Do Real Estate Investors Make Money Buying Houses?

by Stephen Twomey | Feb 2, 2024 | Accredited Investor, BAM Blog, Blog, Real Estate Investing | 7 comments

What makes real estate unique and interesting is the fact that there are many ways to participate. Investors can purchase physical properties or invest in real estate investment trusts (REITs). There are also many different property types such as residential real estate, commercial real estate, industrial real estate, etc.

Investors can easily find a strategy and property type that suits their financial goals and investment preferences.

But because real estate is generally considered a low-risk investment, many investors jump in, expecting to quickly turn a profit. However, successful real estate investing requires a careful analysis of market trends, property values, and potential risks. Investors need to use a strategic approach instead of buying into the idea that real estate investing is easy. Remember that no investment is without risk. [1]

With that out of the way, we can say that investors can definitely make money by buying homes. This is why real estate investing remains a popular avenue for wealth creation. It has the potential for long-term returns if you know what you are doing. Here are some ways investors can generate a profit through real estate.

Appreciation

Real estate investors can typically generate profits through property appreciation. This refers to the increase in the value of a property over time, which generally happens with real estate properties. Investors profit from selling the property at a higher value than what they bought it for. [1]

Property appreciation can occur in two main forms: market appreciation and forced appreciation.

Market appreciation is driven by external factors like economic growth, increased demand for real estate in a particular area, and infrastructure development. All of these things can lead to a rise in property values. On the other hand, forced appreciation is within the investor’s control and involves enhancing the property’s value through strategic renovations, improvements, or efficient management.

Savvy investors usually purchase real estate properties in up-and-coming neighborhoods so that it appreciates over the long term at a higher rate. Because of this, we can consider appreciation a one-time pay-out for a long-term investment. [1]

By carefully selecting properties in areas with high growth potential and actively working to improve and maintain them, real estate investors can position themselves to greatly benefit from appreciation.

Rental Income

Real estate is a good source of predictable, regular cash flow. Depending on the type of investment, it can even be a source of passive income. The level of involvement ultimately depends on the investment strategy, but passive income is possible through monthly rent. [1]

Real estate investors generate rental income by acquiring properties and leasing them to tenants. The monthly rent paid by tenants serves as the primary source of revenue in this model. In exchange, tenants earn the right to occupy the property.

The amount of rental income is typically determined by factors such as the property’s location, size, amenities, and market demand for similar properties. Well-located rental properties with several amenities may produce larger rental income.

Keep in mind that this approach means that you will be playing the role of landlord, meaning you are responsible for collecting rent and managing the day-to-day operations of the rental property. So while it’s a good source of passive income, this is not a passive investment as it requires a lot of your time and energy. [1]

Successful investors strategically choose properties in high-demand areas and set competitive rental rates to attract and retain tenants. This means real estate investing can be a good way to enjoy a steady cash flow. Consistent rental income even contributes to the property’s return on investment (ROI).

On top of that, investors often seek to increase rental income over time by making improvements to the property or adjusting rental rates based on property appreciation.

Fix and Flip

Some real estate investors earn from real estate by using the popular “fix and flip strategy”. This is when an investor purchases distressed properties, renovates or “fixes” them, and then sells them quickly for a profit.

Fixing properties means adding value to them through renovations and improvements. By investing in upgrades that appeal to potential buyers, investors can significantly increase the market value of the property. This is an example of forced appreciation, which we mentioned earlier.

Investors may add things like modern kitchens, updated bathrooms, and other amenities to improve the appeal of a property.

The goal of this strategy is to sell the renovated property at a higher price than what it cost to purchase them. Run down or outdated properties can be purchased at a low price for the local market. Through renovations and repairs, they become more attractive and may sell for a higher price. [1]

While on paper this may sound like an easy and lucrative strategy, it is only if you understand the process and know how to make repairs and do renovations on your own. Investors also need to be knowledgeable enough to calculate the value of the property, the cost of renovations, and its post-renovation value.

Successful fix and flip investors often possess a keen understanding of the local real estate market. Timing is crucial in this strategy, as holding onto the property for an extended period can erode potential profits due to carrying costs like mortgage payments, property taxes, and maintenance expenses.

Done properly, it can lead to big profits. It helps to have good relationships with contractors who can help estimate the costs and make repairs at a reasonable price. [1]

Wholesaling

Real estate investors can generate income through wholesaling by acting as intermediaries in property transactions.

Similar to the fix and flip approach, wholesaling involves finding distressed or undervalued properties. But instead of renovating and adding value to them, the investor negotiates favorable purchase agreements with sellers and sells those contracts to other investors or buyers at a higher price. The contract spells out the amount the wholesaler will sell the property for. [2]

The difference in prices is known as the wholesale fee and can be 5% to 10% of the property price.

Successful wholesalers often possess strong negotiation skills, a keen eye for market trends, and an extensive network of buyers. This strategy is particularly attractive to investors with limited capital, as it requires minimal upfront investment and allows for quick turnover of properties.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are suitable for investors who want a hands-off approach to real estate investing. Acting like mutual funds, REITs allow investors to earn money in real estate without directly owning or managing properties. [1]

REITs are specialized companies that own, operate, or finance income-generating real estate across various sectors. They may purchase different types of properties including residential, commercial, and industrial real estate. Investors can then invest in the REIT, which is publicly-traded. [1]

Real estate investors receive dividends generated from the rental income and capital gains of the real estate properties held by the trust. It can be a good source of consistent income for investors. Additionally, the value of the REIT shares can appreciate over time, which means investors can also profit from that when they sell their shares.

