Buying an income property is one of the most profitable real estate investment strategies.
With a traditional or Airbnb rental property, you get to make money in the short run – from rental income and income property management – and in the long term – from real estate appreciation. But before anything else, let’s get to know what an income property is.
To learn more about what makes for the best income property, watch our most recent video:
What Is an Income Property?
An income property refers to a property that can generate income for you. It can actually be a great way to grow your wealth or set up a long-term income-generating stream.
However, to be a successful real estate investor, you need to buy an investment property that is destined for high profitability. Finding an income property for sale can be challenging, especially if you’re a beginner in real estate investing. That’s why it’s essential to consult reputable income property specialists so you can have a better understanding of rental income properties and income property management.
It’s also helpful to use a rental property income tax calculator to help you analyze the necessary data to be successful in finding an income property for sale.
In this article, we’ve put together a list of the 6 must-have characteristics of the best income properties that you should definitely look for.
Characteristic #1: Positioned in a Top Real Estate Market
Not all locations are created equal when it comes to real estate investment. Indeed, the US housing market where your income property is located is one of the most important factors for how much money you will make in real estate. That’s why it is the first factor that you should consider when starting your investment property search.
Related: 10 Best Places to Invest in Real Estate
Generally speaking, look for a real estate market with a strong economy, a positive population growth, and a high ratio of renters vs. homeowners. They are the most significant indicators that you will enjoy a high demand for your long term rental income property, that you will experience low vacancy rate, and that your rental income will be optimized.
Alternatively, if you are thinking about buying an Airbnb property, you should focus on locations that serve as top business and tourist destinations. The most profitable Airbnb locations in 2020 and beyond don’t necessarily have to be major cities. Actually, Airbnb Los Angeles, Airbnb Chicago, Airbnb New York, and many other previously best places to invest in short term rental properties have adopted strict Airbnb laws and regulations which prevent investors from buying an investment property for the sole purpose of renting it out on Airbnb.
Nationwide real estate market analysis conducted by Mashvisor shows that small towns are frequently more profitable when it comes to vacation home rentals investing than major cities. For example, Airbnb Joshua Tree has been a top location for years, enjoying one of the highest Airbnb cash on cash return in the entire US housing market.
Furthermore, as a beginner real estate investor looking for the best income properties, you should keep in mind that location is not only the city but also the neighborhood where you buy a rental property. That’s why you should not limit your real estate analysis to real estate market analysis only but also extend it to neighborhood analysis.
Characteristic #2: Being a Single Family Home
The truth of the matter is that you can make money in real estate investments with any property type. However, experienced real estate investors recommend buying a single family home when first getting started. Single family homes are not only relatively cheap to buy but also to maintain. Property management and maintenance can be a significant contributor to recurring rental expenses, so savvy investors look for ways to decrease this expense, and investing in a single family home is one way to do that.
Moreover, our real estate investment software platform shows that this property type usually brings one of the highest rates of return within the US housing market. Moreover, rentals of this type attract good tenants such as couples and small families who cause minimal damage to the income property and pay rent on time. From the point of view of a landlord, this translates into a reliable source of rental income and minimized rental expenses. In turn, these two factors mean a high cash on cash return and a high cap rate.
Characteristic #3: In a Good Condition
As a first-time real estate investor, it is important for you to start renting out your investment property as quickly as possible. The sooner you list your rental property and get tenants, the sooner you will start collecting rental income.
That’s why another crucially important feature of the best income property is that it is in a very good state, ready or nearly ready to be rented out.
It is a gruesome mistake when buying rental property as a beginner to go for a house that requires a lot of fixing and repairing. This will not only delay the time when you can start making money in real estate investing but might also cost you a lot.
When you consider an investment property for sale, you should perform a professional home inspection to evaluate the exact state of the house, how much work is needed on it before it gets into a rentable state, and how much money the needed repairs will cost you. Hiring a professional home inspector will save you lots of headaches and unexpected expenses later on.
Characteristic #4: Being a Simple Income Property
Real estate professionals agree on yet another common trait among the best income properties. Namely, they are basic and simple rental properties.
Beginner real estate investors should remember that buying an income property is not the same as buying a home. This is not the place where you will spend your own time, so you should not look for the features and amenities that would make your life optimal.
