How to (Really) Make Money in Real Estate

A big part of your real estate strategy might seem obvious, but it’s necessary: You have to figure out how you’re going to make money. 

Now, to some, this might be as simple as renting a property or having one short-term rental in a high-traffic area where you’re bound to get a lot of visitors and tourists. 

However, knowing the method you want to lean on to accomplish what will ultimately make the difference between success and failure in this business is important, as many of your other decisions will center around this anchor. 

• First, think about your goals related to short-term vs. long-term gain. 

A lot of people make money in this business by flipping houses – but that’s going to be more beneficial in the short term. Having a property that you can rent to long-term renters, or short-term renters on a long-term basis is going to be more of a long-term gain. 

People who want to flip houses are usually seeking out cheaper properties so they can make a bigger profit in the sale. With this method, you have to factor in the costs to fix and rehab the property – so that’s another reason to buy the initial sale at a lower price. The goal is to be able to sell the house at max value, which will result in the highest return on investment. A lot of people are very good at this, and very successful in their businesses, but it’s not consistent. 

We’ve experienced situations where opportunity presents itself, and it’s great for everyone involved. However, given the fluctuation in the market, the business can go through lulls and opportunities can dry up. In that case, you hope it’ll swing back around and get better in the future – but that’s no guarantee. 

We had an incredible opportunity to do flips during the housing market crash when there were lots of foreclosures, and it was lucrative. 

As the overall economy shifted and improved, the situation changed. What once used to offer really fantastic margins has started to be squeezed tighter and tighter – and that makes it tougher to make a big profit. 

At ROOST, we have agents that work with clients who flip houses, but I don’t have the stomach for it. 

• In my opinion, real estate is not a liquid investment. 

If you can sell a property and close it at a substantial discount, you’re still going to face 30 to 45 days for that closing to complete. This process can happen faster, but you can’t count on it – and you can’t lose sight of the fact that real estate is liquid. 

Should Real Estate Investors Time the Market?

You can try to time the market to determine the best time to invest, but I think this is usually a fool’s errand.

It’s the same for stocks and bonds as it is in real estate. You can say I’m a coward, but I don’t like to risk my money and the chance at creating lasting, generational wealth on something that could change in an instant or dry up completely. 

The only thing I’m willing to guess and bet on is that residential real estate is going to be in great demand for the rest of my life and beyond. People are always going to need places to live. 

However, the market might not favor people who are flipping and selling homes as much as it favors those looking to buy property – but you can still make money on selling property or renting it even if it’s a buyer’s market. 

I’d rather bet on the long game. 

TV shows make flipping houses look sexy and glamorous, and lots of people are drawn to that element because of how it’s portrayed in the public eye. That being said, they may not have an idea about the amount of time, money, and risk that goes into flipping houses until they get into the nitty-gritty. 

You have to consider other costs: 

• Realtor fees 
• Bank fees
• Interest every time you flip a property
• Money owed to your broker

That’s not even covering the amount you paid to buy that property or what goes into fixing it! While there’s some money associated with rehab and maintenance on residential real estate purchased to be rentals, it’s not necessarily as much as you’d need to put in to flip a house and sell it for top dollar. 

Why? We don’t always need high-end finishes in a rental. You might need those spendy finishes to sell a property, however.

If there’s a mortgage involved, there are pre-payment penalties to consider. All of these hidden fees or areas where people don’t necessarily think about the costs can add up. 

Suddenly, that investment isn’t looking so sexy. 

That’s not to say there’s anything wrong with flipping. A lot of people do it, make a lot of money, and do it well. If you feel you can – go for it. 

Consider a Fix and Flip Over a Straight Flip

Back in the day, I did something similar to what people do today – regular house flipping – called a “fix and flip.” 

• This practice is where you buy a fixer-up, make the repairs, and resell it. 

While this might sound the same, there are some differences. 

For example, if you are buying a house that requires a lot of work and hoping to sell it in a lower-income area, you might not need to put in that much to buy it, maybe won’t spend as much repairing it, and won’t sell it for much either – but the amount you do sell it for could still make you a decent enough profit for your work to be worth it. 

