What are the best income generating assets in real estate investing?
Income generating assets, in the sense of real estate investing, are investment properties that can generate an income for their owner in the form of daily, weekly, monthly, or annual profits.
The income generated from these investment properties can be very attractive for real estate investors. Full-time real estate investors will often seek multiple income generating assets to increase their periodic profits and reinvest the money in more properties, while part-time investors will often invest in one or a few income generating assets to complement the salary they receive from their day jobs and/or to help them pay off any mortgage that they have on their property.
Whether you’re a beginner or an experienced real estate investor, you should probably consider your options when it comes to income generating assets, as some of these assets can generate some of the highest profits in real estate investing.
Also, who wouldn’t want to own investment properties that can generate a passive income and let you enjoy a salary without having to work full time for it?
So, this article aims to go through the different aspects of income generating assets, such as their types, where you can find them, and how they are analyzed for their returns.
What types of income generating assets can you expect in real estate investing?
There are multiple types of income generating assets in real estate investing. In fact, most types of real estate properties can be considered income generating assets depending on the investment strategy that you seek.
For example, a shopping mall can be an income producing asset for all kinds of real estate investors, no matter how small their investment is if they’ve invested their money in the development of the property through a REIT.
However, the most common type of real estate properties that are used as income producing assets is rental properties.
Rental Properties
Rental properties are the most common type of income producing assets in real estate investing. Purchasing an investment property for the purpose of renting it out either for the short term or the long term will make it a rental property and will turn you into a landlord.
As a landlord, you will be responsible for maintaining and managing the rental property, tending to the tenants, and carrying out any repairs needed when the time comes.
The tenants staying in your property will have to sign a lease agreement or a rental agreement stating the rules for living in that property as well as the amount of rent that the tenant would have to pay for the stay.
Rental properties can be a great real estate investment for any real estate investor. One of the biggest advantages of investing in a rental property is that you will be able to finance your purchase with a mortgage loan, while the tenant who is renting your property will be the one who’s actually paying off your mortgage through the rent.
There are two main types of rental properties that you can invest in – short-term and long-term rental properties.
Long-term rental properties are the most common and conventional type. They are properties that you can rent out for long periods of time depending on the lease agreement. This duration can range from several weeks to several years. Long-term rental properties are considered a good choice due to their stability, low level of risk, and the less effort it takes to manage them due to the lower frequency of tenant turnover.
Short-term rental properties, on the other hand, are a relatively new concept in real estate. They are investment properties that you rent out to tenants for shorter periods of time, typically from a single night to a few weeks.
Short-term rental properties can generate some of the highest rental incomes, surpassing long-term rentals in many areas. The biggest downside of short-term rental properties is that they’re not viable in all areas. Some cities, counties,and states have enacted certain laws and regulations that can severely hinder the viability of short-term rentals, limiting the amount of time you can rent out a property for the short term during the year, or demanding that you stay in the property for certain amounts of time during the year.
Short-term rentals were made popular by Airbnb and more recently by HomeAway, both of which are short-term rental companies and service providers that manage and run short-term rentals all around the world.
Related: Real Estate Investing: Traditional vs. Airbnb Investments
Where can you find the best income generating assets for real estate investing?
The best income generating assets can be found on websites, online sources, and MLSs that list real estate properties for sale. However, not all sources will provide you with sufficient data or information related to the property to allow you to determine whether it is a good choice for a rental strategy or not.
To gain the best insights and the right type of data, you will have to use real estate analytics websites and platforms that will help you determine the viability of an investment property and its potential for profits as a rental property.
Some of the best websites that can be used for finding rental properties for sale and gaining some useful insights on them include:
Related: How Can You Find Airbnb Properties for Sale?
While all of these websites are great for achieving the goals of your property search, we will be focusing on Mashvisor as the best example for finding and analyzing rental properties for their projected returns.
In fact, Mashvisor was designed with that purpose at heart. The platform aims to help both new and experienced real estate investors locate investment properties and get estimates for their returns if they are rented out.
