Six Things You Need To Know Before Investing In Rental Properties

| April 2, 2020
rental properties

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Amid the uncertainty created by the Coronavirus pandemic, many investors are looking for the lowest risk strategy which can still bring a reasonable return. Even in these tough times, rental properties remain one of the best investments as people always need a place to live. With the poor performance of the stock market, more and more investors might turn to investing in rental properties. To help out beginners in the real estate business, this article looks at the six things which everyone needs to know before purchasing an investment property.

1. Investing in Rental Properties Comes with Many Benefits

First and foremost, a beginner real estate investor should know that income properties offer a myriad of advantages over other investment strategies. One of the most important benefits is the fact that you can make money both in the short term (through rental income) and the long run (through real estate appreciation). As soon as you buy a rental property and repair it, you can start renting it out to make money month after month. Moreover, over time home values increase in all markets due to the limited supply of land as well as population growth. This means that once you decide to sell your property in a few decades, the increase in its value will exceed the inflation rate over the period for which you held it.

Another major advantage of rental properties is that they are one of the safest investing strategies. Real estate is a tangible asset, so it is virtually impossible to lose your entire investment. Despite temporary slowdowns and even crashes, the US housing market is bound to recover due to the constant need of people for homes.

Importantly, investing in real estate requires relatively little previous experience and knowledge. That’s why it is easy to succeed even as a beginner. With the help of real estate investment tools and a good agent, you can buy profitable rental properties in the top locations.

2. Location Is Crucial

This leads us to the second thing which every real estate investor needs to know. Even if you are not related to the real estate industry at the moment, you must have heard that location location location are the three most important factors there. When investing in rental properties, the local market will determine the property price you have to pay, the closing fees, the monthly mortgage payments, the other recurring costs such as property tax and home insurance, and the rental income you can make. This means that location is the key determinant of your cash flow (the difference between the monthly or annual rental income and rental expenses) and your return on investment.

With regards to cash flow, you should always aim for positive cash flow properties. While some investors buy negative cash flow properties with the hope to have a turn in luck soon, this is not a safe strategy, especially for beginners. Having positive cash flow is the only way to make sure that you are making money rather than losing money from rental properties.

In terms of return on investment, the good rate of return varies depending on which metric you use. Many real estate investors focus on the capitalization rate due to the relative ease of calculating it and comparing the profitability of different properties for sale. A good cap rate is between 8% and 12%. In terms of cash on cash return, investors should aim for about 10% or more.

3. The Options Are Unlimited

One more thing which you should know about investing in rental properties is that this is one of the most diverse strategies. Related to the previous point, you can buy an income property in any city or town. While some markets are generally more profitable than others, buying a positive cash flow rental property is possible in nearly every location, as long as you conduct diligent market analysis and property search. Furthermore, the possibility to invest in different neighborhoods adds further diversity, even within the same market.

Depending on their budget, location, and preferences, investors can choose from single family homes, townhouses, apartments, condos, multi family homes, and other property types to find the rental property most suitable for them. Even in terms of rental strategy, you can decide to rent out your property on a monthly basis (as a traditional, long-term rental property) or on a daily basis (as an Airbnb, short-term rental). As you see, opportunities are endless with rental property investments.

4. Working with an Agent Makes Sense

Another fact which beginner investors should keep in mind is that hiring a real estate agent is generally a good idea. Many first-time investors and homebuyers are hesitant to work with an agent because they don’t want to inflate their cost. However, in the US housing market the agent’s fees are covered by the property seller and not the property buyer. This means that hiring an agent will cost you nothing when buying rental properties.

Meanwhile, as a real estate professional, a good agent can help you out a lot. He/she can advise you on the best location in the local real estate market for investing in an income property as well as on the optimal property type and rental strategy. In addition, real estate agents have access to the Multiple Listing Service (MLS), which regular people don’t. That’s where most properties for sale get listed, so it’s crucially important for investors to gain access to these listings. What’s more, agents are excellent negotiators who will be able to get you the best possible price for your new investment property.

5. There Are Many Tools to Help You

Technology has advanced incredibly in the real estate industry in the past few years. As a result, buying and managing rental properties has become easier than ever before. When purchasing an income property, you no longer need to spend three months on research and analysis. Mashvisor, a real estate investment app, can help you find a lucrative opportunity in 15 minutes. Tools such as Rentometer allow you to set the optimal rental rate for your newly purchased property and keep it at a competitive rate in the local market. Onerent provides high-tech rental property management services. With the advancement of big data, predictive analytics, and AI, the real estate investing business has become fully accessible even for beginners with no previous knowledge and experience.

6. Analysis Is the Key to Success

The last thing that you should know before you can start investing in rental properties with a high return on investment is that real estate analysis is a must. There are a few different types of analysis which you need to conduct in order to succeed as a real estate investor. First, you have to research a few markets to locate the optimal place for buying an income property in line with your budget and expected return. Next, you need to perform an analysis on the market you have selected to identify the best property type, the optimal rental strategy, and the top neighborhoods. Last but not least, you should analyze properties for sale within your budget to choose positive cash flow ones.

Very few experienced investors are able to buy properties based on a gut feeling. The success of the majority of real estate investors depends on the depth of the analysis which they have conducted.

Making profitable real estate investment decisions is possible even for beginners. As long as you keep these six things in mind when buying rental properties, you have all the requisites you need to succeed in the business.

Note: This article originally appeared at ValueWalk. The article was posted by Daniela Andreevska.

 

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Category: Real Estate

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The author of this article is a contributor to ValueWalk.com. ValueWalk is your everyday source of breaking and evergreen news on everything hedge funds and value investing.

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