Last week we covered appreciation, the oldest and most common way for investors to profit from their real estate holdings.
This week, let’s talk about the second major way that real estate generates wealth. It’s the one that we most commonly associate with real estate profits: income.
What is Real Estate Income?
In the simplest terms, your real estate income is the money you have left over after you collect your rent and pay all your expenses. Owning real estate comes with many costs like:
- a mortgage
- property taxes
- insurance
- repairs
- utilities
- property management fees
When your property pays more rent than your expenses to own it, congratulations! You have real estate income.
Why Income? Isn’t Appreciation Enough?
For most investments (ex: stocks, gold, art, even bitcoin) your only way to get rich is to buy and hope that it grows in value so you can sell for a profit. If you believe that investing in real estate means buying a property and waiting for it to be worth more later, then you are thinking like a regular capital investor.
Like with other appreciation investments like stocks, this strategy can work if you have deep knowledge of the markets and real estate expertise. But for most investors, betting on appreciation like this is really more like gambling.
We saw the real cost of this strategy in 2008 when property values plummeted and real estate investors lost billions of dollars.
That’s why wise investors don’t bet on appreciation anymore. They purchase properties that generate more income than they cost to own. This means the investors don’t have to care what the market does. If prices fall, they are safe. If prices rise, they have even higher profits.
Real Estate Income Types:
There are two core income-producing properties that investors rely on:
Residential property
Income from a residential property represents the vast majority of all real estate income.
In its basic form, you own an apartment or a building occupied by tenants. Your tenants pay a fixed rent every month — which rises over the years with inflation and demand — and once you pay your expenses you can claim the left-overs as rental income.
Commercial property
This type of property can also produce income from rent, by leasing space to shops, restaurants office spaces and the like.
What is special about commercial income properties is that tenants are often also willing to pay fees for additional things like contractual options (ex: the right of first refusal on the office next door) or extra business services.
Where Did it Come From?
Wealth from real estate income is not new. And the fact that society’s most powerful families have profited from real estate income for as long as you or I can remember isn’t a coincidence. It has been an important source of wealth for society’s most powerful families for centuries – and this was explicitly planned.
It all dates back to the time of kings, lords and peasants of the Middle Ages.
As any successful king will tell you, his most important asset is his group of loyal friends. And even in this long-ago era, the best way to build friendship and honour loyalty was with a gift of a lordship title and a deed to a large property.
After all, this instantly makes your friend a lord of their own land ( a ‘landlord’ you might say) and lets them collect income from any tenants living on it.
And so the original real estate income is born.
Thankfully, you don’t have to be the king’s friend to get real estate income anymore. Today, tools like REITs and AQRE make income from real estate much more accessible to regular people.
Conclusion
Thanks to companies like AQRE that are opening investing to all people, regardless of their wealth, you now have access to more investment opportunities than ever. However, it can still seem hard, or even impossible, to know how to make good investment decisions.
To learn more about real estate investing and increase confidence in your investment strategy, come back next week to keep learning more in our series on how to Make Money in Real Estate!