6 Ways to Make Money in Real Estate: Financially Independent Investors

Letizia Alto and Kenji Asakura built a portfolio of cash-flowing rental properties to buy back time.

The physician couple had spent their early careers working up to 80-hour workweeks in the hospital and wanted their future lifestyle to look different.

In 2015, shortly after getting married, they set a specific cash flow goal.

“We said, ‘We’re going to replace both our clinical incomes in seven years,'” Alto told Business Insider. “That’s what we were always working toward: To get to the space where we had time freedom. We wanted time with each other and we wanted time with our kids growing up, so we didn’t miss everything that we saw all the doctors around us missing.”

They immediately got to work, redirecting the money they’d saved to buy their first primary home into their first two investment properties. As they expanded to over 100 units, they remained tenants themselves up until 2022, when they moved to Puerto Rico and bought a home. The couple has scaled back on medicine and spends most of their time managing their portfolio, building their Semi-Retired MD community, and traveling with their three kids.

“I think a big differentiator is that we apply a lot of business principles to our rental business,” said Asakura. “A lot of people don’t think about rental properties as a business — they think about it as providing housing — but ultimately, each property is a mini-business.”

There are six main ways to make money in the business of real estate, added Alto, “and our goal is to tap into all of them.”

1. Cash flow

If you buy and rent an investment property, you have the opportunity to generate cash flow, which is your rental income minus all of your expenses. Positive cash flow is a focus and a requirement for Alto and Asakura.

They feel confident in their ability to select strong cash-flowing properties, thanks to a cash-on-cash calculator they created that allows them to input metrics such as purchase price, expenses, and projected rents.

Before purchasing anything, they run the numbers twice — first to see if it’s even worth submitting an offer. Then, once they have a property under contract, they’ll do a run-through with their inspector, property manager, real estate agent, contractor, and insurance broker. Each team member can weigh in on various costs.

Their contractor, for example, can confirm whether their renovation cost estimate is accurate, while their property manager can confirm the amount of rent the property will likely generate. Then, they’ll enter the new, more accurate numbers into their calculator and have more certainty around how the property will perform.

“Let’s say we thought it was going to perform a certain way, we did our due diligence, and there were all these problems that we’re going to have to repair, and the cash-on-cash is now not worth it,” said Alto. “Well, we negotiate and try to get the price down. Or, we try to get credits to get it to where the deal still works for the cash-on-cash return.”

If the deal doesn’t work, “we don’t buy the property,” said Alto. “We will not buy something that’s going to be cash flow negative or cash flow neutral. We really want a cash-on-cash return because that’s ultimately the income that sets us free.”

2. Debt pay down

Mortgage payments build equity, so every time you make a payment, you build a bigger stake in the property until you own the asset outright. The great thing about having tenants is that their rent is helping you build equity.

“If you’re cash flowing, your tenants are paying down your mortgage,” said Alto.

3. Forced appreciation

Forced appreciation is when the investor increases the value of the property. To do so, Alto and Asakura focus on increasing the net operating income (NOI) by increasing income or decreasing expenses.

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Increasing income can be as simple as increasing rent if it’s below market value. Or, with a bit of creativity, you could rent unused spaces of your land or property.

“You’re looking for ways to increase revenue of your property even more by tapping into what we call hidden value,” said Asakura. “That might mean renting out a storage unit, turning a garage into a workspace, or adding a bedroom.”

As for decreasing expenses, one strategy they’ve used is charging back utilities. For example, on a property with a detached garage, they decided to set it up so it could be used as a workshop. They ran separate electricity to the garage, rented the space for a couple of hundred dollars a month, and billed back the utilities.

“If you increase income and decrease expenses, the property creates more cash flow — and then it’s worth more to the next investor because the next investor is buying it to make cash flow,” said Alto, adding that forcing appreciation has made “the biggest difference for the growth of our net worth.”

4. Immediate appreciation

Immediate appreciation is just as it sounds: “Day 1, you make money,” said Alto. “You get it appraised and it’s worth more than what you purchased it for.”

You can capitalize on this type of appreciation by recognizing good deals and acting quickly, negotiating with the seller, and leveraging your network to find off-market deals.

5. Market appreciation

You can’t control market appreciation. That’s a lesson Asakura learned from investing in the early 2000s. He was essentially buying land, waiting for it to increase in value — which, during that era, most real estate was — and selling it for profit. That worked until the 2008 housing market crash, which left him exposed and “stuck with a lot of mortgages, insurance payments, and property taxes.”

The main lesson was to never depend on market appreciation.

That said, “you can set yourself up to make it more likely to happen by buying in the path of progress of a particular neighborhood,” said Alto. “You’ll have a little bit more likelihood of market appreciation, but again, you cannot control it.”

6. Tax benefits

A key to the couple’s strategy is tapping into tax benefits specifically for real estate investors. Especially when they first started in real estate, they used big tax refunds to buy more properties.

“The tax code is essentially a series of incentives to encourage certain behavior that the government wants,” said Asakura. The trick is to understand how to use it to your advantage.

The main tax strategy they use is sheltering their income using a status known as “real estate professional status,” or REPS. To qualify, real estate has to be your primary job. There are stipulations set by the IRS, including spending more than 750 hours on real-estate activities.

If you meet the criteria, your passive losses from rental real estate are considered non-passive, and you can offset your W2 or 1099 income, which could lower your taxable income significantly and place you in a lower tax bracket.

Asakura transitioned to a part-time hospitalist in 2015 so he could qualify for the status. Only one spouse needs to qualify, meaning Alto could continue working and deduct the real estate losses from her clinical income.

In 2015, the first year Asakura qualified for REPS, “we did a lot of rehabbing to create our losses,” explained Alto. “When we rehabbed, we would be increasing the value of the property and increasing cash flow of the property, but the rehab was a write-off, which was insane. I hope people understand that rehabbing is such an incredible thing to do because it is tax beneficial, but you get to keep all the upside of it.”