How Much Do Real Estate Investors Make?

How Much Do Real Estate Investors Make?

Frequently Asked Questions

How do real estate investors make money? Real estate investors can make money through reselling properties at a higher price, earning a fee on wholesale properties, and through rental income. If the investor is holding property for rental, they may also earn money through appreciation of the property value. Inflation can also play a role in increasing the property value and in investors making more money on the final sale. If you are ready to get started, check out our overview of how to invest in real estate.

What percentage of real estate investors fail? While some estimates say as much as 95% of all real estate investors fail, that is because of just a few simple factors: lack of planning, research, and/or time to follow through. A good real estate investor salary doesn’t come without work. The most important work is to gather your team, do your research, and get a good mentor. If you follow the steps in our real estate investing guide and consistently apply what you learn, you will be at the 5% success rate in no time. There is no limit to your real estate investor salary.

How much can I make from house flipping? Real estate investor salaries from house flipping can easily reach $100,000 or more per year. The key to great returns on house flipping is to carefully select your target neighborhoods, accurately calculate renovation costs, and secure a quick sale. TV shows can make it seem like house flipping gives automatic returns. In reality, this requires far more research and perseverance. But, as you learn the market, house flipping can lead to a consistent salary and good ROI. For more information, read our full guide on how to start a house flipping business.

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Alternative Real Estate Income Sources

Real estate investment trusts (REITs)smortgage-backed securities (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs) are investment alternatives within the real estate sector. They are generally considered vehicles for deriving real estate income but they have varying processes for doing so and varying processes for entry.

REITs

With a REIT, the owner of multiple commercial properties sells shares (often publicly traded) to investors (usually to fund the purchase of more properties) and then passes on the rental income in the form of a distribution. The REIT is the landlord for the tenants (who pay rent) but the owners of the REIT record income once the expenses of operating the buildings and the REIT are taken out. There’s a special method to assessing a REIT.

MBSs, MICs, and REIGs

These are even a further step removed, as they invest in private mortgages rather than the underlying properties. MICs are different from MBSs in that they hold entire mortgages and pass on the interest from payments to investors, rather than securitizing portions of principal and/or interest. Still, both are not so much real estate investments as they are debt investments. REIGs are usually private investments with their own unique structuring, offering investors equity investments or partnership servicing.

Several credible real estate alternatives are available for making money in the sector but they come with varying caveats and entry points.

Why Aren’t the Numbers More Specific?

It can be a challenge to accurately predict a rental real estate investor’s income because there is a myriad of factors to be taken into consideration. For example, looking at the cash flow of each property, as well as the different properties owned by the investor.

Due to the fact that real estate investing is mostly a local business, the yearly investor’s income will be determined by the local market. The average salary for a real estate investor in North Carolina is about $99,000, whereas, in New York, it’s over $136,000.

Using Cap Rate to Compare Investments

The good news is that there are tools available that make comparisons between potential real estate investments easier. One of these, which will become invaluable to you on your quest to make money from real estate is a special financial ratio called the capitalization rate (cap rate). Cap rates show the rate of return on a commercial real estate investment. It takes its basis from the net income the property will produce.

If a property earns $100,000 per year and sells for $1,000,000, you would divide the earnings ($100,000) by the price tag ($1,000,000) and get 0.1, or 10%. That means the cap rate of the property is 10%, or that you would earn an expected 10% on your investment if you paid for the real estate entirely in cash and no debt.

Just as a stock is ultimately only worth the net present value of its discounted cash flows, a real estate is ultimately worth a combination of:

  • The utility the property generates for its owner
  • The net present cash flows it generates—relative to the price paid

Challenges That Real Estate Investors Usually Face

Nothing good in life comes easy, and real estate investment is no different.

Presence of Volatility

Market volatility is one problem that is currently plaguing most real estate investors. The coronavirus pandemic has brought with it a lot of uncertainty, which has definitely had an impact on real estate prices. How any investor will deal with the volatility depends on their strategy. Investors who are in it for the long haul may prefer to stick to stable investments for the time being.

Use Invelo for Real Estate Investing
Use Invelo for Real Estate Investing

The Increasing Popularity of iBuyer

Websites like iBuyer are becoming formidable competitors for many in the states. While competition will always be there, it is especially crucial right now for you as an investor to be transparent with your clients.

