Owning an income property is a dream that many aim to realize. There is something particularly appealing about owning a successful income property, especially the fact that it’s a reliable, semi-passive way for making money.
However, the process of finding a house that can be used as a rental property, as well as analyzing that house and assessing its potential return on investment can a be daunting and efforts-full task for real estate investors.
So, what are the different aspects related to finding an income property and obtaining analytics related to its return on investment (cap rate, cash on cash return, and cash flow), and how can an online platform solve these problems and provide real estate investors with an accessible and easy-to-use solution?
Let’s find out.
Finding an Income Property
The first step to buying a house to use as an income property is finding the house. For this, a real estate investor would first have to decide on an area to invest in. The area can either be chosen based on its location in relation to the real estate investor’s primary home or based on the area’s development and potential for appreciation.
After deciding on an area, a real estate investor would then have to drive around, looking for homes with “For Sale” signs in front of them, or alternatively he/she would have to search through MLS listing sources and websites.
Mashvisor is a good example for a website which utilizes MLS listing sources through a platform that allows real estate investors to search for an income property based on the area that they are interested in, as well as through filters that can be used to customize the property search and obtain more relevant results.
Related: Finding Income Properties Using a Heatmap
The most important aspect to take into consideration when trying to find an income property is the location of the house. The location is a major factor that will affect the all aspects of the performance of your real estate investment; from the tenants whom you will attract, through the property management companies available to you, to property tax, the location will greatly affect all these factors and more.
Additionally, as a landlord, you will want to choose a location for your income property that is suitable for you, especially if you’re not interested in hiring property management companies.
Related: Location Location Location – Is Location Really All in Real Estate Investing?
Another factor related to the income property’s location is the area’s future development. Typically, you will want to choose a location that shows signs of future development, which will make the area more attractive and desirable to live in, resulting in an easier job for you as a landlord to secure tenants and maintain a high occupancy rate.
Additionally, property management companies in developing areas might have lower prices and might also provide better services in order to maintain their dominance over competition in the developing area.
One of the prominent aspects of any real estate property, appreciation is tightly related to the location of an income property and the development of the area. Appreciation is the increase in a real estate property’s value over time, resulting in the property being more worth than it was initially bought for.
Appreciation allows real estate investors to make money by selling properties at a higher price than what they originally paid for them. And for income properties, this means that a landlord could make money through rental income as well as through selling the rental property in the future, resulting in more profit for the real estate investor.
Related: Is It OK to Invest in Real Estate Just for Appreciation?
Income Property Analytics
After finding an income property, a real estate investor will want to calculate and project the return on investment through real estate analytics. Obtaining real estate analytics can be a challenge for some investors, and although some MLS listing sources can provide you with some data to be used for your analytics, the data is often insufficient, unreliable, or inaccurate.
For this matter, a real estate investor can rely on Mashvisor. Mashvisor gathers its data from a number of different MLS listing sources, and through its own algorithms, it can provide real estate investors with real estate analytics that can be used for their investment needs.
The main use for real estate analytics is to calculate the projected returns that an investment property will have.
In order to calculate an income property’s net income or annual income, a real estate investor would first need to obtain a number of different values related to the expenses that will apply to his/her investment, the median property prices in the area, and the average rental income of similar investment properties, in addition to a number of other factors that can affect the income property’s returns such as mortgage payments, property tax, and income tax.
For these calculations, a real estate investor would typically have to rely on an income calculator, which takes into account all the different aspects that can affect your investment property’s returns in order to provide the investor or the landlord with the metrics that are used to evaluate an investment property’s returns.
Related: 5 Must-Have Features of an Income Property
Cap rate is the main metric used to assess an investment property’s returns. Cap rate measures the rental property’s net income against the property’s purchase price. In short, the cap rate is measured by dividing the net income by the price of the property. So, if an investment property is worth $100,000, and its net rental income is $2,000, then its cap rate would be $2,000/$100,000, or 2%.
Cash on Cash Return
Similar to cap rate, cash on cash return is used to measure the investment property’s returns. Cash on cash return, however, takes into account the method of financing the investment, while the cap rate calculates the values as if the property was fully paid with cash.
Cash on cash return is a better indicator of the income property’s returns specific to your investment and your financing method. For our previous example, if you were to purchase the investment property with $80,000 mortgage and $20,000 cash, then the calculation would be like this:
Cash on cash return = net income/cash paid = $2,000/$20,000 = 10%.
Related: Cap Rate vs. Cash on Cash Return
The cash flow is, in general, the net income or rental income of your investment property. Cash flow is mainly used for rental and income properties that generate a profit over time through a rental agreement. Cash flow is a very important metric, as it is used in calculating the other metrics related to your investment property’s returns.
In order to calculate an income property’s cash flow, a landlord would need to first know the exact and estimated expenses that will apply to his/her rental property and his/her investment in general, which include property tax, income tax, property management companies’ fees, vacancy rate, and any other factors that might result in spending money to keep the property running.
Related: Cash Flow Investment Property: The Key to a Successful Investment
Even before owning an income property and becoming a landlord, a real estate investor should realize that there is a great amount of time and effort that is needed just for the process of finding an appropriate investment property for renting out, and analyzing the property and its returns in order to make sure that it will earn enough money to keep it running as well as earn a positive cash flow for the owner.
Mashvisor can be a great tool to use when trying to find and analyze investment properties, providing users with a large set of data and real estate analytics that can help them better manage their money and finances by providing them with values such as cap rate, cash on cash return, and cash flow to make the best investment decisions in order for their real estate investments to succeed.