If you want to learn how to make money in real estate, go to your nearest McDonalds.
Yes, the fries are addictive, but you may be surprised to learn that the land they’re made on is far more important to the company than their french fry recipe. In fact, real estate is such a crucial part of McDonald’s bottom line that founder Ray Kroc famously quipped that he was in the real estate business, not the burger business.
In order to get you inspired enough to start your own real estate empire sans amazing french fries, we interviewed 25 CEOs, investors, brokers, and tech gurus to see how they are making money in real estate. If you want to borrow from their wisdom, read on.
1. Invest in Short-Term Rentals
Andrew McConnell, CEO, Rented.com
Love them or hate them, sharing economy startups like Airbnb are here to stay. As a result, tech savvy real estate investors have been clamoring for opportunities to invest in short-term rentals. Andrew McConnell, CEO of short-term property management marketplace Rented.com explains the allure:
“The rise of Airbnb and VRBO in recent years has created a tremendous real estate investment opportunity for those who have been paying attention. As travelers increasingly prefer 'alternative accommodation' options to hotels, the rental demand for such properties increases. This increased demand leads both to greater occupancy and to higher nightly rates. With Rented.com’s recent Short-Term Rental Income Report we have seen a number of markets where on average you can expect a double digit cap rate, with individual opportunities far exceeding even that.”
In order to find a great short-term rental property to invest in, focus your search in areas with high demand for short-term rentals. This means cities like New York and San Francisco, college towns, or areas popular with vacationers.
2. Invest in REITs (Real Estate Investment Trusts)
David John Marrotta, President, Marrotta Wealth Management
Real estate investment trusts are firms that own, manage, or otherwise represent real estate (usually large) portfolios. Investing in an REIT can be a great way to invest in the real estate market with relatively fewer risks. Here’s David John Marrotta on the ROI of REITs in Forbes.
“While bonds appreciate on average 3% over inflation and stocks appreciate about 6.5% over inflation, real estate falls between these two. Residential real estate investments appreciate about 4.1% over inflation and commercial real estate investments appreciates about 4.9% over inflation.
They also have a lower volatility than U.S. stocks. The lower volatility and low correlation together means that REITs find a place in the efficient frontier of investing when you are crafting your investment plan.”
3. Invest in Non-Performing Notes
Dave Van Horn, President, PPR The Note Co
Non-performing notes are mortgages that borrowers are behind on. Instead of foreclosing on the property and selling the home, lenders instead sometimes sell the non-performing mortgages to investors at a deep discount.
There can be a great deal of financial risk investing in non performing notes, so proceed cautiously. Lengthy legal battles to foreclose and get a clear title can cost investors tens of thousands in legal fees.
4. Consider a 1031 Exchange
David Wieland, CEO, Realized1031.com
Let’s face it, being a landlord can be hard work. Fixing your tenant’s toilet on a Saturday night isn’t for everybody. If you want to trade your rental property for an investment that doesn’t require a plunger, you should consider a 1031 exchange.
Here’s how they work:
Section 1031 of the IRS code allows real estate investors to sell investment properties in exchange for a “like-kind” property of equal or greater value. For example, you could sell your two family rental and co-invest in say, a shopping center or office building. Sure, this doesn’t sound that exciting until you learn that under a 1031 exchange, you won’t pay a dime in capital gains tax.
Realized1031.com allows you to co invest in turn key commercial properties that can give you a great ROI without the midnight calls to fix toilets. Their investments range from retail and office buildings, to a $40 million apartment complex in Florida.
5. Invest in Wholesaling Houses
Scott Williams, Founder, REtipster.com
Wholesaling houses is one of the only ways to invest in real estate without a ton of capital. Here’s how it works. Real estate or investing professionals find homes that are undervalued, then put them under contract. They add contingencies to the contract that stipulate they will assign the contract to another buyer within a certain (usually very short) amount of time. They then work to find a buyer who is willing to pay slightly more than the price they are under contract for and assign the contract to them, keeping the difference as a profit at closing.
While wholesaling can be a great way to raise capital for other real estate investments, it should be noted that in certain states, this activity may be considered acting as a real estate agent, requiring a license. The law here can get rather byzantine, so be sure to research the fine print on how your state classifies these transactions before even thinking about wholesaling.
If it turns you you do need a real estate license, we have an in-depth guide on how to get one here.