How To Make Money In Real Estate With No License

Real Estate Increase in Property Value

First, it’s important you understand that property values do not always increase. This lack of asset increase can become painfully evident during periods like the late 1980s and early 1990s, and the years 2007-2009 when the real estate market collapsed. In fact, in many cases, property values rarely beat inflation—the increase in average prices in an economy.

For example, if you own a $500,000 property and inflation is 3%, your property might sell for $515,000 ($500,000 x 1.03%), but you aren't any richer than you were last year. That is, you can still buy the same amount of milk, bread, cheese, oil, gasoline, and other commodities (true, cheese may be down this year and gasoline up, but your standard of living would remain roughly the same). The reason is that the $15,000 gain wasn't real. It was nominal and had no real impact because the increase was due to overall inflation.

Mortgage rates are an interest-related factor that influences property values. To calculate a mortgage, you need a few details about the loan, and you can then use the mortgage calculator below to crunch the numbers.

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Rental as a Real Estate Investment

Making money from collecting rent is so simple that every 6-year-old who has ever played a game of Monopoly understands on a visceral level how the basics work. If you own a house, apartment building, office building, hotel, or any other real estate investment, you can charge people rent to allow them to use the property or facility. 

Of course, simple and easy are not the same thing. If you own apartment buildings or rental houses, you might find yourself dealing with everything from broken toilets to tenants operating meth labs. If you own strip malls or office buildings, you might have to deal with a business that leased from you going bankrupt. If you own industrial warehouses, you might find yourself facing environmental investigations for the actions of the tenants who used your property. If you own storage units, theft could be a concern. Rental real estate investments are not the type you can phone in and expect everything to go well.

3. Option a Property

A third way to make money in Real Estate investing without money or credit is to “Option” a property. 

How It Works

This type of transaction is similar to a Lease Option, but very different as well. Consider it a Lease Option’s cousin, who is much hotter and more fun.

Here is the simple difference between the two:

  • Lease Option: the seller has agreed to take a monthly payment for a specific amount of time, with a set purchase price to come at some point in the future. I do not accept any less than 5 years for these transactions and try to get ten years. 
  • Option to Buy: the seller is not accepting monthly payments. They have simply given you the exclusive right to buy a property at a certain price for a certain period of time.

Why would a seller choose one over the other?

Let’s look at a few circumstances and reasons that may persuade a seller to decide one way or another.

  • With an Option, the seller can continue to live in the house. At the same time, he/she will continue to make the monthly payment and take care of all maintenance and repairs.  The seller may not want to accept monthly payments, with the idea of someone else is living in their house.  While they may be motivated to sell, the thought of someone else eating dinner and walking around naked where they raised their children may be too much for them to handle. 
  • They may not have the time required for a Lease Option. If a seller is ten months behind on their payments with foreclosure knocking on the door, and you (the investor) don’t want to make up those payments and there is still a TON of equity in the house, an Option may be your only choice, short of paying cash.
  • With a straight “Option” the seller has nothing to lose. You have a set amount of time to buy their house, which you will only do if and when you find a buyer at a higher price than you have an Option for.  In this type of transaction, your target audience is not the B/C credit buyer, but rather the individual with cash or the ability to go to a bank and get a loan.

Why You Should (or Shouldn’t) Invest

The positives for you the investor, are as follows: You are not dealing with tenant buyers, repairs left by tenant buyers, angry sellers, evictions, lawsuits, monthly payments with no tenant-buyer… the list goes on and on. 

The negatives are you do not make any money at all unless you successfully find a qualified buyer within the time allotted in your Option to buy. The seller benefits because they pay no Real Estate commission, and they have the privilege of living in the house while you are trying to sell it.

1. Long-term residential rentals

One of the most common methods for making money in real estate is to leverage long-term buy-and-hold residential rentals. People will always need a place to live, and that means getting involved with rental properties. You need to do the proper amount of due diligence to source your property by keeping three principles in your mind: location, location, location.

Yes, you’ve heard it before, but location is everything when it comes to real estate. Not only does this apply for actually an increased asset value over time, but also in your ability to quickly rent that property to a long-term tenant. When you’re considering long-term residential rentals, look for a great location. That’s more important than the current state of the property itself. In fact, run-down homes in great locations are one of the best investments you can make.

This involves a more traditional approach to making money in the real estate market. It means buying a property with some cash on hand to make a down payment and then holding that property for the long term. Depending on your personal situation, you can easily grab that property for a very low or even no down payment. That’s especially true if this is a pre-existing, income-producing property.