You need to earn their trust and assure them that there are no hidden fees to ambush them after they agree to the deal. Conveying a sense of transparency and reliability is necessary for you to outperform all your competitors.

Dwindling Numbers of Home Listings

The limited number of lucrative, active home listings presently contributes to making the market even more competitive and difficult for real estate investors to make handsome profits. Just for illustration, the number of active listings in the Austin-Round Rock Metropolitan Statistical Area (MSA) went down by 56 percent in June 2021.

About this, Kristee Leonard, The Leaders Realty, LLC, said, “It is even more vital right now for an investor to be working with a real estate broker who will provide them with off-market listings.”

Hyperinflation Due to the Pandemic

The hyperinflation on assets brought on by the pandemic makes it difficult for real estate investors to offer competitive prices to customers. This makes it difficult for real estate investors to estimate cash flows from a property and decide whether or not to invest in it.

The effect of appreciation on the investors’ returns can be canceled out by hyperinflation as it reduces the investors’ purchasing power.

Moreover, the diminishing number of home listings contributes to the prices of real estate increasing.

Capitalization Rate Compression

Capitalization rate compression happens in markets with rising prices—the higher the prices, the lower the capitalization rates.

Supply chain disruption also contributes to increasing prices, as Cliff Booth, Westmount Realty Capital, LLC, believes.

“Disruption to supply chains has contributed to inflation in construction pricing, spurred by a drastic increase in the cost of materials, including lumber and steel, as well as overall higher wages due to a limited construction labor pool.”

Andrew Schena, Capital Equity Partners, LLC, thinks investors should review their basics and realize the opportunity cost of investing in deals that are unlikely to succeed. “Understand who, what and where you’re investing in,” he said. “Ensure the operator has stress-tested their business plan.”

Finances

As with many businesses, you need money to be able to make money in real estate. Do not forget to consider costs like down payment, closing costs, maintenance fees, mortgage payment, selling fees, etc.

Down payment depends on factors such as the type of property, sale price, and the type of mortgage loan you take out from a lender or bank. When thinking about costs, you should expect at least a 20 percent down payment and an additional 2 to 5 percent in closing costs. Closing costs may include agent fees, insurance, appraisal costs, etc.

Buying condos may subject you to Homeowners’ Association (HOA) fees, which are extremely high. Also known as the HOA fee, it is a sum payable by owners of some particular types of real estate. These fees are used to maintain and enhance those properties.

How to make more money as a real estate investor

As you can see, your estimated salary as a real estate investor can vary greatly. Fortunately, investors have a lot of control in their careers. That means if you're not making what you want or just want to scale up, there are plenty of steps you can take to do so.

Here are just a few ways you can improve your earnings as an investor:

Diversify

If you've only flipped properties or rented out single-family homes, expand into other forms of real estate investing. Add a few vacation homes to the mix, try a multifamily property, or give wholesaling a whirl. You'll increase your earning potential — plus, you could find something you're really good at or just enjoy more.

Do more deals

This one's pretty simple: The more deals you do, the more you'll earn. If you're only doing five flips per year, think about adding another two. If you have two rental properties, consider a third (maybe even a duplex or triplex to really increase those earnings). Just keep in mind that the bigger your portfolio grows, the more work you'll be required to do. So be prepared and set aside the time (or team) to do it.

Get a mentor

If your real estate career isn't quite panning out, then look to someone who's come before you. Many successful real estate investors offer coaching and mentoring programs, and they can help guide you on growing your career and your earnings. Attending networking events is a great way to find a potential mentor. You can even ask your favorite real estate agent for some recommendations in the area.

Improve at least one skill

Read, take classes, and make it a point to improve at least one of your basic investing skills. If you improve your negotiation skills, for example, it might mean lower costs and higher returns on your next flip. If you increase your knowledge of carpentry, it could reduce rehab costs down the line. Even small, incremental improvements in your capabilities can make a big difference on your bottom line — and your real estate business as a whole.

Change your location

The data above spells it out: Real estate investing returns vary widely depending on where you're active. If your properties aren't delivering the return on investment (ROI) you've been hoping for, then branch out location-wise. Try a real estate investment in a new city or even a new state. Just be sure to do your research and identify the real estate market with the highest potential possible before diving in. You'll also want a plan in place for how you'll manage the property (or just the deal) from far away.

Increase your rents and prices

Obviously, if you charge more rent or price your flips higher, you'll make more cash. You'll just need to be careful here and make sure the price hike is justified. If it's not, you might find yourself with a vacant property — and that can hurt your earnings (and cash flow) more than anything.

