Some people get in to the real estate business with the notion of becoming overnight millionaires. Before you commit and decide that this is where you want to invest your money, it is wise to understand how money comes by in real estate.
Value appreciation
The value of a property increase in value as time goes by due to several factors. This increase in value or appreciation is achieved by refinancing or selling the property.
Raw land
Developing a piece of land that has no development on it increases its value. With the towns and cities becoming more and more congested, any available land on the outskirts becomes a high target for sale to developers. The value sky rockets once the land is developed.
Raw land can also appreciate in value when materials of high value or minerals are discovered.
Property for residential use
The location of a residential house is a major determining factor for its value. The more amenities the neighborhood has, the more the value and the opposite can be true.
Upgrading the facilities in the house can also increase the value. A new paint job, new bathroom features, remodeling the kitchen etc. can raise the cost of a property.
Property for commercial use
Similar to a property for residential use, the location, amenities and facilities as well as upgraded features make a commercial property gain in value. A good commercial property has high demand and this demand in itself increases the value of such a property.
How inflation affects appreciation
Inflation has a great impact on the economy and therefore your investments are not spared. If the inflation is high, you end up spending more while investing as opposed to when the inflation is low.
Real estate income
There are various ways through which you can make some income or rent from real estate.
Income from raw land
Raw land can be leased out for production especially in the agriculture sector. Also depending on the rights you have on the piece of land, you can receive regular payments or royalties from companies for any discovery or any structure they put up.
Income from residential property
This involves getting someone else to live in your property and they pay you a monthly fixed amount commonly known as rent. The rent goes up as the demand rises.
Income from commercial property
A commercial property brings you income as rent, just as a residential property.
Real Estate Investment Trust (REIT)
In a REIT arrangement, a person owning several commercial properties gets individuals to buy shares from this venture so that they can buy more properties. The investors then get a share of rent income distributed to them.
Mortgage Investment Corporations (MIC)
This is investing in private residential properties and this type of income comes through payment of interest to investors.
Finder’s fee
This is whereby, you pay a certain amount of money to buy a specific property at a set time. In the meantime, you look for another buyer, who buys the property at a higher price and the excess amount becomes your profit, commonly referred to as the finder’s fee.
In conclusion, the major ways in which you can make money in real estate is by buying for less and selling for more or collecting rental income.