REITs also offer diversification. By owning real estate through REITs, investors can spread their risk across different types of real estate assets.

Short-Term Rentals

Short-term real estate rentals have become very popular in recent years, and investors can capitalize on this lucrative market to generate substantial income.

By strategically acquiring properties in desirable locations, real estate investors can tap into the growing demand for temporary accommodations like vacation homes. These short-term rentals are fueled by tourism, business travel, and short-term housing needs.

Platforms like Airbnb and VRBO have revolutionized the way travelers find lodging. This opens up a new and dynamic platform for real estate investors. They can showcase their properties online and attract more renters.

The key to success lies in optimizing occupancy rates and nightly rates, adapting to changes in seasonal demand, and ensuring a positive guest experience. Investors should take care of the investment property and add amenities to enhance the property’s appeal. This can even help command higher rental prices.

Remember that short-term rentals are not welcome in every city, despite their popularity. Some cities prohibit rentals of less than 30 days unless the resident stays in the property along with the guest. Other places may require property owners to register their short-term rentals and pay a fee. [3]

As the short-term rental market continues to evolve, savvy investors need to learn how to navigate these new waters to reap significant financial rewards.

Tax Benefits

Real estate investors can also leverage a variety of tax benefits to enhance their ROI. One way this could be achieved is through depreciation.

Depreciation is the incremental loss of an asset’s value, generally due to assumed wear and tear. This allows investors to deduct a portion of the property’s cost each year over its useful life. This non-cash expense provides an annual tax shield, lowering taxable income and, consequently, reducing the amount of taxes owed. [4]

Additionally, investors can benefit from interest deductions on mortgage loans, which can significantly reduce taxable income. Real estate professionals who actively participate in managing their properties may even qualify for special tax treatment, such as the ability to deduct real estate losses against other income.

These tax advantages make real estate an attractive investment option for a lot of investors.

Commercial Real Estate

Commercial property is a real estate asset that has been zoned for businesses. This may include industrial and retail establishments like shopping malls, warehouses, office buildings, and manufacturing sites. [1]

Much like residential real estate properties, commercial properties can generate rental income by leasing them to businesses. Rental agreements typically involve long-term leases, providing a steady and predictable stream of income. Commercial real estate investors can also benefit from property appreciation.

Other investors take on a different approach, engaging in property development and redevelopment and aiming to sell their commercial properties for a profit. There are many ways to leverage commercial real estate to generate income and build wealth. Real estate investors can choose which one suits them best.

Multifamily Syndication

Similar to REITs, real estate syndication allows you to engage in real estate investing without becoming a landlord and taking on all the responsibilities that go with that title.

In a real estate syndication deal, a group of investors pool their financial resources together to collectively acquire a real estate property. When the deal is made to acquire a multifamily property such as a condominium or apartment community, this is called multifamily syndication. [5]

Multifamily syndication is the most popular type of syndication deal for two reasons: one, because multifamily properties are larger and more difficult to acquire for a lone investor; and two, because it is more challenging to manage a large real estate property by yourself. Multifamily syndication makes it possible.

A syndicator, also known as the sponsor, puts the deal together and locates investors who will participate in the deal. As the general partner (GP), the syndicator takes on most of the responsibilities in the syndication deal. Meanwhile, investors become limited partners (LPs) and their only responsibility is to provide most of the capital needed to purchase the property, and pay certain fees. [5]

Because the syndicator also handles property management, this is a true passive investment in real estate.

In exchange for providing the capital, investors get a share of the property’s rental income. Multifamily properties are known for their strong and consistent cash flow, which is another reason why this type of investment is so popular. Even if one or two tenants leave, the cash flow is not fully disrupted, unlike with single family rental properties.

Depending on the deal structure, investors may also earn a share of the equity upon resale. Each deal is different, and investors need to carefully analyze the syndication agreement before agreeing to participate.

Keep in mind that most syndication deals are exclusive to accredited investors. If you are an accredited investor looking for a passive real estate investment, multifamily syndication may be right for you.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

Successful real estate investing often involves careful research, market analysis, and a solid understanding of the local real estate market. Managing risk and having a clear exit strategy are also crucial aspects of a successful real estate investment.

So to answer the question, it is definitely possible to make money in real estate by buying houses—or even commercial properties. There are many ways to achieve this goal.

But if you are an accredited investor looking for a hands-off investment in real estate, multifamily syndication is the right choice. Since the syndicator is the one who will be making all the decisions, it is important to do your due diligence and find a syndicator you can trust.

One of the best things about multifamily syndication that sets it apart from REITs is that you can choose to participate based on the property that is being offered. And if you are an accredited investor looking for multifamily real estate syndication deals in the Midwest, you should work with BAM Capital.

BAM Capital is an Indianapolis-based syndicator with a reliable track record for excellence. It is known not only as a leader in its industry but also as a trustworthy syndicator that accredited investors love.

BAM Capital prioritizes high quality multifamily properties in the Midwest that are Class A, A-, and B++, with in-place cash flow and proven upside potential. This syndicator uses an award-winning strategy to mitigate investor risk while creating forced appreciation. [6]

Because BAM Capital is a vertically-integrated company, they can handle every step of the syndication process, from acquiring the property to renovating and managing its daily operations. In fact, BAM Capital now has over $700 million AUM and 5,000+ units. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.