How he budgets his money

Here are Mehta's monthly personal expenses as of July 2021.

Elham Ataeiazar | CNBC Make It

  • Savings: $10,000
  • Transportation: $1,745 for his car payment, rentals when he is out of town and insurance.
  • SEP IRA: $1,500
  • Food: $700 for dining out and groceries. Mehta eats out for many of his meals.
  • Travel: $460
  • Discretionary: $310 for donations and shopping.
  • Subscriptions and memberships: $198 for an Equinox gym membership and Spotify.
  • Phone: $70

Mehta lives rent-free in one of the buildings he owns (though the management company he and his brother own covers the mortgage with rental payments from other tenants). The catch: He moves every few months, to whichever property has an open room.

Sahil Mehta and his brother, Suyash, own 5 properties together.CNBC Make It

He tries to save as much money as he can each month, and when he and his brother have saved enough, they look for a new property. He currently has around $80,000 in his personal savings account, rebuilt after the brothers purchased a multi-million-dollar property and renovated it earlier this year. Right now, every extra dollar is going to contractors and other expenses; he estimates they've put an additional $500,000 worth of work into the house, and will refinance it soon.

"The goal is to save as much as possible, but sometimes that ends up being very little just because of the natural expenses that come with property management and property improvement," he says. Unexpected maintenance issues like a leaky pipe, for example, could wipe out an entire month's savings. He and his brother pay for the expenses with the company cashflow.

The Mehta family on a trip in Hawaii.Courtesy of Sahil Mehta

He and his family travel to Hawaii every year. They enjoy exploring different islands and soaking in the sun.

Mehta, who admires Elon Musk, purchased a Tesla Model X in December 2020 for $130,000. He put down $45,000 and financed $85,000. Because he uses it for business, he was able to reduce his 2020 tax liability by the entire cost of the car.

"It was my dream car," he says. "I feel so fortunate to be able to buy it."

Aside from the car, Mehta lives fairly frugally. His spending hasn't changed much from when he earned $15 per hour working at Chipotle, because he and his brother both prioritize saving over spending on themselves in order to grow their company.

"One of the biggest barriers to entry is just having money. We know that," he says. "We just want to reinvest as much as possible to grow this business in the best way possible."

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Frequently Asked Questions

What’s the average real estate investor salary?

Recent estimates put the average salary around $124,000 annually. But remember that as a real estate investor, you won’t make a fixed salary. Your money is going to come from the individual investments you make, and you can also lose money (meaning you have a negative salary).

If you play your cards right, you can earn a steady cash flow and make large gains when selling properties. 

Do I need a real estate agent?

A thousand times yes! Having a real estate agent is a very smart move and generally worth every dollar you’ll pay in commissions and fees. 

Real estate agents can provide expert knowledge of the local market. A realtor can also help you maximize rental income and save money on costs that you might not otherwise consider.

Can you do real estate on a part-time basis?

Most beginners start off investing in real estate on a part-time basis. Eventually, you might make enough in residual earnings from rental properties and REITs that you can live full-time off your investments. However, it’s going to take some time to get to that point. 

To make it easier while working a separate job, consider hiring a property management company to handle operations. 

How Do Real Estate Investors Make Money?

There are many different ways to make money from real estate.

Appreciation

The most common way for real estate investors to profit is through their real estate’s increasing in value, i.e., appreciating. The investors realize the profit by selling the real estate to someone at a higher price than what they originally paid for the property, making a profit.

There are ways to improve the profit you can gain by selling your property. One way is through the use of leverage. However, leverage can be dangerous. It can work against you if estate prices fall. You can also refinance the lower at a lower interest rate, thus lowering your costs and improving the returns.

If the property you own is undeveloped, you can also develop it to add value and help its price rise. Developers buy undeveloped land, which holds potential for development. They then construct buildings, residual or commercial, which increases the value even further.

If you are lucky and some valuable minerals or resources happen to be present on your land, your land can appreciate significantly.

Various factors affect the value of land, the most important being its location. Schools near the area, shopping malls, playgrounds, etc., affect how convenient living in that location is. Intangible factors also play a role here. A few examples would be employment rates, property taxes, and crime rates.

If you have a house built already, you can add extra rooms or furnish the kitchen using state-of-the-art appliances to bump up its value.

Remember that the opposite can also happen. If the neighborhood grows increasingly unsafe with rising crime rates, real estate prices in that neighborhood are most likely to fall.

Do account for increasing inflation, though. Even if inflation causes your real estate to increase in value, it will generally lead to increasing prices of most other things you need, thereby hurting your purchasing power.

Rent

Rent is a popular way of earning residual property income. You would own the building and rent out space. You can live in one of the units and rent out the ones you don’t need. The tenants would pay an agreed-upon amount each month, which would eventually go up over time to adjust with inflation.

