And when I say “formula,” I’m not referring to some kind of secret recipe for success that only the pros are aware of. Rather, this is an actual formula that anyone can follow when buying rental property and the results will be positive every time.
The Formula for Investing in Real Estate Rentals Successfully
A Good Location + A Positive Cash Flow Rental Property = Successful Real Estate Rental Investing
A little underwhelming? Well, that formula is not so simple once I break it down, as you’ll see. However, it’s all you really need to be making money with rental properties. So, let’s take a closer look:
A Good Location
The first thing every rental property investor needs to find is a good location. So how do you find the best places to invest in real estate?
Plan Your Budget
Finding a good location starts with your budget. If you’re buying rental property with cash, you’ll have to sit down and work out the costs. Remember, you won’t only be covering the listing price of an investment property for sale. You’ll need to consider things like closing costs as well as a cash reserve to fall back on.
Looking for an extensive list of costs for investing in rental properties? Here’s A Comprehensive List of Rental Property Expenses.
If you’re buying investment property with a mortgage, how much can you afford to put down? Alongside the down payment for rental property, you’ll have to think of closing costs and the cash reserve as well. If this is your method for investment property financing, get in touch with a mortgage lender and work to get pre-approved today. That way, you’ll know how much you can afford before you start your investment property search.
Why is your budget the first factor in the formula for investing in real estate rentals? Well, I can list 100 reasons why the Los Angeles real estate market or the New York real estate market make for great places to buy a rental property. But it simply doesn’t matter if you cannot afford it. You can always explore how to invest in real estate with no money or ways to find cheap investment property for sale in any housing market. But, sometimes the easiest route is to just stick to your budget, assuming you have some cash saved up for this venture.
Identify Locations That Promise a Good Return on Investment
Once you figure out the real estate financing, you’ll have to look at the return on investment you can expect in certain cities across the US housing market. This will be the next step that will help you narrow down possible real estate markets. This is key because you don’t want to simply invest in real estate rentals wherever you can afford to buy them. You want to find only the best places to invest in real estate that promise a high return on investment. It could mean investing in a rental property two blocks away from where you live or it could mean long-distance real estate investing.
This kind of real estate market data is available online. One resource to check out is Mashvisor. Here are a few lists to start which include both the listing prices and the return on investment metrics:
20 Most Profitable Locations for Traditional Rentals in 2020: Cash on Cash Return
20 Most Profitable Airbnb Locations in 2020: Cash on Cash Return
If you’re investing in single-family home rentals, check out this guide where we list 28 great cities:
Single-Family Homes: The Best Rental Properties for 2020
And for multi-family home rentals, read:
What Are the Best Multi-Family Markets 2020 with High Cap Rate?
Besides looking at the return on investment data, there are other qualities of a housing market to check out, like:
- Economic and job trends: How has the economy been doing? Read a few reports online as well as forecasts to get a good idea.
- Population trends: Have headlines been talking about population growth or are people leaving the location in favor of other cities?
- Renter population trends: Are more people renting out homes or buying homes? The price to rent ratio can be indicative of this but also check out the actual percentage of renters in the real estate market vs homeowners.
- Real estate supply and demand: Is it a buyer’s market or a seller’s market? While this shouldn’t be the final deciding factor as you can still find good real estate deals in a seller’s market, you do need to know beforehand what kind of market you’re entering.
- Real estate appreciation rates: Have property values increased historically? Will your rental property investment appreciate over the next few years? Check out historical rates as well as appreciation forecasts.
- Rental laws and taxes: Are there rent control laws? Are the property taxes really high? Do a little online research and take note of these as you narrow down where to buy investment property. If you’re investing in real estate vacation rentals, check out Airbnb laws and regulations as well.
Once you narrow down the city where you want to invest, you need to find the best neighborhoods for investing in real estate rentals. Again, you’ll need to look at the different return on investment metrics to identify these including:
- Median Listing Price
- Average Rental Income
- Average Cap Rate
- Average Occupancy Rate
Consult a real estate agent or check out Mashvisor’s Real Estate Heatmap to get this kind of neighborhood information quickly and easily.
Find the best neighborhoods to invest in real estate in minutes!
Also, be sure to investigate neighborhood crime rates as well as the availability of key neighborhood amenities that tenants look for. It may also be wise to figure out what neighborhood class you want to invest in. Experts recommend investing in real estate rentals in a Class B neighborhood. You can learn more about neighborhood classes here.
With that, you’ll have the first element down in the formula for investing in real estate rentals successfully.
To learn more about how to conduct real estate market research, read: How to Research Real Estate Markets: The Beginner’s Guide.
A Positive Cash Flow Rental Property
Even if you found a great place for buying rental property, you’ll still need to go house hunting for positive cash flow properties. What is a positive cash flow property? How can you find one?
A positive cash flow rental property is one where the rental income you’re earning is higher than the money you’re spending on rental property expenses.
The only way to find such an income-producing rental property in the real estate market is to perform rental property analysis during your search. This means figuring out the potential rental income, rental property expenses, and how your mortgage factors in before buying.
While some expert real estate investors recommend starting your analysis with the 1% rule in real estate or the 2% rule, a cash flow analysis is really the best way to find income-generating assets with a good return on investment. This is because those quick screening tools don’t take into account costs and expenses. A full cash flow analysis will help you determine if you’ll be making money when investing in real estate rentals or not.
And knowing the cash flow will bring you one step closer to figuring out the return on investment. But the key is positive cash flow– if you find a property that can generate a large positive cash flow, you could be looking at properties for sale that promise a 20% return on investment or higher. Do the math to be sure! Or use Mashvisor’s Investment Property Calculator. This tool does all the math – cash flow and return on investment analysis – for you.
Find a positive cash flow property right now.
Don’t forget to follow the math with some good old fashioned real estate due diligence! Get a home inspection done, a home appraisal, title search, the works.
Success with Rental Property
If you were wondering how to make money investing in real estate rentals and how to succeed with these types of real estate investments, now you know the formula:
A Good Location + A Positive Cash Flow Rental Property = Successful Rental Property Investing
Put the formula to the test. Start your search for real estate rentals here.