells the home to an owner occupant or an investor looking for a turnkey rental property.
7. Wholesaling
Real estate wholesaling – also known in some areas as contract flipping – is a variation of home fixing and flipping.
A wholesaler finds a distressed seller, such as an owner going through a divorce or under financial hardship. After negotiating a purchase contract with a below-market price, the wholesaler opens escrow with a small refundable earnest money deposit, then finds another investor to assign the contract to in exchange for a wholesale fee.
When the deal closes, the wholesaler gets paid, and the new owner makes any needed repairs then turns around and sells the home or rents it to a qualified tenant.
8. Real estate bird dog
People who have a lot of time on their hands but very little money sometimes start out in the business by being real estate bird dogs.
Real estate investors hire bird dogs to search for distressed property or to find owners selling off the market, then pass the lead along in exchange for a bird dog fee. While fees vary based on the investor and quality of the lead, fees that real estate bird dogs earn may range from $500 to $5,000 or more.
9. Private lending
Private and hard money lenders provide loans to people who can’t qualify for financing, or who need a loan to fix and flip a home. Interest rates are high and loan terms are short, creating the possibility of making some good money in a short period of time.
To be sure, there is a certain amount of risk in private lending. Steps private lenders take to help minimize the risk include requiring the borrower to have a large amount of equity, cross collateralizing the loan with other assets the borrower owns, or even taking a small piece of the deal.
10. Real estate agent/broker
Investing in real estate doesn’t require a real estate license. However, many successful investors began their careers by working as a licensed real estate agent and eventually owning a company or franchise as a broker.
There isn’t a big barrier to entry for people that want to become a real estate agent. After attending licensing classes and passing the state test, a newly licensed agent can interview with different companies to find the best match.
Real estate agents have access to the multiple listing service (MLS), which can be a good way to find deals as soon as they hit the market. Real estate agents typically earn a sales commission equal to 3% of the property selling price for representing a buyer or seller, so the money can quickly add up for an agent willing to work hard in the business.
11. Property management
Another good way to put a real estate license to work is by being a property manager for real estate investors.
Managing real estate requires quite a bit of knowledge, including marketing a vacant property and screening tenants, signing the lease and collecting the rent, making sure the property is well maintained, and understanding the local and state landlord-tenant laws and fair housing laws.
Although property managers do a lot, there is also the potential for making good money.
Property management companies generally charge a monthly fee of between 8% and 10% of the monthly rent collected, in addition to new client start up fees, commissions on new leases and tenant renewals, project management fees for a major renovation, and sometimes markups on repair work done by outside vendors.
12. Real estate investment trusts
Real estate investment trusts (REITs) are companies that buy, own, and manage all types of income producing real estate, including residential and commercial property, and special use investments like cell phone towers or cold storage distribution facilities.
Shares of publicly-traded REITs can be purchased on trading platforms like Robinhood, Fidelity, and Ameritrade. One of the best things about owning a REIT is that they are required to pay out most of their profits to shareholders in the form of dividends.
In fact, some high-yielding REITs in the mortgage and real estate sectors pay annual dividends of 7% or more.
13. Crowdfunding
Real estate crowdfunding platforms like Fundrise and CrowdStreet raise money from large numbers of investors. Account minimums range from $10 to $25,000 and opportunities are available for both accredited and non-accredited investors.
People can invest in the debt or equity of projects like apartments, office buildings, single-family subdivisions, and mixed-use developments. Distributions may be paid out to investors monthly, quarterly, or annually if the project is successful, along with a percentage of any profits when the property is sold.
While crowdfunds may be easy to invest in, one of the drawbacks is that ownership shares are not as easily traded as publicly-traded REITs, or even owning real estate directly. Investors who put capital into a crowdfund should be prepared to have their money tied up for an extended period of time.
14. Commercial real estate
Commercial real estate includes assets such as retail, office, industrial property, apartment buildings, and raw land.
One of the advantages to commercial property is that leases generally run 5 years or longer, which can make the rental income stream more predictable. Commercial leases are often structured as triple net leases, which means that the tenant is responsible for paying for maintenance, property taxes, and insurance in addition to a monthly base rent.
One of the drawbacks to investing in commercial real estate is that business tenants may be affected more by economic cycles than residential tenants. For example, with more people working from home, the demand for single-family homes with more room is increasing, while the demand for office space in many markets is decreasing.
Things to know about making money in real estate
Here are some of the things to consider when choosing among the different ways to make money in real estate:
Capital: Certain methods for making money in real estate require more upfront capital than others. While many investors choose to purchase a single-family rental home, lenders generally require a down payment of at least 25% for an investment property loan.
Risk: In real estate investing, there is usually a correlation between the level of risk and potential reward. For example, although house flipping might lead to large profits in a short period of time, repairs could be much larger than anticipated due to hidden property defects.
Liquidity: Investments such as publicly-traded REITs are liquid, because they can easily be bought and sold. By comparison, selling a house may take 30 days or more, while some crowdfunding investments have lockup periods of two years or more.
Simplicity: Because houses can be found everywhere, there’s a strong demand for rental property, and financing is generally available, real estate can provide sound investment opportunities.
