Many people are attracted to the real estate investing business. However, some still have questions such as “Are rental properties profitable investments?”The short answer is most definitely! Real estate, in general, is still considered one of the best ways to make money and build wealth. One way of doing so is through owning rental properties.
Keep reading to learn why are rental properties profitable, why some properties are more profitable than others, and how can a real estate investor find the best rental property for a high profit!
Why Are Rental Properties Profitable?
Cash Flow
It goes without saying that the main motivation of every real estate investor is to make money from their investment properties; this is why most of them are wondering are rental properties profitable. In real estate investing, money is made through cash flow and appreciation – both of which are reasons for why are rental properties profitable.
A rental property provides the real estate investor with a steady source of cash flow in the form of monthly rent collected from tenants. In real estate investing, cash flow is the profit that property investors make after calculating the difference between their monthly rental income and monthly expenses of their investment properties.
How does cash flow answer the question of are rental properties profitable? Well, the cash flow from a rental property is what property investors use to pay expenses such as mortgage payments, rental property taxes, operation costs, etc.
However, property investors need to keep in mind that in order for a rental property to be profitable, it has to generate a positive cash flow – when incoming cash flow outpaces outgoing cash flow. Positive cash flow indicates successful real estate investing and leads to a high return on investment. If your rental property is generating negative cash flow, you’ll start losing money instead of making money from real estate investing.
Related: How to Find The Best Positive Cash Flow Investments in Real Estate
So, are rental properties profitable? Yes, when they generate a positive cash flow!
Appreciation
The second reason why are rental properties profitable is real estate appreciation. As mentioned above, profit is made in real estate through cash flow and appreciation – the increase of the investment property’s value over time.
Related: Real Estate Investing for Positive Cash Flow vs. Appreciation
Appreciation is what allows property investors to sell their investment properties for a profit after holding it for years. For example, if you buy a $300,000 investment property today, its value 15 years from now would be much more thanks to appreciation and thus, you can sell it for a higher price!
In real estate investing, a rental property appreciates for various reasons, like when mortgage interest rates go down, demand for real estate increases, or there’s a lack of real estate supply. Therefore, a real estate investor has to perform a real estate market analysis and calculate the appreciation rate to ensure buying an investment property with a high expected appreciation.
So, are rental properties profitable? Yes, when their value increases over time thanks to real estate appreciation!
Tax Benefits and Deductions
The world of real estate investing, in general, is profitable because it offers many financial benefits only to property investors. When it comes to answering the question why are rental properties profitable, the next reason is the tax benefits and deductions you get from owning a rental property.
One example of the tax benefits is that the cash flow that your rental property generates is tax-free. In addition, when property investors decide to sell investment properties and reinvest the profits, they are not required to pay the capital gains tax.
As for tax deductions, owning a rental property enables property investors to deduct almost all expenses related to their investment such as real estate property taxes, mortgage interests, insurance, and operation expenses. Being able to deduct from these expenses ultimately increases the real estate investor’s profits and overall return on investment. Exactly how much you can deduct depends on your rental income and local real estate laws in the housing market in which you’re investing.
So, are rental properties profitable? Yes, thanks to tax benefits that allow property investors to increase their return on investment!
Hedge Against Inflation
Lastly, owning a rental property is profitable because real estate investing works as a potential hedge against inflation. Historically, cash flow and rental property prices have kept pace with inflation. In simple terms, this means that as the cost of living increases, so do market prices for investment properties.
This answers our question of why are rental properties profitable because as inflation increases, real estate investors can raise the amount they charge for rent, meaning they can generate a higher rental income. In addition, if a real estate investor is selling an investment property during times of inflation, he/she can list the property for a high price and make a profit from the sale – especially in a real estate market with a limited supply of rental properties.
So, are rental properties profitable? Yes, thanks to inflation which allows property investor to rent out or sell their investment properties for a higher price! To learn more about all aspects of real estate investing, continue reading our blog.
When Are Rental Properties Profitable?
Now that you know the reasons for why are rental properties profitable, you might be wondering why some rental properties are more profitable than others. As a real estate investor seeking answers to are rental properties profitable, you should know that there are many factors that determine how profitable rental properties are. The 2 main factors are:
Location
Location plays a major role in everything related to a real estate investment, including its profitability. Where your investment property is located affects your rental income, operation costs, positive cash flow, and appreciation. Generally, the best and most profitable rental properties are in locations with:
- A good standard of living that attracts tenants
- Reasonable rental property taxes and good insurance
- High rental income – meaning you can charge higher rent
- Expecting major economic growth
- Land is becoming limited
- Infrastructure development projects are being planned
- Major business hubs and tourist attractions
In such locations, a real estate investor has a good chance of finding rental properties with a positive cash flow and high expected appreciation – which are reasons to why are rental properties profitable.
Click here to compare investment properties in your location and find which is the best and most profitable!
Rental Strategy
In real estate investing, you can rent out your investment property either as a traditional (long-term) investment or an Airbnb (short-term) investment. Whichever rental strategy you opt for will determine your profitability and return on investment. Keep in mind that this factor is correlated to location – some locations yield higher profitability with a traditional real estate, while others are better suited for Airbnb real estate investing.
Thus, to understand when are rental properties profitable, a real estate investor has to perform a real estate market analysis to determine which rental strategy is optimal and generates a higher return on investment.
Related: Airbnb Investment or Traditional Investment: How to Determine The Optimal Strategy
How to Find Profitable Rental Properties
Mashvisor is an online platform that provides property investors with the best real estate investing tools and data analysis of both traditional and Airbnb investments to perform a thorough real estate market analysis.
To find the most profitable rental properties, make use of Mashvisor’s:
- Investment Property Finder: A powerful search tool that is heavily customizable, allowing you to search for investment properties based on specific criteria, such as finding properties of a certain type, in a certain neighborhood, or with a certain Cap Rate.
- Investment Property Calculator: This versatile and customizable tool allows you to calculate the different values related to an investment property. The main values that you will be able to calculate are Cash on Cash Return, Cap Rate, Cash Flow, and Airbnb Occupancy Rate.
- Heat Map Function: The heat map function for the property finder tool allows you to find investment properties much faster using visual cues. For example, you can set the heat map to indicate the areas with the highest Cash on Cash Return, and you will immediately be able to tell which areas have the highest potential for high Cash on Cash Return properties.
Sign up with Mashvisor to get full access to the above real estate investing tools, as well as the Airbnb calculator, and find the best and most profitable rental properties in the US housing market within minutes!
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.