Investing in rental properties makes for one of the most durable, stable, and profitable investments out there. Your rental property investment is long term and generates more reliable returns as opposed to stocks and shares, for example.
You may be wondering how does one go about investing in real estate and having positive cash flow properties? What characteristics does your rental property need to have in order to achieve a high return on investment? What do you have to consider in order to capitalize on the best rental properties?
We are here to talk about those best rental properties and the characteristics that they possess. We have developed a list of these characteristics and if you find a property that possesses all of them, it will be among the best rental properties in the US housing market!
#1. Profitable Location
A profitable location is a key characteristic of the best rental properties. You want your rental property to be in a location that aligns with your goals and one that contributes to high returns. When looking for the best rental properties, you want to consider your rental strategy and find neighborhoods that match it. You also want to research the property taxes beforehand as well as vacancy rates and the future real estate development. Let’s dive into each of these elements a little further.
Rental Strategy and the Right Location
If you want to invest in vacation home rentals, for example, then we recommend that you look into neighborhoods where the tourist populace is high. For such an investment strategy, you would want to look into locations that are in close proximity to tourist attractions such as beaches.
If you want to go with the long term rental strategy, a neighborhood whose job market is booming is a strong indicator of finding the best rental properties. Growing employment opportunities, moreover, tend to attract more people, and therefore increase demand for real estate. After all, hot rental markets tend to follow job and population growth.
So first, determine your goals and set a rental strategy and then find a location to align with them.
You can use Mashvisor’s Heatmap Analysis Tool to kick start your market research. This real estate investment tool allows you to search for neighborhoods that match your rental strategy (high traditional cash on cash return, good average Airbnb occupancy rate, etc.). With machine-learning algorithms as well as predictive analytics, Mashvisor’s Heatmap Analysis Tool will help you find the best locations with the best investment properties.
To start looking for the best neighborhoods in your city of choice, click here to give the Heatmap a try!
Low Property Taxes
Property taxes can significantly affect the overall cash flow of your investment properties. The best rental properties tend to be in locations where property taxes are low. As a matter of fact, many real estate investors seek out-of-state investment properties for sale to avoid paying high property taxes. These property taxes include taxes on land, the property on that land, and the rights and interest of the investment property.
States that offer low property taxes on rental properties include Hawaii, Alabama, Louisiana, and Delaware. While property taxes are a big incentive for many real estate investors to invest out of state, other taxes could be high compensating for the difference. Hawaii, for example, has the lowest property taxes but the highest income taxes. Bottom line, when you are looking for states that have low property taxes, make sure to learn about all other pertaining taxes and how they could potentially impact your real estate investment.
Vacancy rates are crucial to determining the profitability of an investment property. As a real estate investor, you surely do not want to invest in a location where the vacancy rate is high. This is because high vacancy rates will force landlords to lower rents in order to attract tenants while low vacancy rates allow investors to raise rental rates. Moreover, as a real estate investor, you want to determine the seasonal fluctuations as far as vacancies and account for them. The best rental properties are those that can accommodate for any seasonal fluctuations in vacancies.
Investing in real estate is a long-term commitment. You want to thoroughly assess the short- and long-term effects of owning rental properties and how they could impact your returns. That being said, you should study future development within an area. New developments could provide competition for your property and, if not managed correctly, you might find it difficult to maintain your returns. Reach out to your local municipal planning department as it will have information on all the new development projects planned. Keep in mind that new development plans to build business parks or malls are positive and make for a good location to invest in rental property.
#2. Positive Cash Flow
Achieving a positive cash flow requires that you assess your rental property expenses and subtract them from the expected rental income. Positive cash flow is when rental income exceeds the incurred expenses associated with the investment property. Often times, real estate investors neglect some of the expenses leaving them with negative cash flow. Assess your expenses accurately so as to avoid unexpected costs that could harm your cash flow.
#3. Good Return on Investment
The best rental properties tend to have a high cash on cash return and capitalization rate. Those two metrics are pith in estimating the return on investment for a property. So before buying a rental property, make sure to calculate them so as to estimate the profitability.
The Cash on Cash (CoC) Return Formula:
Cash on Cash Return (CoC) = Annual Net Operating Income (NOI)/Total Cash Invested
Capitalization Rate (Cap Rate) = Net Operating Income/Current Market Value of the Property
Alternatively, you can resort to Mashvisor’s Rental Property Calculator to get more accurate rates in a single click. To start analyzing investment properties in your city and neighborhood of choice, click here.
What cap rate and CoC return should you consider when selecting an investment property? Well, that depends on the location, the investor’s target return, and the real estate investment strategy. However, real estate experts claim that, as far as cap rate, anything above 10% is considered profitable. As for CoC return, some recommend a good COC rate to be between 8 and 12%.
#4. Minimal Maintenance
The best rental properties are those that require minimal maintenance. Maintenance is often neglected by many real estate investors, therefore, causing them to incur many unexpected costs, and in return, impacting the cash flow. Beware of cheap real estate investment properties as they tend to be accompanied by high maintenance. And this will not only drain your budget but your energy as well. From the different property types, a condominium is a low-risk investment and has the least maintenance to deal with. This is because the condo complexes will lift the burden off your shoulders by handling the majority of the maintenance.
Yes, it is true that location will be a strong determining factor in the success of your investment property. But don’t forget to perform investment property analysis and make sure you get positive cash flow, a good ROI, and have an easy time with rental property management. In addition, diligent research will lead you to your goal of finding the best rental properties.