One reason people think that it’s easy to get rich by buying, selling and renting real estate is that no one is making more of it. Manhattan Island is not growing and neither is the San Francisco peninsula.
To get rich in either of those markets requires that you start rich. (President Trump would be a good case in point.)
For the rest of us, getting rich in real estate depends on what we mean by rich. Most of us have seen at least one of those TV shows about buying some rundown house in an otherwise decent neighborhood and watched the stars knock down walls and tear out kitchens before “flipping” the house for a nice premium.
While you may want to try your hand at flipping homes, there are other ways to make money investing in real estate. The pros at Realtor.com look at five ways and calculate the risk-reward of each. See the website for full details.
House flipping. In the first half of 2017, the median gross return on flipping a house was 48.6%. Even if you figure that 30% of the gross return is eaten up by renovation and other costs, that’s still a hefty 18.6% return on your investment.
Investing in rental properties. Buying a rental property not only returned about 13% in profit in the first half of 2017, property owners also get tax reduction benefits like mortgage interest and property tax deductions along with operating expenses and repairs.
Investing in REITs. Real-estate investment trusts trade on stock exchanges in the same way as stocks. One way to make money with REITS is the tried and true method: buy shares at a low price and sell them at a high price. Most REITs also pay dividends, so there’s another way to make money. Median returns in the first half of 2017 amounted to just 2.75%, but over five years the median return is 9.79%.
Crowdfunding. This is much like investing in a REIT. A self-selected group of people put money into a fund that they then use to invest in real estate. Annualized return on these funds is 8.72%, but they have a short history and were only opened to small investors a couple of years ago. Make sure you understand how long the crowdsourced fund can hold on to your investment — most will not allow you to withdraw for at least five years.
Buying and living in your own home. Because real estate values typically rise of time, buying and living in a house can pay off handsomely. According to Realtor.com, the median one-year house price appreciation is currently 19% and the five-year appreciation is 44.8%. The housing crisis of 2007 and 2008 demonstrate that buying a house is not a sure-fire winner, but over a long time horizon, even those parts of the country where home prices still lag are likely to return a profit.