There are over 21 ways to make money in real estate investing. I've been investing since the 80's and can tell you that each of these ways have been tried and proven to be legal and successful ways to make money in real estate. In Part I of Way to Make Money in Real Estate Investing investors were given the first 10 different ways to invest in real estate. Below is the last 11 ways that I know of to make money in real estate investing:
21 Proven Ways To Make Money In Real Estate Investing
11) Develop – Developers either build from the ground up, or do major renovations. If the developer sells, the developer makes a profit over and above his or her costs. Or the developer might opt to keep the property, and make a positive cash flow and acceptable return on investment based on the revenues.
12) RE Option Contract – Make an agreement with an owner which gives you the option to purchase the property for a pre-determined price. You will typically have to give the seller “consideration” (a negotiated amount of money) to have the option to buy within a certain date.
Hopefully you will be able to sell the property for a higher price than your option price, the consideration, and any other costs you may incur.
13) Syndication – Become a syndicator. You can put together deals where you and your investors purchase properties. There are many ways to make money as a syndicator, including acquisition fees, management fees, and gaining a percentage of the property in your role as the syndicator.
Several of my properties have investors. More about this approach will be described in another blog post.
14) Assemblage – Using this approach, you quietly acquire several pieces of property which are located either near or adjacent to each other. You are in the process of acquiring a large parcel of property that could have a higher and better use.
As an example, my sixty-seven- and seventy-seven-unit buildings are located in a very desirable area of Milwaukee which is prime for condominium development. Between these two buildings is a twenty-four unit property.
One day the thought popped into my head that if I acquired the twenty-four unit building, I would control a major parcel of real estate in a very desirable location. A developer might pay a pretty sum to buy all three buildings, tear them down, and build a major condominium high-rise. But when I approached the owner of the twenty-four-unit, he wasn't at all interested in selling, and, in fact, was hoping I’d sell him my two buildings.
One legendary Chicago real estate investor, Arthur Rubloff, was a master of assemblage. Over several years, he quietly assembled pieces of real estate located on the far southwest side of Chicago. After gaining control of several acres, he developed Evergreen Plaza, a very successful shopping mall.
15) Notes – Buy real estate notes at a discount so that they produce high annual yields. For example, let's say you find someone who sold a property and took back a first mortgage for $74,000 at 7% amortized over a twenty-five year period, with a ten-year balloon.
After a couple of years, the note holder finds a nice retirement home and determines that he needs cash to make the down payment. Most banks won't use his note as the security for a loan, and so, in order to raise money, he has to sell the note at a discount. Let’s say there's $72,000 left on the note.
If he wants to sell it, he may have to discount it by $10,000 or $20,000 to liquidate the note. The investor who buys the note for $55,000 has a stream of money payments coming in that will be well above a 7% return. If you get impatient, you can re-sell the note and hopefully make a profit at a higher price.
A second way to make money on notes is by brokering them. For example, let’s say you are able to buy a note with $100,000 left on the loan for $70,000. You may be able to flip it to another note buyer for $80,000 and make a quick $10,000.
16) Substitute collateral – As an offshoot of buying discounted notes, you could theoretically buy discounted notes or even bonds, and substitute them as part of your down payment when you acquire a property. For example, if you could find an $80,000 note to buy for $60,000, and then find a seller who is willing to accept the note as an $80,000 down payment (or part of a larger down payment), then you have just gained $20,000 of equity.
However, I’ve never done this, and when I've approached sellers as to how responsive they'd be to this idea, they tell me they prefer cold, hard cash.
17) Rights & Royalties – Lease or sell certain rights that you, as the owner, have on the property. These could include water rights, air rights, oil rights, and the like.
18) Low Cost Financing – Buy at a market price, but get a low interest rate. A classic case is the five-unit building I purchased in Aurora, Illinois. I paid market price (about $70,000), but got 0% financing on the loan. This helped make the cash-on-cash return very high.
To make this deal even better, Uncle Sam figured I overpaid for the property and so the 0% loan was really an interest-bearing loan. Uncle Sam allowed me to impute the interest rate of 9% even though I wasn't paying any interest. Tax breaks are always welcome.
19) Government Programs – Take advantage of the many government-sponsored programs. The government offers an array of goodies which can dramatically improve the figures when you perform a numerator/denominator analysis.
These benefits include reduced property taxes, grants, loans that can be forgiven, dollar-for-dollar tax credits on your income taxes, and low-interest loans. All of these help improve your bottom line.
20) Existing Liens – Buy out existing lien holders at a substantial discount and then purchase the property. You can gain a lot of equity using this approach. I haven't personally done this, but I know others who have paid off contractors at great discounts so they would release their mechanic's liens on a property.
They then turn around and purchase the property directly from the owner, but factor in the full value of the mechanic's liens.
21) Be the Bank – Be a hard money lender. If you have lots of spare cash sitting around and you are concerned about getting a higher return on your money than what is offered by the banks or treasuries, you can become a hard money real estate lender.
A hard money lender makes real estate loans using his or her own money. You are essentially operating like a bank. You can reap returns in line with existing lenders, or if you wish, you can target your loans to higher risk situations and earn higher returns.
You can also make loans and ask for a piece of the future appreciation. In this case, you are an equity partner. I personally follow Shakespeare's advice in Hamlet: “Neither a borrower nor a lender be” – at least in part. I'm a borrower who pays back loans on a timely basis.
I have only taken back one note to sell a building. I have never actually loaned money directly to a real estate borrower. I'm not equipped to make loans the way a bank is. Nevertheless, lending money is one additional way an investor can make money in real estate.
This completes my list. Although I'm sure it's not comprehensive, it does give an overview of many money-making opportunities in real estate. With creative thought, I'm certain you could add more ideas. Real estate provides a wealth of opportunities.