There are three reasons real estate investing is attractive to people from all walks of life: it requires almost no qualification for entry, you don’t need a lot of money to start (you can use other people’s money), and, most importantly, it pays well.
But how much does it pay, exactly? Are real estate investors really paid well? Join us to find out what amount of money you can expect to make if you get into the real estate investing business.
Real estate investors earn around 10K a month or 120K a year – that’s the short answer. However, there’s much more to it than the rough amount of $12000 a year which is the national average.
For starters, your salary depends on the opportunities in your real estate market. In 2021, investors in San Francisco, CA had the highest salary at $12,679 (or $152,145 per annum), but on the other end of the spectrum, the lowest paying real estate investing job was only $47K per annum.
To be fair, “how much do real estate investors make?” is a loaded question. It’s as if you are asking “how much does a professional basketball player make?” without specifying whether we are talking about players like Le Bron James or about rookies.
So, we are going to delve deeper into the income structure for real estate investors. That should help you determine the range of annual pay you can expect.
How do real estate investors make their money? Traditionally, it’s either through value appreciation or cash flow. Let’s examine both.
The value of real estate goes up over time. This is great for those who own property, and it’s a problem for those who don’t. Investors buy real estate at the current market price (or below its market price, if they’re lucky) with the intention to sell it further down the line, when the prices go up. It’s what is known as a “buy and hold” investing strategy.
Where’s the income if investors hold the property? Well, to profit from value appreciation, investors need to sell the property. If you don’t sell the property, you are sitting on an investment that has more value compared to the time you bought it, but you can’t cash in until you enter in a transaction with a buyer.
You need to factor in property management costs (for all those years) as dents in those returns. Also, the property might decrease in value, too. Events that are beyond your control, like change in mortgage rates, natural disasters, and spike in crime rates, can bring the sale price of property down. For instance, an influx of sex offenders significantly affects real estate markets – no one wants to raise their kids in a neighborhood full of registered child molestors.
Income from cash flow is simple: you take more money from the property than what you put into it. It’s a model that’s typical for rental units. This income is available on a continual basis if you manage rental property cash flow successfully.
In essence, the formula is: rent from tenants / mortgage (or loan) payment + all of your operating costs (property management). Rental property metrics, like capitalization rate, cash on cash returns, and net operating income, are more complex than this, however, the formula above describes the income stream in general terms.
Plus, things like rental vacancy rate, as well as costs for property management and repairs of regular wear and tear, diminish your returns.
What about the typical approach to real estate investing? Strategies like wholesaling, house flipping, and creative financing solutions like lease option contracts? Well, they don’t represent investing, not in the true sense of the word.
Let’s explain this.
When you do a wholesale deal, you are just an intermediary: the profits come because you have placed yourself as a go between for the house seller and the end buyer. You are more of a real estate entrepreneur, than an investor.
The same applies to house flipping. You get a property, you throw money at it (rehab project) with the intent to profit from projected after repair value (ARV) when you sell it. This model is closer to the industrial process (raw material + labor = product) than it is to investment in real estate.
Do we really need to split hairs when it comes to types of income for real estate investors? Absolutely yes. Profit from increase in property appreciation over time is much different than the ongoing struggle of sourcing income from multiple flips. If someone invests an X amount of money in stocks from a Real Estate Investment Trust (REIT), they are still a real estate investor, even though they have nothing to do with the property itself.
So, it is a useful distinction to make because people might discuss returns on investment in real estate with you, but refer to different types of investing. Make sure you compare apples to apples.
In the real estate investing industry, investors tackle business like operations to turn a profit. The ventures are labeled as real estate investing companies or real estate investing businesses because of this. Real estate investors are actually acting more like business operators or managers.
And this affects the way their salary is calculated.
Real estate entrepreneurs are free to choose both their investing strategy and the type of legal entity they’ll register (company, corporation, LLC, partnership) to put the strategy into practice. While this is great for their business operations, it also adds too many variables when it comes to calculating salary. We will share a few elements that affect the revenue model to illustrate this.
Often real estate investors are solopreneurs and they use the profits at their own discretion (salaries, investing in the business, buying new properties, etc). And if you work for someone else, you may receive commission for each closed deal. Revenues vary greatly in each scenario.
Sometimes, there isn’t any salary in the typical sense. For instance, real estate investors who deal exclusively with rehab projects calculate a cash on cash return, and there is no regular income, just a lump sum that remains on the books after project completion. To calculate cash on cash returns, you need to subtract the total costs:
from the selling price of the property (including ARV).
And to get an annual figure, you need to add cash on cash returns of all deals for that year. If you like to express this balance as a monthly income, you’ll need to divide the total annual amount with 12.
As you can imagine, each investor reports different returns based on the number of deals they’ve completed. Plus, investors’ efficiency in completing the rehabs, especially in buying the property at below market price and in keeping rehab costs at minimum, plays an important role in the equation.