The amount remaining after subtracting the costs you incur is your rent. The location also plays a huge role here, regardless of whether you will be renting out commercial or residual property.

Short Term Rentals

Short-term rentals are growing in popularity over the last couple of years. A good example would be Airbnb, one of the best alternatives to hotels today.

You can rent out certain rooms or the whole house when you are away or not using it. This service can be in high demand, especially if you live in a popular place with tourists. Keep sanitization costs and local costs in consideration, though.

House Flipping

This is something that only experienced people attempt, usually. These are people who are knowledgeable about real estate valuation, house renovation, and marketing.

Also known as real estate flippers, such people often aim to sell an undervalued house in six months or less. However, the property must have some inherent value itself, such that the flipper can profit from it even without any changes. Some flippers add value to the property through renovations before selling them for a profit.

There are risks unique to house flipping too. For example, if you cannot turn over the property quickly, you might be in financial trouble if you do not have enough cash to pay the mortgage on the property.

Try Invelo for Real Estate Investing

If you are currently buying investment property, whether flipping or renting, or if you are thinking of becoming a real estate investor, you’re going to need a tool to manage prospects, market to leads and convert deals. There are many tools available for this, but very few address the four key aspects of real estate investing:

  1. Finding Prospects – Use our built-in list builder with over 150 million property records to find target prospects that meet your specific criteria. Select from dozens of data points to optimize your list.
  2. Marketing to Leads – Use built-in marketing campaigns to send direct mail, ringless voicemail, email, sms and more. Setup filter criteria to automatically find new prospects and add them to campaigns as they get added to your database.
  3. Manage and Convert Opportunities – Track every step of the deal lifecycle including skip tracing to find better contact information, adding notes and setting tasks so you never miss an opportunity to close a deal.

On top of that, Invelo is unique because it has intelligent automation and built-in education. There is no reason to reinvent the wheel. Tons of investors have already figured out the best practices for finding, marketing, contacting, negotiating and closing real estate deals. Invelo has integrated all of this learning in to educational training and automation so you can “set it and forget it”.

Invelo has a forever free account — try it instantly and see what Invelo can do for you.

REITs

REITs

There are other ways to make money from real estate. If you want regular income from real estate without having to go about it in the traditional ways, you can invest in a real estate investment trust (REIT). REIT is a  company that owns, operates, or finances real estate that generates income.

Similar to earning dividends from stock investments, investing in REITs can help you earn a regular income.

REITs have a unique advantage for individual investors. It allows them to invest in non-residual properties, purchasing which is usually not feasible for most individual investors.

Also, unlike many other methods to earn money from real estate, REITs can be exchange-traded and thus are highly liquid.

Others

There are yet more ways to invest in real estate. There are online real estate investing platforms to help you invest in properties that may not be otherwise accessible to individual investors.

There is also contract flipping, where you can ‘flip’ the rights of a purchase contract to others instead of reselling the literal house itself. This would entail you bridging the gap between a seller and a buyer.

There are MBSs (mortgage-backed securities), MICs (mortgage investment corporations, and REIGs (real estate investment groups). MBSs and MICs mostly deal with investing in private mortgages rather than the properties themselves.

REIGs are groups of private investors who pool resources such as money and their knowledge regarding the real estate market and then acquire or invest in real estate that generates income.

Challenges That Real Estate Investors Usually Face

Nothing good in life comes easy, and real estate investment is no different.

Presence of Volatility

Market volatility is one problem that is currently plaguing most real estate investors. The coronavirus pandemic has brought with it a lot of uncertainty, which has definitely had an impact on real estate prices. How any investor will deal with the volatility depends on their strategy. Investors who are in it for the long haul may prefer to stick to stable investments for the time being.

Use Invelo for Real Estate Investing
Use Invelo for Real Estate Investing

The Increasing Popularity of iBuyer

Websites like iBuyer are becoming formidable competitors for many in the states. While competition will always be there, it is especially crucial right now for you as an investor to be transparent with your clients.

You need to earn their trust and assure them that there are no hidden fees to ambush them after they agree to the deal. Conveying a sense of transparency and reliability is necessary for you to outperform all your competitors.

Dwindling Numbers of Home Listings

The limited number of lucrative, active home listings presently contributes to making the market even more competitive and difficult for real estate investors to make handsome profits. Just for illustration, the number of active listings in the Austin-Round Rock Metropolitan Statistical Area (MSA) went down by 56 percent in June 2021.

About this, Kristee Leonard, The Leaders Realty, LLC, said, “It is even more vital right now for an investor to be working with a real estate broker who will provide them with off-market listings.”

Hyperinflation Due to the Pandemic

The hyperinflation on assets brought on by the pandemic makes it difficult for real estate investors to offer competitive prices to customers. This makes it difficult for real estate investors to estimate cash flows from a property and decide whether or not to invest in it.