Instead, you should focus your investment property search on houses that are functional, comfortable, and practical, without unnecessary extras such as swimming pools, unless you are investing in luxury real estate.
Having overly luxurious real estate rentals will significantly decrease the tenant pool which you can attract and might inflate your vacancy rate. In addition, expensive properties require more expenses related to property maintenance, which makes them suboptimal for beginners.
Thus, when looking for rental properties for sale, focus on those which are cheap and easy to maintain and which will attract the wider range of tenants. Having a high vacancy rate will drive your rate of return down.
Characteristic #5: Being Affordable to Buy
Most beginner real estate investors have a relatively limited budget and need to apply for a mortgage loan to finance the purchase of an income property. This means having the cash to pay a down payment of at least 20% of the home value plus covering other startup costs such as home inspection, home appraisal, fixes and repairs, property taxes, home insurance, and closing fees. Moreover, you commit to monthly mortgage payments for many years.
All this means that the best income property should be affordable for your budget. You should not only be able to pay the initial expenses related to buying an investment property but also have enough cash reserves to cover any unexpected costs down the road.
For example, you need to factor in a situation where your tenants are unable – or unwilling – to pay rent for a couple of months. In this case, you will still be expected to pay the mortgage payments, even if out of your own savings. Another situation which might develop is the need for urgent property maintenance work which might not be included in your home insurance.
You should buy an income property that you can pay for and take care of in order to avoid a foreclosure which is equivalent to losing your rental property altogether.
Characteristic #6: Comprising a Positive Cash Flow Property
Last but not least, the best income property allows you to make money in real estate investment. This means that it has the potential to bring you positive cash flow from the beginning. Don’t make the mistake that many new investors fall for. They buy a negative cash flow property planning to upgrade it or hoping for their luck to turn in the future.
The right way to buy rental property is to conduct diligent investment property analysis before deciding on the house. In your rental property analysis, you should look for many factors, and one of them is whether it will be a positive cash flow property. Other indicators include the rental income you can expect from your property and the return on investment, including cash on cash return and cap rate.
Your analysis should be based on traditional or Airbnb rental comps in order to be reliable.
To minimize the time you need to spend on analyzing investment properties for sale and the amount of traditional and Airbnb data that you need to collect, you should try Mashvisor’s real estate investment tools. Among others, these feature a rental income calculator, which will tell you not only how much rental income you can expect from a property but also what occupancy rate, cash flow, cash on cash return, and cap rate a property will generate.
More importantly, our investment property calculator analyzes properties within the entire US housing market, regardless of whether they are listed on our real estate app or not. All you need to do is to enter the street address of residential real estate properties that are not available yet on our website in order to get an analysis of their investment property potential.
Related: Best Real Estate Apps for Investors
How to Buy Income Property
Now that you know the different characteristics to look for in a rental income property, here are several tips on how to buy an income property:
1. Hire a reputable income property specialist or real estate agent.
Income property specialists have the knowledge, expertise, and experience when it comes to finding an income property for sale near me. They can guide you with paperwork and negotiations. They can provide sound recommendations on how to minimize risks and be successful in real estate investing.
2. Get your finances in order.
Rental income properties don’t come cheap. So, if you’re planning to buy one to generate rental property income later, you need to assess your financing options and see which is suitable for your investing needs.
3. Look for a profitable market.
It’s location, location, location. Look beyond your local market and explore other parts of the country to find a high return real estate.
4. Analyze the numbers.
The end goal is to generate rental property income, so it’s only imperative to invest in rental income properties with a good return on investment. And to do that, you need to conduct a thorough analysis of the income property you want to buy.
Investing in rental income properties is one way to generate income for the long term and eventually, become financially independent. But to be successful in the real estate landscape, it’s crucial to do your research. There are so many variables to take into account that it pays to be updated on the latest in the industry and keep your eyes peeled for potential high return markets.
Know what to look for in a rental income property and where to look. Take advantage of available tools such as a rental property income calculator. While there are a lot of resources available to increase your knowledge of real estate investing, it’s also important to consult income property specialists and real estate agents who are more knowledgeable about the market.
We’ve given you the six characteristics that the best income property possesses to ensure the highest possible return on investment. Starting earning rental income is easy as long as you buy the right investment property. To start searching for the most profitable rental properties throughout the US, sign up for Mashvisor now.