So, you’ll come across figures that express the income range of real estate investors based on investing strategy.
If you do a little research on salaries for real estate investors, you’ll find a few estimates on the expected range of income. The figures are along the following lines:
and so forth. As you can see, the range is so vast that it is practically useless.
There isn’t even such a thing as a lowest guaranteed salary for either of the investing strategies. In fact, almost 95% of real estate investing businesses close shop in the first year.
A lot of factors influence the income range for real estate investors. Let’s check some of them in the next section.
You probably want to zero in on the salary you can expect. Some aspects of your real estate investing career, like the time you can put into the business (part time or full time), are totally up to you. But other aspects are more general, and can help you determine the income range. The biggest among these factors is the real estate market.
Your performance is tied up to the real estate market in which you operate. The criteria for choosing the best real estate markets are complex, but we are going to single out certain features which can show you where to find more opportunities.
Big metropolitan areas along the coast – cities in the states of California, New York, and Miami attract a lot of people with the quality of life and the amenities (particularly the beach). This translates into a high demand for housing (both homeowners and renters), and makes it easier for you to get your piece of the pie.
Dynamic real estate markets – or neighborhoods where properties change hands fast. They grant you the opportunity to flip, wholesale, or rent whenever you feel a profit can be made. For instance, if you are a landlord, rental market metrics like owner to renter ratio, rental occupancy rates, average rental yield, and others, can serve as an indicator about the turnover of the market.
Job migration hotspots – or when a big company opens headquarters and needs qualified workforce. It’s what happened to Austin when Tesla and Apple moved there. Similar trends emerged in the Research Triangle of Raleigh/Durham when tech startups based their operations there, and when Amazon moved its headquarters to Seattle. All of these people need housing, and they’ve got a good paycheck, too.
General migration patterns – any other reason that may motivate people to move. You need to check historical data on housing appreciation to spot these markets. Boise, Idaho, and Tacoma, Washington are perfect examples of this, and if you don’t pay attention to data, you might miss them.
Let’s turn to real estate investing aspects that are within your control.
That being said, you can overcome market limitations or lack of time and money by taking action. Regardless of the amounts you are supposed to be making, you can always earn more if you change your perspective and start doing things differently.
Let’s review some ideas for improving your income. In no particular order:
It seems straightforward: if you close more contracts, you are likely to bring higher profits. However, closing more deals comes with a number of caveats.
For starters, you need to have access to extra capital to close more deals. This means going into more debt, taking another hard money loan, or partnering up with a new lender – some of these options might not be available for you.
Also, you shouldn’t aim to maximize your close rate just for the sake of it. The most simple strategy to close more deals is to give offers on all properties that come your way. If you close at all cost, you can end up with properties that are not good investing opportunities. The result? You don’t break even or you start making losses.
And on the flip side, if you do hit a winning strike and you put many properties under contract, managing them can cause you a lot of headaches. You should never underestimate property management costs. For example, if you have 8 properties and two of them need urgent repairs (critical water valve breaks in one of them, and the roof needs fixing on another) you should be able to service these issues without suffering losses.
So, improve your close rate, but don’t bite more than you can chew.
If you specialize in one specific type of real estate investing deals, try to implement some of the other investing strategies. Those who do flips can diversify with rental properties and landlords can try doing a wholesale deal.
The approach is known as the multiple close model. Dan talked about this at length in the 4th episode of the REI Marketing Nerds podcast:
I think the most common variation of this is an investor who can flip houses when they want, they can wholesale deals when they want, and they can work with a realtor, or they have some way of making money off of leads that just want retail price. So they have the ability to flip when there’s a lot of profit to be made, they have the ability to wholesale when maybe there’s profit to be made but they don’t necessarily want to do the work, and they have the ability to work with leads that want retail price on their home.
Do what it takes to give yourself some slack. The idea behind the multiple close model is to make your real estate investing business resilient to unpredictable real estate market dynamics, particularly fluctuations in inventory and leads.
If you do it right, you will effectively make more money off of the same inventory (and leads) you already have in your system.
No, we are not referring to wielding influence over the real estate market here, although it would be neat if you can do that. It’s more simple than that – switch to investments in another real estate market.
Out of state property owners are common these days, and you can complete a lot of the regular business operations remotely. The pandemic taught us that you can even close a deal (from start to finish) virtually.
That being said, do your due diligence before you enter a new real estate market. Laws and regulations might differ from what you are used to in your county. The legislation on Air BnBs is a perfect example of this: if you are not careful code enforcement officers will ask your renters to leave.
Also, when you invest out of state, you may face new operational challenges because of the distance. For example, if you do property management on your own in your primary market, you won’t be able to do the same for your secondary market because it’s far away.
Research whether the switch to a new market will be cost effective, and if everything lines up, you can make more money.
