Real estate is one of the five basic asset classes that every investor should consider adding to their portfolios. It offers unique cash flow, liquidity, profitability, tax advantages, and diversification benefits.

Real estate investing covers a broad category of operating, investing, and financial activities centered around making money from property or cash flows tied to a tangible property.

There are several ways to make money in real estate, but some can take time to start paying off. Some experts suggest that you start investing when you’re young, even in your twenties.

Real estate appreciation

Properties tend to increase in value, often due to a change in the market that increases demand for property in its area or because of the effects of inflation. It could also happen because of upgrades you’ve made to your investment to make it more attractive to potential buyers or renters.

Real estate-related income

Related income is generated by brokers and other industry specialists who make money through commissions from buying and selling property. It includes real estate management companies that keep a percentage of rents in exchange for running the day-to-day operations of properties.

Ancillary real estate investment income

Ancillary investment income can be a huge source of profit. It includes things like vending machines in office buildings, or laundry facilities in low-rent apartments. They effectively serve as mini-businesses within a bigger investment, letting you make money from a semi-captive collection of customers.

Cash flow income

The purest, simplest form of real estate investing is all about cash flow from rents rather than appreciation.

This type of investment focuses on buying a property and operating it so you can collect a stream of cash from rent. Cash flow income can be generated from apartment buildings, office buildings, or rental houses.

The investor/landlord acquires a piece of tangible property, whether it’s raw farmland, land with a house on it, land with an office building on it, land with an industrial warehouse on it, or an apartment. They find a tenant who wants to use this property, and the tenant and landlord enter into a lease agreement. The tenant is granted access to the real estate and the right to use it under certain terms, for a specific length of time, and with certain restrictions.

The tenant pays for the ability to use the real estate. Rental income can give investors a psychological boost as well. It can be more hands-on than investing in stocks and bonds.

Investors have the satisfaction of using their negotiation skills to determine the rental rate. A good operator can generate higher capitalisation rates or “cap rates”—the rate of return on the investment based on the net operating income it produces.

Managing cap
rates on rentals

You should enjoy a satisfactory rate of return on your capital if you’re able to price your rental rates appropriately, after accounting for the cost of the property and any upgrades you’ve made.

This includes:

Reasonable depreciation reserves

Property and income taxes

Maintenance

Insurance

Other related expenditures

In exchange for a percentage of the rental revenue, you can establish or hire a real estate property management company to handle the day-to-day operations of your real estate portfolio when your holdings are large enough. This approach transforms investments that you had to actively managed into passive investments that you can simply set up and let someone else deal with.

Residential real estate investing

Investing in properties, houses, or apartments in which individuals or families live can sometimes have a service business component, such as assisted living facilities for seniors or full-service buildings for tenants who want a luxury experience.

Commercial real estate investing

Commercial real estate investments largely consist of office buildings. These leases can be locked in for many years. When a commercial investment is fully leased with long-term tenants who agreed to richly priced lease rates, the cash flow continues even if the lease rates on comparable properties fall, provided that the tenant doesn’t go bankrupt.

But the opposite can also occur. Rather than securing superior,
long-term cash flow compared to the prevailing market rate, you could find yourself earning below-market lease rates because you signed long-term leases.

You might lock in the rental rates to coincide with the prevailing market rate, only to see the market pick up and rates increase again.

Industrial real estate investing

Properties that fall under the industrial real estate umbrella can include warehouses and distribution centres, storage units, manufacturing facilities, and assembly plants. – The Balance.