Benefits of Investing in Real Estate and How You Can Earn Money From Real Estate

Note: this is Chapter 1 of an entire guide on Why Real Estate Investing?

Among the many benefits of real estate investments is the ability to gain both consistent cash flow (read: income) as well as capture long term gains through appreciation. In the best cases, you earn both income and appreciation jointly. Of course, this will vary from investment to investment, but this guide will explore the possibilities and leverage that you will have.

Income from Rental Payments

Rental payments attribute the income piece of residential real estate investments. Owning a single-family home makes you a landlord with a tenant, who pays you money to live in the house.

Ideally, you would like to have your rent exceed your mortgage payment and other fees associated with your rental home. Many real estate investors use "The 1% Rule" to determine quickly if a home will be able to do this. The 1% Rule means that you can earn 1% of the purchase price in rent each month. However, the 1% Rule is an estimate and there are other factors that may increase complexity.

For example, if you bought a $100,000 home with a loan of $80,000, your mortgage payments would be able $500 per month. Using the 1% Rule, you would want to be able to rent the home for $1,000 per month, which allows you to cash flow $500 per month.

In the short term, this means that you are able to generate an additional $500 per month. Practically, this is like buying yourself a monthly $500 raise!

Being able to cash flow properties is one of the most attractive parts of residential real estate that is not offered in other investments like stocks and bonds, especially at the return that residential real estate may offer.

Let's look at a real example: Consider a home purchased for $150,000 with a mortgage of $120,000 costing a monthly $564 (3.875% interest rate). In addition to the mortgage payment, you must also include Insurance and Property Taxes which come out to be $80 and $250 respectively. All in, your expenses would be $894. Assuming we use the 1% Rule of $1500 per month rent, your total income is $1500. By subtracting $894 from $1500, your total cash flow is $606 per month!