Are you looking to purchase a rental property to generate cash flow and build wealth? Real estate properties come with many advantages including consistent cash flow, tax breaks, leverage, and appreciation potential. However, not all rental properties generate good returns. Owning a rental property can be lucrative, but only if you make the right choice. If you are not careful, you may end up buying a rental property that yields a poor rate of return and negative cash flow.
One of the challenges that first-time real estate investors face is determining whether a rental property for sale is right for them or not. There are many factors that you need to take into account to figure out if a real estate deal is profitable. This can be overwhelming if you are inexperienced.
Fortunately, there’s an easier and more efficient way to make smart investment decisions – using Mashvisor. Anyone, regardless of their experience in real estate, can use Mashvisor to quickly and accurately analyze real estate deals before buying.
Here’s how to use Mashvisor:
1. Determine How the Neighborhood is Performing
Understanding the market in which your property is located will help you make an informed decision when it comes to buying a rental property for sale. The neighborhood in which you buy will influence your occupancy rate, rental rate, rental property expenses, and even the types of tenants you attract. All these will affect the performance of your income property.
Before you buy a house to rent out, you need to conduct an in-depth neighborhood analysis to ascertain that it is a profitable one. Some of the characteristics of a profitable neighborhood include access to public transportation, low crime rate, high job growth, and proximity to public amenities like restaurants, schools, hospitals, etc. However, the easiest way to determine how a neighborhood is performing is to look at neighborhood-level data using Mashvisor.
Mashvisor’s investment property calculator provides comprehensive neighborhood-level data and analytics for any neighborhood in the database.
When you click on the neighborhood’s, you’ll be taken to the Neighborhood Analytics Page. There, you’ll be able to access all neighborhood data and analytics showing the real estate trends in the neighborhood.
- Median Property Price
- Average Price per Square Foot
- Traditional and Airbnb Rental Income
- Traditional and Airbnb Cash on Cash Return
- Airbnb Occupancy Rate
- The Optimal Rental Strategy (Traditional or Airbnb)
- The Number of Properties (Airbnb, Traditional, and For Sale)
- Walk Score
- Optimal Number of Bedrooms
- Real Estate Comps
- Optimal Property Type
- A Rent Analysis of Historical Rental Income for Airbnb and Traditional Properties
With this list of neighborhood data, you’ll be able to analyze a neighborhood and determine if it’s the right area to buy a rental property for sale. You can also compare this data with the data for other neighborhoods in the city to determine the investment potential of the neighborhood relative to other neighborhoods in the city.
Keep in mind that not all neighborhoods in your city will perform the same. Sometimes, a rental property for sale near you isn’t always a sound investment choice. You can find better investment opportunities in neighborhoods far from where you live. Mashvisor’s real estate heatmap can provide you with a visual representation of how different neighborhoods in the city are performing.
2. Analyze the Rental Property for Sale
If you are satisfied with the neighborhood in which the rental property for sale is located, the next step is to analyze the property itself. Traditionally, you would have to spend weeks or even months collecting real estate data and then enter the data into Excel spreadsheets to do real estate calculations. This is an arduous and time-consuming process.
Fortunately, Mashvisor’s rental property calculator does all the leg work for you. You no longer have to collect property data as it’s already driven from reliable sources such as the MLS, Airbnb, Redfin, etc. Mashvisor then uses the latest machine-learning algorithms and predictive analytics to make an accurate return on investment projection. For each rental property for sale on the platform or off market homes for sale whose address you enter, you’ll get readily-calculated real estate metrics.
The most important numbers that will guide you into deciding whether the rental property for sale is right for you include:
One of the most important things that real estate investors should consider when evaluating a rental property for sale is cash flow. Cash flow is basically the rental income you are left with after accounting for the operating expenses.
As a real estate investor, you should focus on buying rental property with positive cash flow. This is the only way to make money. If the property you are analyzing generates negative cash flow, that is a major red flag. With such a property, instead of making money every month, you’ll be taking money from your pocket to offset rental expenses. You should avoid this at all costs, especially if you are a beginner real estate investor.
Related: What Is Cash Flow and How Does It Let Real Estate Investors Make Money
If you are buying an investment property with cash, the return on investment metric to use is the capitalization rate (cap rate). It is calculated by dividing the property’s net operating income (NOI) by its fair market value or purchase price.
To determine if a rental property for sale is right for you, you need to compare its rate of return with that of other similar rentals in the area. Since cap rate doesn’t take into account the financing method, it’s great for quickly comparing multiple investment properties for sale in your target location. A cap rate of 4%-10% can be considered a good one. However, it will also depend on factors such as location and property type.
Related: Real Estate Investing for Beginners: Cap Rate Explained
Cash on Cash Return
When using a mortgage loan to finance a real estate investment, investors usually use a different return on investment metric to gauge how profitable it is. This metric is cash on cash return. Since most people use leverage in real estate investing, cash on cash return is a key metric in rental property analysis.
Cash in cash return is the ratio of a property’s annual pre-tax cash flow to the total cash invested. Most real estate experts recommend a cash on cash return of 8% to 12%. However, like with cap rate, factors such as location and property type have to be considered to determine the optimal cash on cash return.
3. Conduct a Comparative Market Analysis to Identify a Rental Property for Sale
Before you make the decision to buy a house at the listing price, you should determine if it’s really worth it. You do so by determining its fair market value through a process called comparative market analysis or real estate market analysis. This involves looking at what other similar properties in the area have sold for recently (rental comps).
By determining the fair market value, you’ll know whether the rental property for sale is overpriced, below market value, or fairly priced. This will help you place a competitive offer. Without comparative market analysis, you may even end up overpaying for a rental property.
Mashvisor’s rental property calculator makes your comparative market analysis easier as you can access real estate comps for any of the real estate listings on the platform with the click of a button. If you are wondering what to charge for rent, Mashvisor’s rental property calculator also provides rental comps to help you determine a fair rental price. This is the optimal rental price that will maximize your rental income and minimize your vacancy rate.
To get access to our real estate investment tools, click here to sign up for a 7-day free trial of Mashvisor today, followed by 15% off for life.
Related: Comparative Market Analysis: A How-To Guide for Real Estate Investors
The Bottom Line
The key to determining whether a rental property for sale is right for you or not is to do a thorough analysis of both the market and the property. Mashvisor is one of the best house hunting apps on the market as it helps you do all these accurately and in just a matter of minutes.
Start out your 7-day free trial with Mashvisor now.