The question which picks the minds of all beginner real estate investors is how to maximize return on investment when buying a rental property.
While real estate investing is one of the best ways to make money both short term and long term, not all income properties are created equal. Thus, not all of them bring the same rate of return for investors.
There are a few different factors which you need to take into consideration when choosing the most profitable investment property. And there are a few different things that you can do to push profitability up on any rental property.
In this article we will provide you with the best advice on how to achieve maximum return on investment as someone who’s just getting started in real estate investing.
To learn even more on this topic, watch our real estate video available below:
What Is ROI in Real Estate?
Before we move onto practical advice on how to invest in real estate for maximum profitability, we need to clarify what is ROI in rental property investing.
In brief, this is how much profit you make on an income property compared to the money you have invested in the property and the money you keep spending on it as a landlord or an Airbnb host.
There are two main ways how to calculate ROI when it comes to rental properties: cap rate and cash on cash return.
The capitalization rate, or cap rate for short, is the most straightforward way to calculate the rate of return on a rental property. It constitutes the net operating income (NOI) divided by the property sale price or the property current market value (CMV). The best cap rate for residential real estate investment properties is 8-12% as it is also a measure of the risk associated with buying rental property.
The cash on cash return, or CoC return for short, is a more comprehensive measure of return but also requires more effort to calculate. It is calculated by dividing the before-tax cash flow by the total amount of cash invested in the income property. As such, it takes into account the method of financing of the investment property: cash vs. mortgage. A good cash on cash return is a value above 8%, and the higher the CoC return, the better for a real estate investor.
How to Achieve Maximum Return on Investment on a Rental Property
Find a Property in a Top Housing Market
The first factor which one should take into consideration when buying an investment property to make money in real estate is the location. The real estate market determines the median property price, the average rental rates, the rental expenses, and the occupancy rate. This means that the housing market where an income property is located ultimately determines the rate of return on a real estate investment. This holds true whether you look at the cap rate or the cash on cash return.
To maximize return on investment, look for a location with affordable home values, strong economic growth, positive population growth, and fair traditional and Airbnb rental rates.
Keep in mind that location refers to both the city and the neighborhood where you buy an income property. Mashvisor’s real estate investment tools can help you find the best area for buying a traditional or Airbnb rental property in any US city. Our heatmap provides a color-coded visualization of the listing prices, traditional rental income, traditional cash on cash return, Airbnb rental income, Airbnb occupancy rate, and Airbnb cash on cash return that you can expect within a city by neighborhood. This neighborhood analysis will give you a good idea where to focus your investment property search for maximum profitability.
To start using the heatmap and other tools available on our real estate app, sign up for Mashvisor now.
Focus on the Best Property Type
Another key factor which determines how much money you will be able to make with real estate investing is the property type. The most profitable type of rental property depends on a number of factors. The most important ones include the real estate market and the rental strategy which you plan to implement.
As mentioned above, location determines both property prices and rental income rates. This means that in different markets different property types – single family homes, townhouses, condos, apartments, multi family homes, etc. – bring the highest return, with regards to both cash on cash return and cap rate.
Similarly, single family homes and townhouses are a perfect fit for traditional rental properties. Tenants of long term rentals look for the best place to live with their family, so they are willing to rent bigger properties in neighborhoods away from the city center. Meanwhile, Airbnb guests are interested in proximity to tourist attractions and business hubs, so they frequently search for condos and apartments close to the city center.
Once again Mashvisor’s real estate investment software is able to help you find the property type with the highest return on investment in your location. Our neighborhood analysis highlights the best property type for each area within a city.
Pay the Right Property Price
When we described how to calculate return on investment when investing in real estate, the two metrics we used both factored in the rental income or cash flow, on the one hand, and the cash investment or the property price, on the other hand.
This means that to maximize the rate of return, you have to pay the lowest possible price when buying a rental property. It is important to note that the property price factors in both the down payment and the monthly mortgage payments which are the most sizeable expenses for an investor in rental properties. Moreover, they affect other recurring expenses such as property tax and home insurance.
If you are confident in your skills as a real estate investor, you can choose to buy an income property on your own. Then you need to conduct comparative market analysis to find out the fair market value of the property that you are planning to purchase. Finding real estate comps is easy with Mashvisor. We provide you with a list of MLS listings as well as foreclosures and other off market properties in any US housing market which match your exact criteria. You can view both active listings and sold listings to get an accurate estimate of the home value that is fair for the property type that you are interested in.
If, alternatively, you want to hire a real estate agent, he/she will be able to help you determine the fair market value and to negotiate the best price.
The lower the price you pay on an income property, the higher your return on investment will be.
Choose the Better Rental Strategy
Another key factor which determines the rate of return on an income property is the rental strategy which you select: traditional vs. Airbnb. Mashvisor’s nationwide real estate market analysis shows that in the vast majority of US locations short term rentals are more profitable than long term rentals. However, making such a generalization could turn into a costly mistake for a beginner real estate investor.
When you buy an investment property, you need to perform detailed rental property analysis. This is the only way to determine if a vacation home rental or a traditional rental property will generate a better rate of return in each particular case.
Mashvisor’s rental property calculator can help you out in this regard as well. All you have to do is to click on an investment property listed on our platform or enter the address of any residential real estate property in the US housing market. Within the click of the mouse, you will gain access to detailed investment property analysis including a few different measures of return on investment:
- Traditional and Airbnb income
- Traditional and Airbnb occupancy rate
- Traditional and Airbnb cash flow
- Traditional and Airbnb cash on cash return
- Traditional and Airbnb cap rate
All these numbers and figures are based on the performance of actual traditional and Airbnb rental comps in the area. We get traditional and Airbnb data directly from the MLS as well as Zillow and Airbnb.com to provide real estate investors with the metrics that they need to make smart and profitable decisions.
Set Up the Optimal Rental Rate
Buying a rental property with a strong potential and choosing the right rental strategy is still not a guarantee that you have optimized return on investment. The next step is to decide on the correct rental rate, regardless of whether you rent out on a short or long term basis.
Setting up the rental rate too low means that you are missing out on the opportunity to make even more money with your investment property. Having the rental rate too high, alternatively, means that you will not be able to beat the short term rentals competition in the neighborhood.
That’s why it is best to ask for a rental rate comparable to the rest of the similar income properties in your area. This will provide you with the right balance between traditional or Airbnb occupancy rate and rental rate, leading to the maximum rental income.
The traditional way to decide on the competitive rental rate is to conduct rental market analysis. Now, however, you can simply access readily available traditional and Airbnb rental comps from the Mashvisor real estate app. You will see what rent comparable rental properties are asking for, what occupancy rate they are enjoying, and how much income they are earning.
Use Real Estate Investment Tools
Last but not least, maximizing return on investment in real estate is easier with the help of the best real estate investment tools. The Mashvisor app provides you with all the tools that you need to make smart, data-based decisions when investing in real estate.
- Neighborhood analysis tool
- Property Finder
- Investment property search app
- Rental property calculator
With the help of these real estate investment tools, we’ve turned a 3 months of research into 15 minutes. There’s no more need to conduct manual real estate analysis. You can identify the most appropriate neighborhood and choose the most profitable income property from the comfort of your home for the best return on investment.
The ultimate goal of every real estate investor is to make as much money as possible. The way to do that is to buy a rental property which can provide the maximum return on investment. Follow the 6 pieces of advice provided above, and make sure to sign up for Mashvisor now. You are one step away from finding profitable traditional and Airbnb rental properties in any US housing market.