The Wealth Generator!
Real estate. One of the most well known wealth creators in the world. You ask most billionaire's and they'll happily list all the real estate they own and then some! There have been many self made millionaire's and billionaire's created as a result of learning how real estate works and how they can make serious money off it! In The Game of Money I like to think real estate is one of the most proven and best ways to win the game!
Making money in real estate though is not an easy feat. There's no click your fingers and watch numbers in your bank account double. Like any investment, real estate has its ups and downs and if you're not smart about it losing money can become very common. However, unlike some investments, you can learn and study the ins and outs of real estate, learn from other people's mistakes, what works and how you can make the most profit out of it.
But ok, let's get onto the good stuff.
As an overview there is two big ways to make money in real estate and that is through either capital growth or cashflow!
Capital growth in my opinion CAN be the most riskiest way to make money through real estate depending on what approach you take. Capital growth is quite simple to understand. It is basically the growth of the value of your property. Say for example you bought a single family house for $600,000 and then sold it 5 years later for $650,000. You have experienced capital growth as your houses capital has increased by $50,000.
Now the risky part of this approach can be if you buy a house with the mindset and plan to sell it in 6 months time at a higher price you bought it. This is where it can become a real numbers game where you have to calculate all of your expenses of buying and selling the house and then comparing that to the capital growth of the property. The expenses are much deeper than what most assume. People think that they can time the market well enough to "flip" a house for a large amount of profit in a short time. It is doable of course and some people have gotten lucky and achieved this but it is not common and I would not recommend you take that path.
However, if done right, capital growth can have the biggest power when it comes to building wealth. This is the more safer approach where you are essentially planning to own the property for 10+ years let's say. Historically over time thanks to a many factors real estate prices increase. Now the % that it increase is different between countries, states and suburbs and is where knowledge and learning is essential to success. But the point being the value of land increases and will continue to increase when looking at the bigger picture. This is where owning land over time greatly reduces the risk of the investment. The idea of capital growth can be tied into the other way of earning money through real estate which will be explained below.
How to increase your capital growth fast!
Renovations! The power of renovating and improving a house is phenomenal. For a few hundred dollars you can improve the value of your house by thousands! Or even better, spend a few thousand dollars on your property and see its price increase tens of thousands. In short, the money you spend on the house doing renovations is amplified when valued.
Some ideas that increase the value of your house by giving it a so to speak "facelift" is:
New coat of paint! Freshen up the walls, skirtings, roofs and even the exterior! The best part of painting your house is you can do this yourself therefore making it very inexpensive. Paint is a great way for buyers to instantly fall in love with the house due to that fresh coat feel
Lay new carpet. Old worn torn carpet looks raggedy and instantly affects the purchase price. This can be a little costly though but is well worth it
If you want to take the next level, spending a little bit extra for a complete kitchen or bathroom renovation will add a LOT of value. This is expensive though and will require trades to complete the task but the rewards are very beneficial!
Now my personal favourite way to make money through real estate is cashflow. Turning your property into a cashflow machine for life is something that sounds extremely appealing! The cashflow is generally earnt through rental income. That being that you own a property, whether it be residential or commercial and rent it out or let someone else "borrow" your property for cash! Now the process is no where near as simple as explaining the concept.
There is a lot of maths involved in renting out your properties for cashflow. And also like capital growth there is risk associated! We are going to use rental income as the example. In creating a cash flowing property your aim is for your rental income to outweigh your expenses. This is where the maths comes in, you will need to calculate all your expenses and assure that it is lower than your revenue off the property. If your expenses are higher than your income then you have a negatively geared property (see other post for what negative gearing is). This means that your property is costing you money which is far from the cash flowing machine you are trying to create! The best part about having a cashflow mindset is knowing that in the background you are receiving the benefits of capital growth. You are building your wealth through both the cash coming from the tenants and the value of the land and property appreciating!
In conclusion when it comes to real estate the main two big approaches for making money is capital growth and cashflow. Both have different levels of risk and reward associated with them. Nothing in real estate is easy, there is no drop your money and see the returns! It just doesn't happen (unless your investing into real estate funds and REIT's but that is for another post). However if you're willing to to learn and work hard in the area of real estate you will see the huge rewards and haul the benefits for many years to come.
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