If you work for someone else, consider working on your own. This will effectively put more money in your pocket, but it will also increase the level of responsibility, so think twice before you do this.
And if you already work on your own, consider hiring a team. Wait a minute, isn’t that an extra cost? Yes, in strict terms, any new team member will need a salary and that drains your budget. However, if you recruit the right person that could lift your real estate investing business off the ground, then it’s an investment. It will free up more of your time, so you can focus on improving in house processes.
It could be the first step toward scale up your business.
Increase in your ad spend is another way to have more deals come your way. Again, this is counter-intuitive: you spend more money to earn more money, but it works.
Suppose you start a PPC ad campaign. Google Ads will effectively put more eyes on your website, and you will get more leads. This will enable you to pick and choose the deals you want to pursue as opposed to maximizing your close rate with the leads you already have.
And if you close the right deals, you will have a good return on ad spend (or ROI).
Start networking more aggressively. Now, sometimes you want to attend networking events but you don’t have time to do it. Lack of free time is a real issue for part time investors, who work a 9 to 5 job and have a family, but if the growth of your real estate investing company is important to you, you should develop your time management skills.
After all, meet ups of local Real Estate Investing Groups take place once a month (or once a week), so if you make an effort you can attend. Book your spot at a professional event or enroll for a course. The results from networking come when you least expect it – you never know when you’ll get to meet someone who can transform your real estate investing business (a venture partner, a lender, a mentor).
Plus, you can score a deal that’s not available elsewhere (like off market property) through networking.
Speaking of attending courses – learn a new skill. Any skill that is relevant to your day to day operations will decrease your costs.
Some real estate investors take on property management tasks and they invest strategically within their own ZIP code so that they can take care of all properties. If you prefer to hire a cleaning service or a handy man instead of doing it yourself, that’s ok, too.
You can learn to do property appraisal. This will allow you to complete house inspections on your own, and will help curb the expense of hiring an expert appraiser. Also, you can learn to do digital marketing on your own. So, instead of paying someone else to manage your ad campaigns, you can take over some of the lead acquisition tasks.
Before you invest in learning a new skill though, make sure you choose something that you like to do anyway. The new skill will eat up your time and if you practice it just to lower operating costs, you might end up hating the task.
If you are a novice, hiring a mentor can significantly improve your annual salary as a real estate investor. Just make sure you get someone with a lot of experience (and preferably a large real estate investing portfolio).
A good mentor will teach you a lot about the industry. They’ll:
Some mentors offer apprenticeships free of charge, but they can also charge you a fixed rate, or ask for a commission from the deals you’ll close. At any rate, it’s a great way to scale up your real estate investing business.
Those investors who bought a property by getting into debt (mortgage or a loan) can save some money by refinancing their loan.
What’s the scoop with refinancing? Well, while the borrowed amount (the principal) remains the same, interest rates fluctuate. So, if you refinance your loan when the interest rate is low, you’ll end up paying less interest than what you were supposed to. This will bring the overall ROI up.
Refinancing applies especially to investors who follow the BRRRR method (buy-rehab-rent-refinance-repeat).
The end goal for many real estate investors is to achieve financial freedom. And risk mitigation is an important part of maintaining financial independence.
You can diversify the assets you hold – it’s your best insurance policy against a downturn of the economy (and societal turmoil). What does this mean?
In terms of real estate assets, look into other class of assets, i.e if you own residential property, which is a big milestone towards financial freedom, invest in land, commercial or industrial property.
And as far your wealth is concerned, you can consider investing in private equity, stocks, or ETFs. If you pour your money in real estate exclusively, you may have issues with liquidity.
Another way to increase your income is to become a lender yourself. Don’t worry, you don’t need to have a lot of money to lend. There are many micro-crediting platforms which allow you to collect returns from borrowers.
Tax liens on properties work in a similar fashion. If a homeowner doesn’t pay property taxes for a few consecutive years (2-5), the county holds a tax sale auction to collect the debt. Real estate investors buy this debt (the tax lien) on behalf of the property owners because:
Tax liens are issued for relatively small amounts (hundreds of dollars to a couple of thousands) and you might pick up a property at below market price. However, tax liens are complex debt collection instruments, so do your due diligence before attending a tax sale auction.
We’ve come full circle on: “How much do real estate investors earn?” We started with “it depends” and we will leave you with “it depends.” However, we do hope that after you’ve checked this article out, you have a better understanding about revenue streams and volume of profits in real estate investing.
While the average salary for real estate investors is $12K per annum, you can certainly take action to bring profits that are well beyond this mean figure. There are a lot of ways to do this: expanding your skill set, streamlining in house processes, changing the organizational structure, diversifying your portfolio, etc.
The point is, you can earn a decent living as a real estate investor. And if you are good at it, you are likely to reach financial goals like getting out of debt, achieving financial independence, planning an early retirement, and saving to send your kids to college, within years.
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