There are endless articles, podcasts, and TV shows out there about how to make money in real estate with little to no money of your own. Most of these talk about wholesaling or flipping with hard money. This appeals to a lot of people who believe their lives will be better if they quit their day job and enter the world of real estate full-time.
Want more articles like this?
Create an account today to get BiggerPocket’s best blog articles delivered to your inbox
I am one of these people.
I grew up working in and around my parents’ rental properties and working construction. I went to college, got a degree, and found a “real job” in telecom sales. I worked hard and made good money. But ultimately, I wasn’t happy.
After some reflection, I was determined to re-enter the world of real estate. Given my sales experience, I wanted to become a real estate broker. This allowed me to simultaneously make a living and see opportunities firsthand. When I had enough money, I started investing in my own deals.
Making a Living vs. Investing in Real Estate
There are many ways to make money in real estate. You can wholesale, fix and flip, develop, broker properties, and more. If you don’t like your day job or you don’t have a job, working in real estate is a great alternative.
However, it’s still a job.
There’s a difference between making a living in real estate (which is simply another job) and investing in real estate. If you want to make real, life-changing money, you need to invest in real estate—you need to buy property and hold onto it.
When you wholesale or flip a property, you’re working for the asset (you have a job) instead of letting the asset work for you (you have an investment). If that’s your day job and it enables you to buy and hold properties, then great. But buying and holding needs to be part of your strategy from the beginning.
Benefits of Holding Onto Property
Over the years, I’ve wholesaled and flipped properties, and I’ve worked with clients who have been very successful in doing this. I can honestly tell you that I regret selling almost everything I’ve ever sold. The only sales I don’t regret are the ones I exchanged into other properties.
Many people I talk to say the same. They wish they would have held onto more of their properties.
Because of the trifecta of benefits you get from holding: income, equity, tax advantages.
I’m not going to call it “passive income” because it’s not exactly passive—there is work to be done. Instead, I call it “ongoing” income. What’s especially great is the income goes up over time as rents increase. Like other investments, time (holding) is your friend.
I bought a duplex in Denver in 2011 and the rents I received at the time on each side were $1,100/mo. Today, my rents are $2,000/mo.
Expenses have gone up a bit, but the net income on that property has doubled. If you multiply that by the number of properties you own, that can grow to be a significant income.
Again, time (holding) is your friend. As years go by, the value of the property goes up and the debt is paid down. This is where wealth in real estate is generated.
I paid $190,000 for the duplex mentioned above in 2011. It’s now worth over $575,000 today.
I’ve used the equity in this property to buy other properties, and I’m getting ready to use some more equity to help get my kids through college. It’s the gift that keeps on giving. Again, the more property you hold onto, the more wealth is created over time.
The income from properties you hold is offset by property-related expenses, loan interest expenses, property tax expenses, and a depreciation write-off. The amount of taxes paid on the money made is extremely low.
When you flip properties, you may pay short-term capital gains taxes on your profits. This is one of the highest tax rates you can pay when combined with your ordinary income tax.
Depending on your intent when you bought it, you have to hold your property for 12 months or more in order to avoid short-term capital gains or to do a tax-deferred 1031 exchange. Talk to your certified public accountant about how to minimize taxes if you plan to flip properties.
Is Now the Right Time to Buy and Hold?
You may be wondering if now is the right time to buy.
I’ve bought and sold properties through good and bad times. I believe NOW is always the right time to buy, as long as the fundamentals of the purchase are sound. By that I mean:
- It cash flows.
- It is a good product in a decent location.
- You’re not over-leveraged.
Generally, if you’re worried about real estate cycles, don’t be.
There are cycles, yes. But over the long-run, values always go up.
I purchased a single-family rental in Phoenix in 2003. The value went up dramatically prior to 2008, and then it went down.
Because it was a nice property in a good location, it was always rented during the downturn, and it broke even on cash flow. I held it until the market came back up, and sold it again in 2014.
Had I held it longer, it would be worth much more today.
The Bottom Line
There are a lot of different ways to make money in real estate. Everyone’s path is different.
You don’t necessarily have to work in real estate to invest in real estate. Many people keep their day job and invest in real estate on the side.
Whatever you do for a living, if you want to make real, life-changing money in real estate, buy and hold as many properties as you can. And if you do sell, do a 1031 exchange into another property or properties to keep the assets working for you.
Join the discussion here.