Tips for making money with real estate investing 

Don’t quit your day job until you’re truly ready

Maybe you just read “The Millionaire Real Estate Investor” by Gary Keller or “ABCs of Real Estate Investing” by Ken McElroy, and you’re ready to make a splash in the market. 

As they say: Don’t quit your day job. Real estate requires a steady cash flow, and if you’re getting it from your full-time job, there’s no reason to disrupt that. It can take years of hard work, and often, years of losses to make it to the top. So don’t rush the process, or you could wind up in a tough situation. 

What’s more, a lender will want to see steady proof of income before giving you a loan. Simply put, quitting your day job might make it harder to secure the funding you need to buy a property. 

Be selective

It’s also important to be highly selective about the properties you purchase. Take your time and rely on the guidance of experts to help you make the right decisions. 

Just because a property seems like a guaranteed money-maker, it doesn’t mean that it will be. The best investments are often the ones that you don’t make! 

Location is key with rental property

Location is absolutely imperative for success when looking for a rental property. 

Let’s say you find a stellar unit at a great price. If it’s in the wrong part of town, you may have a very hard time renting it out. In many cases, you’re better paying more for a prime location because you’re less likely to have difficulty occupying or offloading the property.

Get a great agent 

Finding a great realtor is half the battle. Avoid working with a friend or relative just because they’re in the industry. Only go with the top performers to increase your chances of success.

Ask your personal network to see if they can recommend someone awesome. If you already know successful real estate investors, ask for their opinion on which agent(s) they recommend. 

You should also look for specialty agents for buying and selling. Often, agents excel in either one area or the other. It’s somewhat rare to find a pro at both buying and selling. 

Learn More:

Lean on REITs

When you start out in the real estate market, you’ll be challenged on several fronts: managing your property, keeping your clients and tenants happy, and assessing larger market conditions and trends. Real estate investing can be a full-time job, making it very difficult for someone with another full-time job.  

Consider testing the waters with investments in REITs and learning the market from the ground up. Invest slowly and track the market over a few months or years. Try to increase your bottom line by making wise investments. 

Then, when you’re ready, look into supplementing your investment by purchasing a direct property. You’ll have a better understanding of how the market works, decreasing your chances of making a bad investment.  

Do investors need a real estate license?

Investors don’t necessarily need a license to invest in real estate. However, there can be some good reasons for attending real estate school and passing the state licensing exam:

  • Access to the local MLS to find more investment opportunities.
  • Potential for more income by keeping the real estate commissions for yourself.
  • Build a network of other licensed real estate professionals to help you find and close more deals.

Of course, there are some drawbacks to getting and keeping a real estate license active. One of the biggest cons to having a license is that recurring association and renewal fees can really add up. This drains away valuable cash that might be better spent on buying more income property to scale up your portfolio. 

The Role of Inflation in Property Values

When considering appreciation, you have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your dollar can only buy about 90% of the same goods the following year, and that includes property. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it would still be worth many times more today. Because of runaway inflation throughout the 1970s and a steady pace since, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was fair market value at the time.

Thus, inflation alone can lead to appreciation in real estate, but it is a bit of a Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods cost five times as much to buy too, so purchasing power in your current environment is still a factor.

Why some investors make more money than others

Despite the hot housing markets from coast to coast, some real estate investors have been making a lot more money than others. Why is that?

To answer that question, review this list of things successful investors do every day:

  • Treat real estate investing as a business instead of a hobby.
  • Create a solid plan with achievable goals to stay organized and on track.
  • Choose an investment strategy and niche to accomplish short- and long-term goals.
  • Research and monitor the current economic trends such as consumer spending, job and population growth, and development for each market being invested in.
  • Develop a network of vendors, business partners, clients, and other investors.
  • Maintain high ethical standards, be honest, and follow the Golden Rule.

Other Real Estate Investment Ideas

Still, other investment opportunities exist in real estate. You can invest in real estate investment trusts (REITs). Publicly Traded REITs issue shares and are traded on an exchange, while privately held REITs or non-traded REITs are not available on any exchange. All types of REITs will focus on particular sectors of the real estate market, such as nursing homes or shopping malls. There are also several exchange-traded funds (ETFs) and mutual funds that target the real estate investor by investing in REITs and other investments in the real-estate sector.

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