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Real estate, as an asset class, has long been heralded as a critical pillar of wealth creation for entrepreneurs. It is a tangible investment avenue, and its potential for consistent appreciation and income generation makes it an excellent wealth-building tool.
According to the U.S. Federal Reserve’s 2020 Survey of Consumer Finances, real estate comprises about 30% of American families’ total wealth, demonstrating its significant role in wealth accumulation. In essence, real estate investment represents an accessible pathway for entrepreneurs to achieve financial prosperity — and here are six ways to make money in the industry.
Related: How to Start Investing in Real Estate With as Little as $5,000
1. Investing in rental properties
One of the most conventional ways to create wealth through real estate is by investing in rental properties. The potential for steady cash flow from tenants provides investors with a continuous income stream, which is a form of passive income. For example, consider a property purchased for $200,000. If this property is rented out for $1,500 per month, the entrepreneur can potentially yield an annual return of $18,000, resulting in a 9% cash-on-cash return.
Successful real estate investor, Robert Shemin, started with a single property and has now built a portfolio of over 400 properties. His estimated net worth is reportedly over $18 million, thanks in large part to his investment in rental properties.
2. Real estate appreciation
Property appreciation is another way real estate builds wealth. Over time, properties tend to increase in value — and if an investor holds onto a property long enough, they can sell it for much more than the original purchase price.
Statistics from the U.S. Census Bureau show that the average price of a home in the United States was about $30,600 in 1940 (after adjusting for inflation). In contrast, by 2020, the average price had escalated to over $300,000, a tenfold increase. The renowned business magnate, Donald Bren, capitalized on this by acquiring a wide array of properties. Today, with a net worth estimated at $15.3 billion, he is one of the wealthiest real estate investors in the world.
3. Real Estate Investment Trusts (REITs)
For entrepreneurs who prefer not to directly manage properties, REITs offer a way to invest in real estate without the burdens of property management. REITs, essentially, are companies that own and operate income-producing real estate. As per the National Association of REITs, the compound annual return for equity REITs from 1972 to 2020 was 9.72%, outperforming the S&P 500’s 7.42% return over the same period.
Investing in REITs is as simple as purchasing shares of a publicly traded company. You can buy shares of a REIT through a broker, just as you would with any other publicly traded stock. There are also mutual funds and ETFs (Exchange-Traded Funds) focused on REITs that provide further diversification. By making real estate investing accessible to a broader audience, REITs open a pathway to real estate’s wealth-building opportunities without requiring extensive capital or expertise in property management.
An example of an entrepreneur who achieved remarkable wealth through REITs is Sam Zell, founder of Equity Residential. Today, Zell boasts a net worth of approximately $5.5 billion, with a large portion derived from his REIT investments.
Related: 5 Proven Steps to Become a Real Estate Millionaire, According to an Investor
4. Flipping properties
House flipping involves buying a property, renovating it and selling it at a profit. Although this requires expertise and hard work, the potential for high returns makes it an attractive option for entrepreneurs.
For example, according to ATTOM Data Solutions, the average gross profit for a flipped house in 2020 was $62,300, demonstrating the lucrative potential of this real estate strategy. Christina Anstead and Tarek El Moussa, stars of HGTV’s “Flip or Flop,” exemplify this success. They have built a multimillion-dollar business through property flipping, further highlighting the wealth creation potential in this approach.
5. Investing in commercial real estate
Commercial real estate (CRE) includes shopping centers, offices, warehouses and apartments. Generally, these properties yield a higher return than residential real estate due to longer lease contracts and higher rental rates.
Investing in CRE allows entrepreneurs to diversify their portfolios and minimize risks. A report by CBRE showed that the average annual return for CRE was 9.5% between 2000 and 2018. Though it requires a larger initial investment, the high yield can lead to substantial wealth accumulation.
Take the case of entrepreneur Rick Caruso, founder of Caruso, a company specializing in creating extraordinary retail, dining and lifestyle experiences. Through strategic investments in CRE, particularly in high-end retail centers, Caruso has grown his net worth to an estimated $4 billion.
6. Developing raw land
Another viable way of wealth creation through real estate is land development. Entrepreneurs can purchase raw, undeveloped land, then increase its value by obtaining the necessary permits and building infrastructure like roads, sewage systems and utilities. Once the land is developed, it can be sold to homebuilders or commercial developers at a profit or it can be utilized to construct properties, thus adding another income stream.
Land development can be highly profitable, but it requires a keen understanding of local zoning laws, planning regulations and market conditions. Entrepreneurs also need significant upfront capital and patience, as this process can be time-consuming.
Related: Why Real Estate Investment is the Ultimate Adventure for Entrepreneurs
Reaping the rewards of your investment choice
The avenues to wealth creation through real estate are vast and varied. Whether an entrepreneur opts for rental properties, capitalizes on appreciation, invests in REITs or decides to flip houses, real estate offers incredible potential for wealth accumulation. While success demands research, financial acumen and sometimes patience, real estate investment remains a proven strategy for entrepreneurial wealth creation. As illustrated by the above examples, those willing to invest the time and effort can reap considerable financial rewards, ensuring their journey towards sustainable wealth.