How to Make Money Investing in Real Estate

We have all heard of someone that made a fortune and retired early by investing in real estate. But no one ever seems to be able to explain to you quite how they did it. When you try to research it yourself you run into all kinds of “experts and gurus” spewing jargon, espousing complicated strategies with catchy acronyms, and trying to sell you on their multi-thousand dollar coaching program. I’m not a one of those “experts” and I don’t have a 6-month mentorship program to sell you.

However, I am a successful, professional real estate investor and I think it’s a shame that so many people think they need to rely on complicated investing strategies and sleazy sales tactics to create a profitable real estate investment portfolio. This is the first in a series of blog posts I have planned where I intend to first explain the basics of real estate investing. Then in later posts I will expand upon this and delve into the specifics of the various, strategies, specializations, and niches that different real estate investors use to create both active and passive income.

There are 4 primary ways that people make money by investing in real estate. Think of these 4 as the “building blocks” of real estate investing. Any piece of real estate can be turned into a profitable investment if one or more of these four main income sources can be used to create value in or from a property. By combining these 4 main elements of real estate investment income and altering the timeline and financing structure you can create almost all the different types of real estate investing deals and structures.Hopefully after reading this you will be inspired to start investing and being making money in real estate!

1. Rental Income

This is what lures most of us into initially considering real estate investing. The promise of that steady stream of cash flow. Whether it’s from long term renters, short term AirBnB guests or commercial tenants. This is the easiest type of real estate investment income to understand.

The difference between sophisticated investors and rookies is whether or not they have a plan for how to redeploy that rental income into another wealth building asset and/or business. Savvy investors understand that any income they don’t need to use to pay for living expenses right away should be used to generate additional income. They prioritize growing their overall return on investment and diversifying into multiple income properties. This is the easiest way to grow your net worth and total income level over the long term.

2. Market Appreciation

Once you own a property, your net worth automatically increases anytime its market value increases. This is one of the most truly passive forms of wealth creation because it requires literally zero further input or work on your part. Market appreciation is usually caused by macro scale economic factors like rising GDP and changes in the inflation rate. The catch is that to access this new source of capital you will need to either sell or refinance the mortgage on the real estate in question.

Market changes can also be a double-edged sword. Real estate prices tend to increase overall, over time, but decreases in market value in some years are a normal part of the economic cycle. Relying on market appreciation alone to make a real estate investment profitable is called market speculation. The latter is really just a complicated form of gambling and should be avoided. Market appreciation can create massive wealth for real estate investors, but it should never be solely relied upon to make a deal work.

3. Tax Advantages and Write-Offs

Many of the costs associated with owning an investment property can be written of on your taxes because they are considered a business expense. If you own the investment property in your personal name or the name of a business that earns income from other sources you may be able to use these tax deductions to shelter a greater portion of your total taxable income. Thus, reducing the total income tax that you pay each year.

You will also have the ability to schedule large capital expenses like renovations or improvements to the property, to occur in the same fiscal year that you also earn large windfalls from your other business’ or regular day job.  By doing this you can help to balance out the tax implications of a sudden, large increase in annual income. The advice of an experienced accountant or CPA is required to best take advantage of the tax savings created by real estate investing.

4. Equity Gain from Mortgage Principal Repayments

This only applies if you have used some sort of debt leveraged against the property in order to finance the purchase. Most investors use a mortgage loan to purchase property. Some larger and more sophisticated investors will use other debt structures like lines of credit, portfolio loans, low interest balance transfer credit cards, etc.

Typically, every time you make a mortgage payment it is divided into two portions. The first portion is applied towards the interest charged on the loan and the second portion is applied towards the principal amount borrowed. This means that each month you pay back an ever-increasing portion of the loan principal and automatically gain a corresponding amount of equity in the property.

This equity gain is a source of income! If you don’t believe that this counts as income, ask the CRA or IRS. They treat it as a taxable income and so should you! Even though the money has not been directly deposited in your bank account yet. True, they may wait until you sell the property before calling due the tax owed, but believe me, they always have the tax bill waiting for you when the time comes.

Many people forget to account for equity gain when calculating the total return on a real estate investment. In many cases it’s one of the largest streams of income that a rental property will generate in its first few years. Mortgage principal paydown is also one of the best ways to steadily grow your net worth every year. Every time the tenants pay rent and you use part of it to make a mortgage payment you are effectively paying yourself.

For more info on different mortgage types and cash-out mortgage refinances click here.