Buying income properties is one of the best ways to make money in real estate. However, not all income properties are guaranteed to give you good returns. To be a successful real estate investor, it is important to learn how to find income property that will make you the most money. In this blog, I have compiled a list of the characteristics to look for when looking for an investment property for sale. Even though it is rare to find a perfect investment property will all these traits, your objective should be to maximize each of these factors as best as you can. Depending on your situation, some factors may also be more important than others. Here are 4 traits of the best income property:
1. They Are Found in Top Locations
When it comes to real estate investing, location is very crucial since it will determine the profitability of the rental property. It will determine the optimal rental strategy for that particular market, the type of income property to invest in, your target tenants, the occupancy rate, your rental income, your operating expenses, etc.
The best rental investment properties are usually found in top locations. Your first step in your income property search should be finding a good housing market. Never purchase an income property investment in a location you are not familiar with. You will need to conduct a real estate market analysis to find a high-performing housing market. Take into account factors like the economic situations, crime levels, proximity to the CBD, availability of public transport, infrastructure, schools, hospitals, shopping centers, and other amenities.
Since real estate markets are dynamic, the best place to buy income property is one that is ideal for both traditional rentals and Airbnb rentals. Also, consider the future plans for the area and how they will affect people living in that area. In addition, consider the overall state of the housing market in your location of choice. How high is the demand for rentals? A location where competition is stiff due to many rentals may not be good for investment. If there are fewer rentals, you will have lower vacancy rates and be able to demand higher rents. All these will influence the performance of your investment property.
To start searching for the best income property locations across the US housing market, click here.
Related: 10 Best Places to Invest in Real Estate in 2020
2. They Generate Strong Positive Cash Flow
Another characteristic of the best income-producing investment is that it generates strong positive cash flow. This means that your rental expenses are lower than your rental income. In other words, great investment properties make more money monthly than what they cost. To make sure that you purchase a positive cash flow income property, always perform an investment property analysis. You can quickly calculate the cash flow of an investment property with our rental income property calculator.
Related: Investing in Income Properties: 8 Steps to Positive Cash Flow
3. They Are Small and Simple Investment Properties
You may be thinking that the best income properties to purchase are the expensive luxury rentals since they would generate higher rental income. However, this is not necessarily true. Most of the time, small and simple investment properties like single-family homes and multi-family homes make the best real estate investments. Even though rental income for luxury rentals may be higher, their operating costs will typically be higher too. Small and simples properties are usually less demanding and will have lower operational costs. Therefore, they tend to have a better return on investment in terms of cash on cash return and cap rate.
Buying a multi-unit income property like a duplex or triplex is usually a good way for beginner investors to get into the housing ladder. You can live in one unit and rent out the rest of the units (house hacking). This allows you to live at a reduced rate or entirely for free. Therefore, you will be able to pay down your mortgage quicker. You will also be eligible for an FHA loan, which requires a smaller down payment of 3.5% and has a lower interest rate.
To assess whether an investment property has a good return on investment, you can easily and quickly do an investment property analysis to calculate the cap rate and cash on cash return using Mashvisor’s investment property calculator. Unlike using spreadsheets, it will take mere minutes to obtain the key metrics with this tool.
Related: Why an Investment Property Calculator Is Better Than Spreadsheets
4. They Need Modest Repairs
The condition of the property is also a big consideration when buying an income-producing asset. Do an inspection on the property to assess if it has any major issues. For a beginner real estate investor, it would be wiser to go for an income property that needs modest repairs or can be rented out as is.
If you are more experienced and have skills in large-scale improvement, you could consider the potential to add value. When buying a fixer-upper, there is potential for more capital gains. However, the effort, time, and cost of the renovations should pay off. When done right, renovations can increase your rental returns. Therefore, you shouldn’t be quick to write off an income property for sale just because it is not in very good condition.
The Bottom Line
Becoming a successful real estate investor will be greatly determined by the income properties you acquire. This is because buying income property is quite different from buying your own home. You should never pick an investment property based on your emotions. To find an income property that will produce good returns and which has good potential for growth, make sure you consider the above characteristics.
As you have seen, many factors come to play to determine the profitability of an investment property. In fact, it is almost impossible to find a perfect income property. The best real estate in the world technically does not exist. However, your goal as a real estate investor should be to find an investment property with the most traits that make for the best residential income property for sale. To make sure you always buy the most profitable investment properties, be sure to conduct thorough real estate market analysis and investment property analysis using our investment property calculator.