If there’s positive cash flow in a residential rental, then it could be a great investment. However, you’ll likely not find that too easily, unless the current owner is unloading for personal reasons due to a divorce or other need to liquidate that property that necessitates having some cash on hand.

Making Money in Rentals

Operating expenses on a new rental property will be between 35% and 80% of your gross operating income. If the monthly rent charged is $1,500 expenses are $600 per month, that’s 40% for operating expenses. Many investors use the 50% rule. If the rent is $2,000 per month, expect to pay $1,000 in total expenses.

To lower your costs, investigate whether an insurance provider will let you bundle landlord insurance with a homeowners insurance policy.

Wall Street firms that buy distressed properties aim for returns of 5% to 7%. Individuals should set a goal of a 10% return. Estimate maintenance costs at 1% of the property value annually. Other costs include homeowners insurance, homeowners association fees (HOA), property taxes, and monthly expenses such as pest control, landscaping, and maintenance.

While stocks may offer a 7.5% cash-on-cash return, or bonds may pay 4.5%, a 6% return in the first year as a landlord on an investment property is considered healthy and that number should rise over time.

ROI Rental property investors calculate their return on investment as ROI = (Annual Rental Income − Annual Operating Costs) ÷ Mortgage Value

Some real estate investors choose to flip houses by purchasing a house for a below-the-market rate, making repairs, and then reselling it for a high return. There may or may not be tenants during a "flip" and investors must consider key factors like affordable materials and labor.

1. Online Real Estate Investing Sites

Online investing sites have changed the game in recent years. With these sites, you can own fractional shares of real estate projects. What this means is that you can get exposure to real estate, but you don’t need to come up with huge sums of capital or deal with tenants. This is a strictly passive income strategy.

Fundrise is my top pick in this category because you can start with very little money and you do not need to be an accredited investor. Here’s a link to our full Fundrise Review.

For other sites, you must certify that you have a net worth over a certain amount or make a certain amount of money per year.

How It Works

With Fundrise, you can start with as little as $500. You open an account and select from a number of portfolio options. Fundrise charges a management fee of around 1% per year, which is fairly low compared with other options, and its 2021 annualized return was 22.99%! You can see how my Fundrise account has performed here.

What You Gain

Investing this way, you gain a ton of freedom and you gain exposure to the real estate asset class with very little money or effort. 

What You Risk

You don’t get to really use any local expertise you may have, and you don’t necessarily get the pride that comes from visiting a real estate project that you wholly own, improve, and can see easily. For some people, that’s a big draw to investing the old-fashioned way!

Get Started With Fundrise

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.

2. Regular Income

You’ll earn a one-time profit when you sell an appreciated property. But many real estate investors use their investment properties to generate a steady cash flow. You can generate regular income through residential properties, commercial properties, and raw land.

When you own a residential property, you can rent out to tenants and collect monthly rent. You need to collect enough rent to cover the property costs, like mortgage payments, utilities, and property taxes—and you might even be able to collect a little extra that you can pocket.

Similarly, you can rent out commercial properties to businesses. With commercial properties, you could make additional money by offering your tenants contractual obligations. “First right of refusal” is a popular one: when a business rents out space on your property, they can pay you to grant them a first-option on an office space that opens up next door. This is a helpful contract for growing businesses, and it’s a good way for you to avoid prolonged vacancies.

With residential and commercial properties, you need to strike the right balance between price and desirability. You need to charge rent that’s high enough to cover your expenses and turn a profit, but the rent needs to be reasonably proportionate to the property’s quality. If your rent is too low, you could lose money. And if your rent is too high, you could suffer from extended vacancies—which are even more costly.

You can generate regular income from raw land, too. They can rent out your land to harvest resources, in which case they’ll pay you royalties on their profits. A business can rent out land for production purposes—most rented land is used for agriculture.

Like residential and commercial properties, you need to make sure that your raw land generates enough rent/royalties to cover your expenses and turn a profit.

Alternative Real Estate Income

The options mentioned above are the most common for the average real estate investor to take advantage of. This section describes methods that aren’t immediately obvious or as well known

REITs

REITs are basically large funds that own swathes of real estate, which allow investors to purchase shares in return for dividends, made up of the rent payments of these properties. REITs are a way for the owner to purchase more properties but with another person’s money.

The downside to investing in a REIT is that you don’t have direct control over allocating your funds, unlike traditional investing. This method is more likely to benefit those who can’t afford a physical property but still want exposure to the market.

Parcl: Digital Real Estate Investing

By using Parcl, you’ll be able to invest in your favorite neighborhoods along with broad or highly granular exposure to other high-value real estate.

