Investment properties are the heart and soul of real estate investing. While it is relatively easy to find investment properties all around due to their increasing popularity (and the increasing popularity of real estate investing in general), in order to find one that is suitable for you and that is guaranteed to make you a profit, there are things that you need to take into consideration.
Whether it is the location of the property, its type, or its analytics, these are all aspects that can heavily affect your investment and determine its success or failure.
Real Estate Investing: Choosing the Location of an Investment Property
In the world of real estate, it is said that location is everything.
Think about it this way: Real estate properties, whether they were residential or commercial, single family homes or multi family properties, townhomes or condos, all have one thing in common, and it is that they are in a fixed position.
You can’t move your house if you don’t like its location, nor can you change the area around your house to make it more suitable for you, and for this reason location is considered the most important aspect of any real estate property.
When it comes to choosing the location for an investment property, there are several things that you need to take into consideration:
- Is the area developing?
- Will your investment property have a potential for appreciation?
- Is the location suitable for the type of tenants whom you’re trying to attract?
- Are there any nearby public services, transportation, restaurants, hospitals, schools, etc.?
These are a few examples of the questions that you should ask yourself when trying to determine the best location to find an investment property in.
Additionally, you will also need to research the area and determine how other investment properties are performing in regards to their returns, occupancy rates, and their expenses.
You can, for example, use Mashvisor to search an area and obtain information about that area’s average returns and other data comps and analytics that will affect your real estate investment, and you can further customize your property search to only include properties of a certain type, size, or age.
Real Estate Investing: The Best Type of Investment Property
When it comes to the types of investment properties out there, there are quite a few options to choose from based on your investment strategy, your budget, and a number of other aspects that will affect your choice.
For example, if you’re interested in purchasing an investment property for the sole purpose of renting it out on Airbnb, then it probably wouldn’t make much sense to invest in a multi-family home or in an apartment building, and you would be better off investing in a vacation home or a townhome instead.
Additionally, your investment strategy plays a huge role in determining the best property types for you to invest in. Real estate investors who are looking to make a quick profit will most likely want to look for residential properties that are in a bad condition to use as a fix-and-flip project, so their best choices are often foreclosed homes that require a good amount of renovation before they can be sold at a higher price to cash in their profits.
On the other hand, there are real estate investors who are looking to expand their investment portfolio and would rather diversify their investment property types, which they can usually do through investing in REITs (Real Estate Investment Trusts).
Whichever property type you choose to focus on, you need to have a solid investment strategy to back it up and a financial plan to guarantee the success of your real estate investment.
Real Estate Investing: Investment Property Analytics
In order to determine whether an investment property is going to be profitable for you or not, you will need real estate analytics.
What are real estate analytics?
Real estate analytics are the calculated values, projections, and estimates of returns, expenses, and other metrics related to your real estate investment that will affect the amount of money that it generates. Real estate analytics can either be calculations of the values for a single property or they can be data comps (comparisons) which compare a number of different properties in an area to determine the average values and whether the properties are performing above or below the market average.
There are three main metrics that we like to focus on at Mashvisor which are related to the projected returns of an investment property as well as the income that it will be generating as a rental property.
The capitalization rate is one of the most commonly used metrics to measure the profitability of a real estate investment.
It describes the rate of return of a rental property regardless of the method of financing.
In theory, cap rates is a measurement of the level of risk associated with an investment property. A lower cap rate corresponds to a lower level of risk, whereas a higher cap rate means a higher level of risk.
This is logical as investing in low risk is associated with low profitability, while high risk is related to the possibility of big gains.
Cash on Cash Return
As you can tell from the name, cash on cash return is a rate of return dealing with cash.
Specifically, it is the rate of return based on the annual pre-tax cash flow and the total amount of cash invested in the rental property.
Since cash on cash return only focuses on cash relating to the investment property, other benefits are not included. For instance, real estate appreciation, tax deductions, and equity are not taken into account when computing cash on cash return. So, if you have a high cash on cash return, you’re really in for more benefits, including the ones just mentioned.
Related: Cap Rate vs. Cash on Cash Return
Cash flow is simply the difference between what you make from your investment property (rent or rental income) and what you spend on it (all costs and expenses associated with paying for the income property – mortgage payments, owning it – property taxes, and managing it – maintenance and repair costs).
Finding an investment property is about more than just driving around and looking for “For Sale” signs in the neighborhood. While you could technically find investment properties with much ease, in order to find one that can actually be profitable for you, you need to take the location of the property, its type, and its analytics into consideration, and you need to have a solid short-term and long-term investment plan to make sure that your real estate investment will be successful.
Additionally, to make the entire process, from finding the property to obtaining its analytics, much easier than ever before, you can use Mashvisor’s platform to search for investment properties, determine the best type of property and investment strategy, and obtain a complete set of data comps and analytics related to the properties that you’re investing in.