Whether you're curious about the investment potential of real estate or you're simply sick of infomercials promising little-known ways to "profit from your property," it's worth learning, for real, how real estate creates wealth.

Rather than providing obscure strategies for investing in real estate or a primer on homeownership for first-time buyers, this article will focus on how to make money through real estate. It will cover both the basic methods that haven't changed in centuries, no matter what kind of gloss the gurus of the moment try to put on them, as well as specific opportunities that have arisen relatively recently.

KEY TAKEAWAYS
The most common way to make money in real estate is through appreciation—an increase in the property's value that is realized when you sell.
Location, development, and improvements are the primary ways that residential and commercial real estate can appreciate in value.
Inflation can also play a role in increasing a property's value over time.
You can also make money in the form of income from rents for both residential and commercial properties, and companies may pay you royalties on raw land, for example, for any discoveries, such as minerals or oil.
Real estate investment trusts (REITs), mortgage-backed securities (MBSs), mortgage investment corporations (MICs), and real estate investment groups (REIGs) are investment alternatives within the real estate sector.

Real Estate Profits From Increasing Property Value

The most common way real estate offers a profit: It appreciates—that is, it increases in value. This is achieved in different ways for different types of property, but it is only realized in one way: through selling. However, you can increase your return on investment on a property in several ways. One way—if you borrowed money to buy the property—is to refinance the loan at lower interest. This will lower your cost basis for the property, thus increasing the amount you clear from it.
The most obvious source of appreciation for undeveloped land is, of course, developing it. As cities expand, land outside the limits becomes increasingly valuable because of the potential for it to be purchased by developers. Once developers build houses or commercial buildings, it raises that value even further.
Appreciation in land can also come from discoveries of valuable minerals or other commodities—provided the buyer holds the rights to them. An extreme example of this would be striking oil, but appreciation can also come from gravel deposits, trees, and other natural resources.

When looking at residential properties, location is often the biggest factor in appreciation. As the neighborhood around a home evolves, adding transit routes, schools, shopping centers, playgrounds, and more, these changes cause the home's value to climb. Of course, this trend can also work in reverse, with home values falling as a neighborhood decays.
Home improvements can also spur appreciation. Putting in an extra bathroom, heating a garage, and remodeling a kitchen with state-of-the-art appliances are just some of the ways a property owner may try to increase the value of a home.
Commercial property gains value for the same reasons as raw land and residential real estate: location, development, and improvements. The best commercial properties are perpetually in demand.

The Role of Inflation in Property Values

When considering appreciation, you have to factor in the economic impact of inflation. An annual inflation rate of 10% means that your dollar can only buy about 90% of the same goods the following year, and that includes property. If a piece of land was worth $100,000 in 1970 and it sat dormant and undeveloped for decades, it would still be worth many times more today. Because of runaway inflation throughout the 1970s and a steady pace since, it would likely take more than $700,000 to purchase that land in 2021, assuming $100,000 was fair market value at the time.

Thus, inflation alone can lead to appreciation in real estate, but it is a bit of a Pyrrhic victory. While you may get five times your money due to inflation when you sell, many other goods cost five times as much to buy too, so purchasing power in your current environment is still a factor.

Real Estate Profits From Income

The second big way real estate generates wealth is by providing regular payments of income. Generally referred to as rent, income from real estate can come in many forms.

Raw land income
Depending on your rights to the land, companies may pay you royalties for any discoveries or regular payments for any structures they add. These include, for example, pump jacks, pipelines, gravel pits, access roads, and cell towers. Raw land can also be rented for production, usually agricultural production, and land tracts with trees may be valuable for the timber that can be periodically harvested.

Residential property income

The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. – Warren Buffett

Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk. – Armstrong Williams

Invest in yourself. Your career is the engine of your wealth. – Paul Clitheroe

“Sometimes your best investments are the ones you don’t make.” Donald Trump

“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
-Theodore Roosevelt

Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk. – Armstrong Williams

Buy real estate in areas where the path exists…and buy more real estate where there is no path, but you can create your own. – David Waronker

The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd. – Warren Buffett

I have always liked real estate; farm land, pasture land, timber land and city property. I have had experience with all of them. I guess I just naturally like ‘the good Earth,’ the foundation of all our wealth. – Jesse H. Jones

It is a comfortable feeling to know that you stand on your own ground. Land is about the only thing that can’t fly away. – Anthony Trollope

"Be courageous. Challenge orthodoxy. Stand up for what you believe in. When you are in your rocking chair talking to your grandchildren many years from now, be sure you have a good story to tell."
— Amal Clooney

There have been few things in my life which have had a more genial effect on my mind than the possession of a piece of land. – Harriet Martineau

Now, one thing I tell everyone is learn about real estate. Repeat after me: real estate provides the highest returns, the greatest values and the least risk. – Armstrong Williams