In real estate investing, income properties are properties that generate an income in a periodic manner, such as on a daily, weekly, or monthly basis.
Income properties in real estate are generally rental properties – real estate properties that you can rent out in exchange for rental income.
There are different types of income properties, or rental properties, in real estate. And although the different types of rental properties function similarly, they can be different with regards to the time period that it takes for each type of rental property to generate its income.
Types of Income Properties
The two main types of income properties are short-term rental properties and long-term rental properties.
Short-term rental properties are income properties that are rented out to short-term tenants for durations that can range from one night to a few weeks. Short-term rental properties are also known as Airbnb rental properties. This is because Airbnb was the first company to operate and popularize the concept of short-term rentals, making them among the most popular choices for real estate investors who are looking to invest in income properties. Other companies that run short-term rental properties and facilitate them include VRBO and HomeAway.
Long-term rental properties, also known as traditional rental properties, are income properties that are rented out to tenants for extended periods of time that range from several weeks to several years. Long-term rental properties are perhaps the most common type of investment properties in real estate around the world.
Click here to find the best performing Airbnb and traditional rental properties in your city of choice!
Features of the Best Income Properties
What makes for the best income properties in real estate investing?
The best metric to rely on when trying to determine whether an income property is a good investment or not is to look at the income property’s cash flow. The cash flow of a rental property is the amount of rental income that remains after all expenses have been paid. A rental property’s cash flow can be either positive or negative, depending on whether the investment property is earning money or losing money.
This means that the first indicator of the best income properties is for the property to have a positive cash flow. The higher this positive cash flow, the higher the rental income that the investment property will generate.
Another crucial metric that is only used for rental properties is the occupancy rate of the property. The occupancy rate is the percentage of time in a year that the income property is occupied by paying tenants. An income property with an occupancy rate of 90%, for example, will be occupied by tenants for 90% of the year.
Alternatively, you can use the vacancy rate, which indicates the percentage of time that the property remains vacant in a year. The vacancy rate is typically counted as an expense, and its percentage is directly subtracted from the total income that the rental property is projected to generate in a year.
Income Properties Financial Planning
To plan your finances for investing in income properties, you have to take a number of factors into consideration. The most important factors that will affect your financial planning and calculations are the rental income or the rental rate that you can generate from the property as well as the total expenses that will apply to the investment property that you’re investing in.
Some of the best metrics for calculating these factors and for planning your finances when investing in income properties are the cap rate and the cash on cash return of the rental property.
The cap rate of income properties is the amount of rental income that they can generate in a year as a percentage of the current market value of that investment property.
Cap Rate = NOI/Current Market Value x 100
This means that the cap rate will be an indicator of how profitable the property is based on its rental income in relation to its total value. The cap rate is typically expressed as a percentage value which represents the percentage of the investment property’s value that you will generate as rental income in a year.
Click here to find rental properties with readily calculated cap rate and CoC anywhere in the US!
The cash on cash return, on the other hand, is a similar metric to the cap rate, with the difference that the cash on cash return takes into account the method of financing that you’re using.
Cash on Cash Return = NOI/Cash Invested x 100
The cash on cash return will only take into account the amount of actual cash that you’ve invested in the property. This means that if you’re purchasing an investment property using an 80% mortgage, the cash on cash return will only take into account the 20% down payment that you’ve paid in cash, leaving out any borrowed money.
Similar to the cap rate, the cash on cash return is expressed as a percentage, and it will indicate the percentage of the total cash you’ve invested in the property that will be generated in rental income each year.
Learn: The Beginner’s Guide to Rental Property Analysis
Income Properties Management
One of the major aspects of income properties is that, unlike the common perception, income properties are definitely not passive investments. This means that income properties will not generate a sufficient rental income if they are neglected and if they are not actively managed. A real estate investor cannot invest in a rental property and then just expect to start making profits from it without having to put some effort into managing and running the property.
Real estate investors who invest in income properties become landlords. As a landlord, they are responsible for managing the rental property and taking care of all aspects related to it, such as tending to the tenants, maintaining the property, and handling turnovers.
Real estate investors who do not want to manage their own properties, however, have the option of allocating some of the rental income that the property generates towards hiring professional property management to manage the property and all aspects related to it on their behalf. Professional property management is an extremely useful service for real estate investors and landlords if you’re willing to sacrifice 8-12% of your rental income in exchange for their services.
Most professional property management companies offer a wide range of services that can include several different aspects of the investment property. These services can include tending to the tenants, screening them, handling the property’s maintenance and repairs, financial record keeping, handling turnovers, and a number of other services.
Bottom Line
Income properties are among the most common types of real estate investment properties for a good reason. Income properties can generate a very high return on investment when planned and managed correctly. The best part of income properties is that the rental income that your tenants pay can go towards paying off the mortgage on the property, making them very financially effective and easier to invest in than other types of investment properties in real estate.
Are you looking to find income properties with readily calculated metrics and analytics and start investing in them right away? Head over to our search page at Mashvisor.com and type in the name of the city that you want to invest in to gain access to the listings in that area and identify the best rental properties for you to invest in.