Real estate is perhaps the oldest trick in the book when it comes to earning passive income – but what exactly is it and how can it be used in your entrepreneurial journey?
Real estate follows much of the same principles as buying stocks and shares.
You purchase a property, wait for it to increase in value and then resell it for a profit.
Real estate isn’t limited just to simply buying and selling properties, though, and there are several ways in which money can be made through the industry.
The first is simply renting out properties to tenants for a profit.
This involved allowing those in need of a home to stay in your property in exchange for monthly payments.
This will be the main source of your ongoing income when earning with real estate.
Purchasing properties for a lower price
Purchasing properties for lower than their market value instantly puts you at a financial advantage as you become the owner of a property without having to pay full price for it.
Consider this an investment – the money you’ve put into the property can be made back at any time and will, if all things go right, increase in value over time.
And selling them for an increased price
Once you’ve purchased a property for lower than its market value, you can earn back the price you paid for it at virtually any time.
Unlike with purchasing stocks and shares, real estate owners can try to beat the market price rather than hoping to match it.
Renting out small units
People don’t just want to rent whole properties – many are interested in renting out smaller units such as singular rooms/storage spaces.
By dividing your whole property into separate, smaller units you can diversify your income and charge more for each individual unit combined than you could if you were to rent out the entire property to a tenant.
Businesses are also always looking for properties to rent for storage, office space and whatever else they require.
Business-owners are often prepared to pay significantly more for properties than, say, a young couple looking for a temporary home.
By renting to businesses, you ensure that your tenants are both safe (so long as the business is well-established – not some dodgy phone-repairing business that like to dodge their taxes & charge extortionate rates) and, in most cases, sustainable.
A business moving their entire team into an office-space, for example, isn’t likely to be leaving any time soon.
Lump-sum profits for resale
Say you purchased a property for £200,000, spent £15,000 on refurbishments and earnt this sum back through rentals.
Now you have a property worth £215,000 that you can sell for an immediate profit – that’s without factoring in profits made through inflation.
Why Real Estate is Less Risky Than the Stock Market
Stocks can change in value incredibly quickly – they can plummet within seconds and skyrocket just as fast.
They are volatile.
Many trading agencies permit you to trade on leverage, meaning that if you purchase 1,000 shares worth of penny stocks each valued at £0.50 you will not be required to pay the full amount of £500 upfront. Instead, companies allow you to trade on leverage meaning that you could probably by the shares for just £50 – a fraction of the full value.
However, if the value of the shares drops down to, say, £0.45 – and this is inevitable in most cases – the balance of your entire account will be completely cleaned.
In the real estate world, that same value of £500 can be placed as a deposit on an expensive property.
Of course this value would be more when dealing with properties:
However for the purpose of making this easier to understand these figures have been simplified).
When renting out properties, the fluctuations of the market aren’t as much of an issue so long as you’re still being paid enough from tenants to meet your monthly fees.
Even if the property isn’t occupied for a long period of time, your mortgage can still be paid using your savings.
Although this isn’t ideal, it still makes trading in real estate much safer than the stock market as your finances are completely in your hands:
You won’t be completely wiped out by margin calls if the market happens to depreciate in value.
Real estate is what you do with it
You intentions for a property should influence the characteristics of it:
The area in which it is situated, the type of property you purchase and the state it is in at the time of buying.
Purchasing a low-end, desperately-in-need-of-renovation property knowing that you don’t want to spend any money on refurbishments or actually do that job yourself is a terrible idea.
Firstly because you’re going likely to be attracting nightmarish tenants that are in need of a low-end property because of their low budget, and secondly because your property will barely increase in value if you don’t intend to, well, increase its value!
If you don’t intend to spend any cash on doing-up a property, you should seek to purchase a property that doesn’t really need it.
Alternatively, if you’re looking for a property that you can improve and sell for an increased price, you should search for units that are in need of repair and are fairly low-value.
If your plans are to rent a home to families then you should consider the local area – are there schools nearby?
Is it a family-friendly place to live?
Business-newbies just starting out in their trade may conversely wish to purchase smaller properties – studios with few bedrooms that are near to business districts and city centres.
Additionally, you should take into account your renovation and handyman skills.
If you plan to do all of the work yourself then you’re going to need a lot of spare time and adequate construction skills.
You’re also letting yourself in for a far more stressful and demanding experience that requires a lot of your time and efforts.
If you choose to outsource your repairs and pay somebody else to handle things for you, you’ll be saving an awful lot of time and a considerable amount of added stress.
You will, however be deducting from your profits if you choose to pay for refurbishments.
Ultimately, your real estate profits are largely dependent on you personally.
With stock markets, you’re very much at the mercy of the unknown.
Buying shares into a promising-looking Japanese tech company that’s set to hugely increase in value could be a terrible mistake because of the devastating tsunami that’s about to hit and destroy the business altogether.
You cannot control this and there’s no way you could predict it – no matter how savvy an investor you are, you’re not a fortune teller.
There are often unforeseeable circumstances that can debilitate businesses and leave you out-of-pocket despite your seemingly wise investment.
With real estate, your profits depend on you and not on the unknown events of the future.
You are in charge of renovations, promotions, tenants and trading the property in when you’re finished.
Real estate doesn’t depend so much on the market and value can be added to a property even when the market is at its lowest.
Real estate will generate you a reliable and predictable monthly profit that can cover your expenses without you relying on an increase in stock values.
You won’t be stressfully buying and selling stocks in the hope of earning enough money to cover your electricity and mortgage bills and can instead put your efforts into improving your properties and adding value to them – regardless of the wider patterns of the market.
Even if your property isn’t doing too well:
You can always sell it onto somebody else and, in most cases, make most of your money back straight away.
Purchasing properties gives you not only a steady and sustainable flow of passive income but also acts as an investment that you can cash in at any time.
Really, there isn’t much to lose.
Of course there are circumstances where the real estate market plummets, or seasonal fluctuations that may decrease your chances of selling your property
if the proverbial does happen to hit the fan:
However people are always going to need houses.
The real estate market will not crash and will always remain a reliable source of income for the investor.
So why wait?
Don’t just sit on your savings and allow them to gather dust faster than they actually increase in value – pump that money into a physical property and begin renting it out to those that need it.
If things don’t go as planned, selling the property on is always an option.
There really is nothing to lose.
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