Probably the most important decision in real estate investing is about the income property that you will buy. How good of a rental property you own will be the main determinant of your success or failure as a real estate investor. While different markets and different tenant cohorts prefer different rental properties, it is possible to draw a profile of the best investment property, a property that will guarantee high profitability and little headaches to its owner. So, let’s have a look at what makes for the best investment property:
1. The best investment property has a strategic location
Maybe you are getting tired of hearing that location is a key factor in real estate investments, but that’s the truth. The first indicator to consider when thinking of buying a new income property is where it is located. In real estate investing, location means a number of things: the state, the city, the neighborhood, the street, the side of the street, proximity to amenities, access to infrastructure, etc. Once you start thinking about a certain market, make sure to conduct proper real estate market analysis to be able to make the right investment decision. If you have already selected a certain area, you should look for a location close to public transportation, good schools, reasonable shopping opportunities, and even hospitals.
2. The best investment property is located in a place with a strong economy
The local economy and labor market will determine how much demand there will be for your income property now and in the future in addition to how much rent you can charge (i.e., how much your rental income will be). Economies set to grow in the coming years and decades guarantee an influx of new incomers who will support a strong demand among tenants.
3. The best investment property is in a location with low property tax
Property taxes are not the same around the country and sometimes differ significantly even from one city to another within the same state. Thus, make sure you study the property tax level well before you choose the best investment property for yourself as a real estate investor.
4. The best investment property is in a city which allows Airbnb
Regardless of whether you are a fan of Airbnb or prefer traditional rental strategy, you cannot deny the fact that Airbnb is growing nationwide. This means that even if you decide that traditional is the better strategy for you at the moment, things might change tomorrow and you might want to switch to Airbnb. Thus, it is crucially important to select a location which allows for short-term rentals without an unnecessary burden on the landlord. As Airbnb is growing in popularity, many hotel associations are feeling threatened and are therefore lobbying hard to regulate and minimize or even fully eliminate Airbnb. So, you need to take a careful look at the local legislation in this regard before being able to choose the best investment property.
Related: New 2017 Airbnb Legal Issues
5. The best investment property is in a familiar market
This doesn’t mean that you should only invest in your own city or even state. Sometimes out-of-state real estate investing offers much better opportunities than investing within the 20-mile radius. What this rather means is that you should familiarize yourself well with the real estate market in the location you choose before being ready to purchase your new rental property. In this way, you are less likely to experience unpleasant surprises related to property taxes, landlord laws, Airbnb legislation, supply of and demand for properties, supply of and demand for rentals, and other crucially important factors.
6. The best investment property is likely to experience significant real estate appreciation
Another factor related to location which makes for the best investment property is choosing a place which is expected to undergo strong real estate appreciation in the coming years and decades. This means that you should go for areas where major infrastructure development projects have been planned and where the economy is expected to grow significantly as well as places where land is starting to become limited. While instant positive cash flow should be the main aim of a real estate investor, the importance of appreciation should not be underestimated for your overall profitability.
7. The best investment property is (nearly) ready to rent out immediately
As a real estate investor, you should rather go for income properties that are turnkey or at least require only minimal maintenance to become ready for renting out. You don’t want to waste too much time, effort, and money on your new rental property before you can start making money from it.
8. The best investment property requires minimal maintenance and management
When buying a rental property, remember that you are buying exactly that and not your own home. Don’t make the mistake of going for an extremely luxurious property which will not only cost a lot to buy but also to maintain and manage. You want a property that is decent while still easy and cheap to take care of.
9. The best investment property is good for both traditional and Airbnb
Coming back to the issue of traditional vs. Airbnb, regardless of what strategy you prefer at the moment, your best investment property would be suitable for both ways of renting. The local economy, the real estate market, and the demand from tenants might change in the future, and you should be able to respond to this change.
10. The best investment property provides good CoC return and cap rate
Before buying your next (or first) rental property, you should perform a careful investment property analysis to determine profitability in terms of both CoC return and cap rate. Alternatively, you can use Mashvisor’s investment property calculator to save time and energy, which within seconds will provide you with all crucial numbers (price, rental income, CoC return, cap rate, occupancy rate – for traditional and Airbnb) for thousands of properties across the US. Generally speaking, you should aim for properties with CoC return and cap rate above 10%.
Related: Cap Rate vs. Cash on Cash Return
11. The best investment property generates positive – and big – cash flow
Finally, the most important factor which determines whether a certain rental property is a good investment choice or a bad one is the expected cash flow. You must always go for positive cash flow, regardless of how large of appreciation you might expect in the future. If your cash flow is negative, it means you are losing money instead of making money from your property, and this cannot possibly be the best investment property. Obviously, the larger the cash flow, the better the property.
While it is hard to say whether a single-family home or a multi-family property is the better investment choice, there is a checklist of the features which make for the best investment property. When buying an income property, always remember to look for the 11 factors above to make sure you are making the right choice.