Parcl Real Estate Trading Platform
Parcl Real Estate Trading Platform

The Parcl platform is the first of its kind built on the Solana blockchain that’ll allow investors to actively, long or short real estate assets.

Thanks to the blockchain-based trading system, you’ll benefit from immediate liquidity, low transaction fees, and no minimum investment.

Join our waitlist and discord if you’re interested in hearing more about how you can trade real estate like you would Stocks, Crypto, or ETF’s. Parcl gives you the ability to invest in real estate without having to own a physical property. If you want to learn more about how Parcl is making it easier to invest in real estate, take a look at our intro to Parcl article.

Metaverse Land Ownership

Metaverse land prices have been surging lately, with all of the hype from Meta, formerly Facebook, entering the digital reality space.

Buying and selling digital land has become a lucrative business, with sales reaching over the $1 million mark.

Landowners within certain virtual worlds have also been actively renting out their land to companies looking to market their products and services within the Metaverse. Although, there are a few downsides to owning Metaverse land.

The biggest concern would be that you’re not guaranteed the security of the virtual world existing in the future. The project could easily and quickly fail, taking your million-dollar virtual property and tenants with it.

If you’re still keen to get involved in Metaverse real estate, make sure you buy from a reputable and popular project like Sandbox or Decentraland. But, the prices are getting steeper, so the barrier to entry is pretty high. Coincidentally a similar problem to the real world.

Should I Invest in a Condo?

Condos are often less expensive than single-family homes, and they have fewer maintenance requirements. However, ongoing association dues and the potential for expensive special assessments are a risk. It is important to investigate the financial health of the homeowners association and the current condition of the overall building and the individual unit.

Condos can be a good option for rental property buyers and they are often located in desirable locations.

Residential Real Estate: Paths to Profits

Here is a closer look at some of the many ways that you can earn income from residential properties.

Buy and hold

This is one of the more traditional ways of earning income from real estate. There are a number of ways to accomplish this: You can buy a single-family home and rent it out; buy a multi-family home and live in one of the units while renting the others—ideally to cover the mortgage and your own housing expenses; or purchase a multi-family home and rent all of the units—either managing the property yourself or hiring a management company to handle renting units, collecting rent, addressing needed repairs, and so on.

Flipping

Property flippers specialize in adding high-return fixes to houses in a short time and then selling them. Flipping can be lucrative if you know how to find properties to fix up, you have the necessary skills to do the renovations yourself or oversee a crew to carry them out, and you have a sense of a property’s underlying costs and potential value.

Airbnb and vacation rentals

The demand for home-away-from-home rentals had taken off in recent years as many travelers preferred this option to staying in a hotel. Homeowners could earn income by renting out a house or even just a room on a short-term basis, especially if the property is in area that's a well-known tourist destination. It's unclear when that market will return. But should it reappear, keep in mind that short-term rentals are regulated and sometimes even banned in certain cities. Check your city's bylaws before listing a property on a website such as Airbnb, VRBO, or HomeAway. And also figure in what additional deep cleaning and sanitizing between guests will add to the costs.

What Do You Need To Make Money In Real Estate?

There is a common phrase in the investing world that it takes money to make money, but that isn’t always the case in real estate. Many real estate investors can start in wholesaling, even with low cash reserves or bad credit. Wholesaling, and many other beginner-friendly strategies, allow aspiring investors to break into the industry without many resources.

That being said, you do need a strong work ethic and time to make money in real estate, especially in the beginning. If you want to wholesale, buy, or flip a property, you need to make sure it has potential. Further, suppose you’re going to work with a business partner or other type of private lender. In that case, you will typically need to do the heavy lifting in terms of market research, deal analysis, and, in some cases, property management.

There are a lot of misconceptions about what you need in the real estate industry. In most cases, it all comes down to how well you can understand the market, identify creative financing, and execute deals. As you gain experience, these factors become much easier, but try not to get discouraged early on.

6 Ways Renting Houses Makes Money

Despite the different ways to invest in real estate, many investors choose single-family rental houses. They are easy to find and finance, and almost everyone knows how a house ‘works.’ 

Single-family rental properties can offer investment returns in 6 different ways.

1. Cash flow

Positive monthly cash flow is the number one way to make money renting houses. Net cash flow is the difference between the rental income you collect from the tenant each month and the operating expenses for the home. 

For example, let’s say you purchase a $150,000 rental home. If the rental income is $1,500 per month and your expenses and mortgage payment (PITI) are a total of $1,300 per month, your net cash flow is $200 each month or $2,400 per year. 