The effect of appreciation on the investors’ returns can be canceled out by hyperinflation as it reduces the investors’ purchasing power.

Moreover, the diminishing number of home listings contributes to the prices of real estate increasing.

Capitalization Rate Compression

Capitalization rate compression happens in markets with rising prices—the higher the prices, the lower the capitalization rates.

Supply chain disruption also contributes to increasing prices, as Cliff Booth, Westmount Realty Capital, LLC, believes.

“Disruption to supply chains has contributed to inflation in construction pricing, spurred by a drastic increase in the cost of materials, including lumber and steel, as well as overall higher wages due to a limited construction labor pool.”

Andrew Schena, Capital Equity Partners, LLC, thinks investors should review their basics and realize the opportunity cost of investing in deals that are unlikely to succeed. “Understand who, what and where you’re investing in,” he said. “Ensure the operator has stress-tested their business plan.”

Finances

As with many businesses, you need money to be able to make money in real estate. Do not forget to consider costs like down payment, closing costs, maintenance fees, mortgage payment, selling fees, etc.

Down payment depends on factors such as the type of property, sale price, and the type of mortgage loan you take out from a lender or bank. When thinking about costs, you should expect at least a 20 percent down payment and an additional 2 to 5 percent in closing costs. Closing costs may include agent fees, insurance, appraisal costs, etc.

Buying condos may subject you to Homeowners’ Association (HOA) fees, which are extremely high. Also known as the HOA fee, it is a sum payable by owners of some particular types of real estate. These fees are used to maintain and enhance those properties.

How To Calculate The 1% Rule

Calculating the 1% rule is simple. Just multiple the purchase price of the property by 1% – or, even easier, move the comma in the purchase price to the left two spaces. The result should be the minimum you charge in monthly rent.

If any repairs are required of the property, you’ll also want to factor them into the equation by adding them to the purchase price, then multiplying the total by 1%.

Using Cap Rate to Compare Investments

The good news is that there are tools available that make comparisons between potential real estate investments easier. One of these, which will become invaluable to you on your quest to make money from real estate is a special financial ratio called the capitalization rate (cap rate). Cap rates show the rate of return on a commercial real estate investment. It takes its basis from the net income the property will produce.

If a property earns $100,000 per year and sells for $1,000,000, you would divide the earnings ($100,000) by the price tag ($1,000,000) and get 0.1, or 10%. That means the cap rate of the property is 10%, or that you would earn an expected 10% on your investment if you paid for the real estate entirely in cash and no debt.

Just as a stock is ultimately only worth the net present value of its discounted cash flows, a real estate is ultimately worth a combination of:

  • The utility the property generates for its owner
  • The net present cash flows it generates—relative to the price paid

How to make more money as a real estate investor

As you can see, your estimated salary as a real estate investor can vary greatly. Fortunately, investors have a lot of control in their careers. That means if you're not making what you want or just want to scale up, there are plenty of steps you can take to do so.

Here are just a few ways you can improve your earnings as an investor:

Diversify

If you've only flipped properties or rented out single-family homes, expand into other forms of real estate investing. Add a few vacation homes to the mix, try a multifamily property, or give wholesaling a whirl. You'll increase your earning potential — plus, you could find something you're really good at or just enjoy more.

Do more deals

This one's pretty simple: The more deals you do, the more you'll earn. If you're only doing five flips per year, think about adding another two. If you have two rental properties, consider a third (maybe even a duplex or triplex to really increase those earnings). Just keep in mind that the bigger your portfolio grows, the more work you'll be required to do. So be prepared and set aside the time (or team) to do it.

Get a mentor

If your real estate career isn't quite panning out, then look to someone who's come before you. Many successful real estate investors offer coaching and mentoring programs, and they can help guide you on growing your career and your earnings. Attending networking events is a great way to find a potential mentor. You can even ask your favorite real estate agent for some recommendations in the area.

Improve at least one skill

Read, take classes, and make it a point to improve at least one of your basic investing skills. If you improve your negotiation skills, for example, it might mean lower costs and higher returns on your next flip. If you increase your knowledge of carpentry, it could reduce rehab costs down the line. Even small, incremental improvements in your capabilities can make a big difference on your bottom line — and your real estate business as a whole.

Change your location

The data above spells it out: Real estate investing returns vary widely depending on where you're active. If your properties aren't delivering the return on investment (ROI) you've been hoping for, then branch out location-wise. Try a real estate investment in a new city or even a new state. Just be sure to do your research and identify the real estate market with the highest potential possible before diving in. You'll also want a plan in place for how you'll manage the property (or just the deal) from far away.

Increase your rents and prices

Obviously, if you charge more rent or price your flips higher, you'll make more cash. You'll just need to be careful here and make sure the price hike is justified. If it's not, you might find yourself with a vacant property — and that can hurt your earnings (and cash flow) more than anything.

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