With a wide variety of features, real estate investing tools, and filters, using Mashvisor guarantees that you will find the best match for your investment based on your search and investing criteria.
Mashvisor’s search tools allow you to customize your property search based on the property’s characteristics and design, your own available budget, the property’s status (for sale, sold, pending, foreclosed, etc.), and even on the projected return on investment that the property is expected to have.
Using popular metrics in real estate investing such as the cap rate and the cash on cash return, any real estate investor can easily analyze different investment properties or even entire neighborhoods to identify the most profitable and suitable income generating assets to invest in and achieve the highest returns.
Related: How to Find An Investment Property Using Analytics
How can you analyze income generating assets for real estate investing?
Now that you know that Mashvisor can help you locate and analyze income generating assets, you might be wondering: How exactly can you analyze a rental property to estimate its returns?
To analyze a rental property, you will have to do some calculations based on three different aspects that will all play a role in your calculation of the metrics used to project a rental property’s return on investment – the cap rate and the cash on cash return.
The three main aspects that you’d need to know about an investment property before analyzing it for returns are the following:
- Your method of financing the property (cash vs. mortgage)
- The rental income that the property can generate
- The expenses that you will incur on the property
Using the information gathered on all of these aspects will allow you to do the necessary calculations and determine the profitability of any rental property.
Using Mashvisor will automatically give you access to most of these values, with the ability to modify and customize the expenses to better suit your investment goals and your personal preferences as well as the expenses that will you incur on your individual investment.
After gathering the information, you will have to do the calculations for the cap rate and the cash on cash return metrics.
Here are the formulas for calculating these metrics:
Cap Rate = (Cash Flow/Current Market Value) x 100
Cash on Cash Return = (Cash Flow/Cash Invested) x 100
So, what does each metric mean for your investment or for the profitability of the rental property?
Related: Cap Rate vs. Cash on Cash Return
But before we explain each metric, we will first explain the cash flow and what it means for a rental property.
Cash Flow
The cash flow of a rental property is the amount of rental income that remains after accounting for all expenses.
Simply out, if a property is generating $1,000/month in rental income ($12,000 annual) and $600/month in expenses ($7,200 annual), the property’s annual cash flow would be ($12,000 – $7,200 = $4,800).
This is basically the net operating income of the property, or the profit that it makes after paying off all expenses.
Cap Rate
The cap rate of a rental property is the amount of profit that the property will generate in relation to its current market value. Basically, a rental property with an annual cap rate of 10% will be generating profits that are equal to 10% of the property’s current price each year. The cap rate is one of the most commonly used metrics in real estate investing for calculating the returns on a rental property.
There is one weakness in the cap rate, however, in that it does not account for the type of financing used to purchase the property. Meaning, it doesn’t matter whether you’ve bought the property using 100% of your own cash or with an 80% mortgage loan when calculating the cap rate.
Cash on Cash Return
The cash on cash return is a very similar metric to the cap rate, with the sole difference being that the cash on cash return does take into account the method of financing used as it only calculates the amount of actual cash invested in the property. Simply, an annual cash on cash return of 10% means that the rental property is generating an annual profit that is equal to 10% of the amount of cash that you’ve paid for purchasing the property. This metric allows you to determine the amount of return on investment that an investment property has against the amount of cash you’ve put into it.
Related: Investment Property Calculator for Analyzing Real Estate Investments
Bottom Line
Income generating assets can be some of the best real estate investments that anyone can make. Most real estate investors, even if they don’t focus on income generating assets, will typically have a few rental properties that are constantly generating a positive cash flow for them. Also, keep in mind that you can combine the rental strategies with other types of investment strategies, such as a buy-and-hold, to achieve the highest returns on your investment.
If you’re a beginner real estate investor and you’re still in the phase of figuring out your options and determining the best investment strategy for you, then you should definitely consider rental properties for your first investment.
Are you struggling to find the perfect match for you? Use Mashvisor to locate the most profitable investment properties and rental properties in your housing market of choice based on accurate readings and projections and start investing in income generating assets and making profits right away!