Of course, earning passive net cash flow of $200 each month may not seem like a lot of money to some people. Also, even though there’s a tremendous demand for tenants for rental homes, there may be periods where there is no rental income if the house is between tenants.

But there are many more ways to make money renting houses in addition to the monthly cash flow. 

2. Appreciation

The second way to make money renting houses is from the appreciation in home value. According to the Freddie Mac House Price Index (FMHPI) report, average house prices in the U.S. have increased more than 37% in the past five years. 

That means that if you purchased a $150,000 house five years ago it would be worth about $205,500 today, and you would have earned $55,500 just from the appreciation. To be fair, some real estate markets have better appreciation than others. 

For example, real estate markets with a high percentage of renters like Atlanta have seen home prices rise by nearly 50% of the past five years. On the other hand, home prices in a high cost of living area like Trenton, New Jersey have only gone up by 29% during the same time period.

3. Amortization

Another way landlords make money renting houses is with amortization, which is another word for ‘paying down the principle.’ A $150,000 single-family rental house purchased with a 30-year fixed mortgage at today’s low rates and a conservative 25% down payment has a monthly mortgage payment of $465 principal and interest. 

When you buy the house your loan amount is $112,500. Five years from now, your loan balance would be paid down to about $97,000, giving you a gain of $15,500 through amortization. Keep in mind that you are using the tenant’s rent check each month to pay down your loan, not your personal funds.

Amortization and financing are two examples of using OPM or other people’s money to make money renting houses.  

4. Inflation hedge

Owning real estate is also an excellent way to hedge against inflation. Since 2016, the annual rate of inflation in the U.S. is about 2% per year, according to the Federal Reserve

On the other hand, real estate prices in the U.S. have grown by an average of almost 11% per year over the same time period. That means that house prices in the U.S. have increased 5 times more than the rate of inflation.

5. Tax benefits

You’ve probably read about real estate investors who make a lot of money every month yet pay very little in taxes. The reason the net worth of some rental property investors is so high is that they take advantage of the tax benefits the IRS gives real estate investors.

Real estate tax write-offs include countless items such as:

  • Operating expenses and repairs
  • Property management and leasing fees
  • Utilities paid by the owner
  • HOA fees
  • Legal and professional fees
  • Insurance and property tax
  • Mortgage interest expense
  • Travel expenses to visit an out-of-town property (a big tax benefit for remote real estate investors)

The IRS also allows real estate investors to depreciate residential property over a period of 27.5 years. For example, if you purchase a house for $150,000 and the lot is worth $25,000, you can deduct $4,545 from your pre-tax income each year ($125,000 / 27.5 years). 

You can’t depreciate the land, because the IRS assumes it never wears out. However, the IRS does assume the house wears out a little bit each year, even if you keep it in tip-top condition. Better yet, if you buy a rental home from another investor, the 27.5 years begins all over again.

Believe it or not, there’s more to real estate tax benefits than deductions and depreciation. When you sell investment real estate and buy a different property, the IRS allows you to use a Section 1031 tax-deferred exchange to indefinitely defer paying capital gains tax. By conducting a tax-deferred exchange, you have more money to reinvest in real estate instead of paying taxes to the government.

6. Self-funding

Last but not least, investing in real estate becomes self-funding when you use what experienced real estate investors call the “rinse, wash, and repeat” technique. Here’s how self-funding for real estate investors works. 

Assume you buy a single-family rental property today and put all of your monthly net cash flow profits into a special reinvestment fund. After a few years – thanks to the combination of your savings plus appreciation and amortization – you’ll have enough equity to do a cash-out refinance to raise the down payment to buy another single-family rental property. 

After another few years, you can do the same thing, over and over again. This is why they call self-funding “rinse, wash, and repeat.”

8. Commercial real estate

One of the great opportunities in real estate for making a considerable amount of money is to invest in commercial real estate. Commercial real estate developers focus not only on flipping properties but also on developing them, adding value to properties in order to increase their net incomes through renovations and upgrades. They also consult on projects that might take more seasoned real estate investors to see to fruition.

Ali Safavid, founder of 5209 Investments, says commercial real estate is one of the most lucrative sources for both income and profits in the real estate market. As long as you can find ways to add value to the exchange, investing in commercial real estate can be one of the largest income generators you’ll find.

People always need office space and retail to run their businesses. These physical locations are bread and butter in the real estate niche. As you grow, you can find ways to open up shopping malls, develop large scale buildings and more. But you have to start somewhere.

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