The 3 Ways To Make Money Investing in Real Estate

Commercial real estate is a popular form of investment for a number of reasons. In addition to generating income and possibly going up in value, commercial real estate also enjoys certain tax advantages. Investors such as financial commentator Jaspreet Singh, founder of “Minority Mindset,” believe strongly in the power of cash flow investing, primarily through owning real estate, as a path to personal financial freedom.

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On Oct. 23, 2023, Singh published a video on his YouTube channel addressing the three ways to make money as a real estate investor. Here’s Singh’s take on the process.

Cash Flow

Cash flow is one of the primary benefits of investing in real estate, and it’s the cornerstone of Singh’s investment philosophy. Singh has long espoused the idea that when you invest for cash flow, you get an immediate and regular return right in your pocket, rather than waiting for capital appreciation that may or may not arrive. That’s why for Singh, the first thing investors should determine when investing in real estate is how much cash flow the property is going to return.

In commercial real estate, the cash flow return is represented by something known as the cap rate. This is the net cash flow that an investor will receive on a property after expenses. All-cash investors receive the full net cap rate, but those taking out a mortgage will have to deduct those costs from the property’s cash flow.

In other words, if you buy a $2.5 million property with a 5% cap rate, you should expect to receive $125,000 in annual cash flow. But if you take out a 70% mortgage on that property at an 8% interest rate, Singh says your mortgage costs will more than eat up your cash flow, making it a poor strategy.

Singh looks for properties that have a cap rate of at least 7%, because they provide a buffer in the case of an economic slowdown. During a recession, for example, you might have to reduce rents on your property to keep it occupied, so having a higher cap rate provides some level of protection.

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Appreciation

The second way that you can earn money investing in real estate is through capital appreciation. As Singh explains it, appreciation in commercial real estate is a bit different than simply buying a personal residence and watching its value go up. At the commercial level, the value of a property will depend on the cash flow that it generates. So if you want to improve the value of your commercial property, according to Singh, you’ll have to find a way to increase its net cash flow.

There are two ways that Singh explains you can do this — by increasing a property’s net income or decreasing its cap rate.

Increasing Net Income

To increase a property’s net income, you’ll need to increase the value of the property in the eyes of tenants. This is most often accomplished through renovations, which make properties nicer and allow you to charge higher rent.

Another way is to choose a property in a location where demand outstrips supply. Over time, a supply-demand imbalance will allow you to raise your rents, thereby increasing your property’s value.

Another option is to reduce your costs, thereby increasing net income, by making your property more efficient. Perhaps you could make your property more energy-efficient, saving on utility bills, or negotiate contracts with vendors to reduce your outlay.

Decreasing Cap Rate

If you want to decrease a property’s cap rate, you’ll need to invest in a high-demand area. As demand for a property rises, its cap rate falls, because it becomes less risky to own it. So, the equation is less risk = lower cap rate = higher property value.

Depreciation

Depreciation is the final way Singh says investors can make money investing in real estate. Depreciation is sometimes called a “phantom expense,” because while no actual cash flows out of your pocket, you’re granted a tax deduction for the expense.

Rental real estate, for example, depreciates over 27.5 years, meaning each year that you own it, you can deduct roughly 3.6% of the cost of your property against your taxable income. Even if you don’t have any income to offset, you can claim the depreciation deduction and get cash back in your pocket every year. While not as direct a source of income as the rent you receive, it still improves your cash flow.

Final Thoughts

Singh constantly stresses in his videos that he is not a licensed financial advisor and that while he believes in his investment strategy for himself, it might not be appropriate for everyone. To that end, Singh recommends that investors consult with outside advisors and tax specialists to ensure that they are devising the right strategy for their own objectives and risk tolerance.

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This article originally appeared on GOBankingRates.com: Jaspreet Singh: The 3 Ways To Make Money Investing in Real Estate