We work with a lot of clients who are construction professionals, so this also provides another advantage to the “fix and flip” mentality. If you can do a lot of the work on your own, and get materials or labor for cheaper, then you might not be out as much money as you might on a standard flip. 

However, instead of considering the question of “Is this risk worth it?” consider this: 

• If you’re going to put the time and effort into fixing a property anyway, why not fix and hold?

By fix and hold, I mean holding onto it for a rental instead of selling it for a short-term profit. That way, you can generate your mailbox money for the rest of your time horizon rather than just doing a one-and-done sale. 

Once you lose that property, it can’t make you any more money. 

If fixing and flipping a house is a good strategy, I think fixing, flipping, and holding onto a property is better. You have to remember that you can use equity for many things, such as getting a line of credit by using a property you own as collateral. Interest rates on lines of credit are high right now, so maybe it isn’t the right time, but this strategy has worked for me. 

Take a look at your rehab budget, and if it’s right, take a chance on buying a house to fix it up and hold onto it. That’s what I’ve done for the past 13 years, and I can’t imagine my strategy will change moving forward.

Truthfully, there’s no right or wrong answer; it’s about your preferences and what will work best for you. Any of these strategies can be good ones, but you have to understand the risks going in – and you need to remember that once a property is sold, it can’t continue to make you money. 

No matter how you shape your strategy, put opportunity first and look at what doors will open for you. 

What You Need to Know About Short-Term Rentals

If you’ve opted to fix and hold a property – or just hold a property – you may want to play into the fad that is Airbnb and other short-term rentals. It’s a great way to make money, but you want to do your research to make sure it’s going to be allowed before you hedge your bets on this strategy. 

For many people, Airbnb and short-term rentals have created a tremendous opportunity for owner-investors. Part of the goal with a hold strategy is to get either a long-term tenant to stay there and consistently pay the rent in full and on time, or offset vacancies by keeping it as a well-booked short-term rental. 

With this strategy, you can rent out rooms, you can rent out houses owned by accidental landlords – but you have to be sure you’re operating within the guidelines of your city, municipality, or sometimes even your HOA. 

Let’s say you want to buy a condo: There will be information about whether you can rent that property as a short-term rental at all and, if you can, there will be existing clauses about how long or how often you can rent them. If you’re only allowed to rent that condo on the weekends or only a few days or weeks out of every month, your dream of having this property make you money as a bustling rental is dashed. Just like that.

• Know the rules before you buy – and have a goal in mind for every property. 

You have to know the rules, but you also have to keep an eye on changing rules and guidelines. I ran into a situation where the HOA decided they were going to change the rules about how long people could rent out their condos. I had a successful property, and I didn’t want to limit it to only being able to be rented for six months out of the year. 

Property rights dictate that if something was perfectly legal when you purchased it, you might be able to get grandfathered in and continue your business as it was before the rules were changed. That’s what we did and, with the help of an attorney, were successful in challenging the HOA. Stay on top of your business and be aware before you ever put money down on something. 

You shouldn’t hope it’s going to be a good investment, you should know it will be. 

Final Thoughts

Any way you slice it, there’s big money to be made in real estate investments, or people wouldn’t do it. I think real estate – especially residential real estate – is always going to be a way for people to make some money and, even better, have generational wealth to pass down to their families. 

Regardless of why you choose to go into this business, however, you’ve got to be realistic about what costs are associated with your investment and how you’re going to make it profitable. 

Remember: An empty property isn’t ever going to make you money. 

Real estate isn’t a passive income investment. Likewise, if you’re unrealistic about the cost of fixing a house – especially if you’re planning to go in on a real fixer-upper – you could end up going way over budget and paying out even more for the interest fees you accrue while you’re working on the projects. 

Ultimately, if you’re going to invest money into anything, you have to find a way to make it profitable or there’s no point in taking the risk. That’s part of why I think holding onto your property after putting in time, money, and effort – along with blood, sweat, and tears on occasion – is the route that offers the most bang for your buck. 

Once your time horizon is up, the mortgage is paid off, and that property is yours. Free and clear. From there, it can keep making you money as long as it’s rented. Short term? Awesome. Long term? Excellent. A gift for your kid? Perfect. 
Find a way to make this investment work for you, and don’t lose sight of the fact that it’s yours.