One of the first questions most new investors as is – how much does an average real estate investor make?
Obviously this will vary based on asset class, niche, and geographic area.
It also varies based on how you invest, how long you’ve done it, and if you have partners or not.
We’ll try to break it down as much as possible so you can have an idea of what you’re getting into before you get started.
Real Estate Niches
Real estate has literally hundreds of niches to operate in. Some areas of real estate perform better or worse depending on the part of the real estate cycle we’re in. But, in the current real estate bubble, everything is on fire, so it gets a bit more difficult.
Regardless, the first thing we need to figure out is what niche you’ll be working in.
There are several core types of real estate. There’s no defined list, so some people will consider some classes as subcategories of other classes.
But, in general, real estate is broken down into commercial and residential real estate.
Commercial real estate is further broken down into multifamily, retail, office, self-storage, mobile home parks, industrial, office, and special purpose.
For a more thorough breakdown of the asset classes, read this article on commercial real estate classes and types.
Returns on Passive Real Estate Investing
Other ways people invest passively in real estate could be through private equity or syndication.
The returns on these are widely variable depending on the type of real estate and the strategy, but the returns are broken down into two primary categories – cash flow and appreciation
Average Cash on Cash Return For Passive Investing
Cash flow in real estate is generally measured as cash on cash return. In the stock market, this is comparable to the dividend yield.
The typical real estate deal will have anywhere from 4-10% cash on cash return. Generally, yields are higher in real estate due to the low-cost leverage real estate can get.
Many real estate deals will have a period upfront with no dividends or distributions as the asset takes time to stabilize, renovate, or lease up.
Average Real Estate Appreciation
The other major form of income for passive investors is appreciation. In the industry, we define two forms of it – market appreciation and forced appreciation.
This is simply the appreciation caused by general economic trends in the area. If people are moving to a particular city or neighborhood, and the housing supply is stable, then prices will go up.
Similarly, if people are moving out of a neighborhood, or if too many people are selling in an area, then prices will go down.
Generally, market appreciation is right around the level of inflation. Sub-markets may beat inflation for long periods of time. For example, certain cities have great economic conditions and steadily grow faster than the rate of inflation while other cities don’t have great conditions and may not even match inflation.
This is the appreciation caused by whatever your business plan is. For example, you may renovate the building, put better tenants in, reduce costs, raise rents, etc. These changes will likely improve the value of the property.
When the changes you perform cause the value to go up, we call this forced appreciation.
There is no rule of thumb for this number. It’s specific to the particular asset and owner.
Type of Market
Another consideration to be made is what sort of market the investment is in. In general, we have appreciation markets, cash flow markets, and hybrid markets.
An appreciation market is a location that tends to have poor or even negative cash flow. People purchase in these areas because they believe over a long period of time, prices will appreciate significantly.
Cash flow markets are where prices rarely go up or down, but they provide stable and consistent cash flow from year to year.
Most markets are some sort of hybrid. They may lay closer to cash flow or appreciation but most cities will have some of both. Unfortunately, very few markets have a lot of appreciation and cash flow at the same time.
Average Returns on Passive Real Estate Investing
When you combine the market appreciation, forced appreciation, and cash flow of a leveraged real estate deal, the returns are often 8-15% per year.
Some will be significantly less and others will be more, but this is what you tend to see on average, around the nation, in a variety of markets.
How Much Does an Average Real Estate Investor Make?
Now that we’ve covered passive investments, let’s talk about being an active real estate investor.
Active investing includes being an asset manager, property developer, house flipper, wholesaler, etc.
But, I want to make a very big caveat – none of this is investing.
House flippers are not real estate investors.
Property developers are not real estate investors.
Wholesalers are definitely not real estate investors.
All of these, and more, are speculators, business owners, project managers, money raisers, deal finders, or whatever else. But they aren’t investors.
Investing is just a word that is used day-to-day. Investing means allocating your capital with an expectation of returns.
So, in each one of these businesses, there is an aspect that is investing and an aspect that is not.
Any money they put into a deal is their investment. This will have returns based on the income of the property.
Whatever money they make by actively running their business is their earned income, not investment income.
How Much do House Flippers Make?
Now that we’ve made that caveat, let’s talk about what you might make.
House flippers have a gross margin that averages about $60-$70k on an average-priced house (300-400k). Gross margin is simply the difference between the purchase price and sale price.
The actual net profit is much lower once you subtract all the costs. A realistic net profit will be 25-40k.
How Much Does a BRRR Strategy Make?
The BRRR Strategy is just like the house flipping strategy, but you refinance and keep the property instead of selling it.
As such, the profits are going to be the same, but you’ll keep equity instead of getting all the cash. Additionally, you attain market appreciation and cash flow throughout the holding period until you sell it.
How Much Do Wholesalers Make?
A wholesaler puts a property under contract then sells the contract to another investor.
While this is clearly not investing, it can be highly profitable. The average wholesaler makes around $5-$7k profit on each contract. They generally mark up a contract $10-$20,000 and once you subtract time and marketing costs you’re left with the lower number.
Investing is Lucrative
Real estate investors only need a few deals a year in order to make a very good income. As you can see, you can range from a few thousand to tens of thousands in profit per deal for active investments.
Additionally, you can earn returns on all the cash and equity you retain in each deal.