What is the best option for your cash investment? Low risk investments that provide a high return on investment, of course! That’s why so many successful investors turn to real estate investing in rental properties.
But what about all of the horror stories you’ve heard about real estate investors losing tons of money from rental properties? They’re probably rushing into your mind as you hear “Buying rental property is one of the best options for low risk investments.”
The reason these stories exist? Every decision a real estate investor makes when buying rental property affects whether it will be a low risk cash investment or not. So, if a real estate investor does not learn exactly how to find low risk investments when buying rental property, his/her real estate investment can fail.
Still, rental properties can be the best low risk investments.
Why Are Rental Properties the Best Low Risk Investments?
Before learning how to find low risk investments when buying rental property, know you’re making the right choice for your cash investment. Take a look at why rental properties are the best low risk investments.
Investment Properties Generate Monthly Rental Income
When buying rental property is done right, a real estate investor can start making positive cash flow from rental income within the first month or so. No other low risk investments allow the investor to start making money back on a cash investment so quickly without having to sell.
Investment Properties Are Tangible Income Producing Assets
The key word here is “tangible”. After buying rental property and gauging the success through positive cash flow (or lack thereof), a real estate investor can take action and affect change. Being able to control the success of a cash investment makes rental properties low risk investments.
Investment Properties Appreciate in Value
Besides making money from rental income, the value of investment properties tends to go up. Especially in the current housing market, which is a seller’s market all around, appreciation tends to happen at a faster rate. This means selling these low risk investments almost always guarantees a high return on investment.
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Steps to Finding Low Risk Investments When Buying Rental Property
We now know that rental properties can be low risk investments, but there are certain steps a real estate investor can take to ensure he/she finds a low risk real estate investment.
Step #1: Location in the Real Estate Market
The first step is pinpointing the best places to invest in real estate for low risk investments. A location in the real estate market can affect everything about low risk investments: their ability to attract tenants, make rental income, generate positive cash flow, and sell for a good return on investment. There are two parts to this step when buying rental property: choosing a city with a promising real estate market and finding the best neighborhood for investment properties.
The Ideal Real Estate Market for Low Risk Investments
A real estate market with the best places to invest in real estate will first and foremost have a healthy economy that exhibits job growth. Look for a real estate market that has new emerging companies or successful companies that are expanding or relocating to the city. This will lead to population growth and an increasing demand for investment properties.
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A real estate investor should take a look at unemployment rates of a location as well as the diversification of the industry. A location dependent on one industry could mean bad things for real estate investing if that industry plummets or relocates.
The real estate market you choose when buying rental property can really make or break the return on investment. Look for a location with low price to rent ratio for the best low risk investments. A good return on investment comes when a real estate investor can charge a good rent price compared to the purchase price of the investment property.
The Ideal Neighborhood for Low Risk Investments
Choosing the best places to invest in real estate doesn’t stop at finding a great real estate market. The choice of neighborhood for investment properties is just as important, as the real estate investing potential can vary from neighborhood to neighborhood. If you want an easy way of choosing the best places to invest in real estate, use Mashvisor. Mashvisor has a rating for each neighborhood, which shows how successful a real estate investment will be in that location.
Click here to check out the Mashmeter rating for the neighborhood of your next real estate investment.
Along with the Mashmeter rating, scout out a neighborhood to ensure it conveniently has walkability and access to public transportation, low crime rates, and good school districts to ensure investment properties will be low risk investments in that location.
Step #2: The Condition of Investment Properties
Once a real estate investor has found some of the best places to invest in real estate, it’s time to choose an actual investment property. Perform investment property analysis to decide which investment property will be one of the best low risk investments.
Investment property analysis will help a real estate investor determine if the condition of the rental property will aid in getting a good return on investment or hurt its chances. The best low risk investments in real estate don’t require too many repairs, yet still, have some room for forced appreciation. An investment property with cosmetic repairs like a need for new paint, carpeting, or a new fixture or two is a safe choice for your cash investment.
A home inspection should reveal what repairs are needed. Investment properties with major structural issues, roof damage, or water and electrical system damage won’t make for low risk investments.
Investment property analysis, as well as home inspection, should reveal the age of the investment property, which a real estate investor needs to take into consideration when buying rental property. Why? The older the investment property, the more maintenance and repairs it will need. Even if the home inspection reveals no need for repairs now, an old investment property will need them soon in the future. Here is how to consider the ages of an investment property and the repairs needed:
- 5-10 years old: little to no maintenance
- 10-20 years old: more maintenance
- 20-30 years old: will require much more repair: roof, water heater, piping, etc.
Be sure to check the home inspection report; older rental properties that have had a deep renovation recently can still be low risk investments.
Step #3: Return on Investment
A strategy that ensures low risk investments is real estate investing for positive cash flow. If a real estate investment has positive cash flow from the start, a real estate investor will be making money as soon as a tenant is in place to provide rental income.
Positive cash flow is when the annual rental income of an investment property exceeds all of the expenses required to own and maintain it (repairs, taxes mortgage, etc.). Continuing with investment property analysis, a real estate investor must carry out calculations to determine if there will be positive cash flow for a high return on investment.
The best return on investment metric to use for investment property analysis is cash on cash return:
Cash on Cash Return= (Cash Flow/Cash Invested) x 100
With a positive cash flow, the cash on cash return calculation will show a positive return on investment. Real estate experts agree that any investment property which can give 8% or higher will bring a good return on investment and positive cash flow.
Sign up for Mashvisor and use our rental property calculator to make the calculations of investment property analysis easier!
Step #4: Exit Strategy
The final step in finding low risk investments in the real estate market is making sure an exit strategy is in place before buying rental property. There are two main exit strategies in real estate investing:
- Buy and hold (long term or short term)
- Selling the investment property
Either exit strategy should apply to low risk investments easily: one as the exit strategy to use immediately and the other as a backup exit strategy, in case things don’t go as planned.
Rental properties can be low risk investments for making money in real estate. A real estate investor just has to take the right steps when buying a rental property. Study the location, the condition of the investment property, and the return on investment, and plan for an exit strategy. In this way, you’ll be planning for success with a low risk real estate investment!