Those new to investing in income property often wonder, “What makes a good income property?” There are many variables that go into answering that question.
Find Income Property in a Good Neighborhood
We will get to finding income properties for sale shortly. But knowing what a great income property is and finding one are not one and the same. While knowing how to identify a good income property investment is helpful, you must first generate a list from which to choose. Here’s how to do so.
It helps to first start with a real estate market that is likely to be profitable for income property investing. Let’s use Houston income properties as an example. Bankrate recently analyzed the U.S. housing market and determined that the Houston real estate market is a market in which it is better to rent than buy. This means rentals will have high demand.
Once you know the market, Mashvisor has the data you need to further refine your search area and show you which neighborhoods are hot. The tool for identifying a good neighborhood for finding income properties is called a heatmap. The Mashvisor heatmap of your search area takes numerical income property data and displays it visually. For example, this tool will instantly show you where income properties in the Houston real estate market have high cash on cash return. Using colors to indicate where you can find income properties that are a good investment can save you time.
Income Property Analysis – Start with the Bones
Before we dive deeply into how to locate or analyze a good income property investment, let’s step back. Before analyzing a dozen income properties for “cash flow,” understand that the decision you make now can be one you will need to live with for many years. Only buy income properties with good bones.
Income property with good bones has a must-have and must-avoid list. Let’s start with the avoid list:
- Septic systems
- Illegal spaces such as basement apartments without proper egress and ceiling heights
- Income property without parking (where that is a big issue)
- Any income property with pricey lead paint, asbestos, hazardous insulation, or other money traps
- Private wells
- Multi-units without separate utilities
Now that we have created a list of what to avoid, one can sum up the must-haves quite easily:
- Public sewer and water
- Legal-to-rent space
- An inspection that reveals no unmanageable hazards
- Separate utilities if the unit is a multi-family home
There are certainly some exceptions to these rules. For example, in some areas, septic systems are the only option. Buy one with a new state or local government approval. Some units require that some hazardous materials or situations be rectified, but may be otherwise gems. Be honest about the renovation costs and do them before listing the property for rent. In city centers, parking may not be a requirement, but it can sure be a big cash flow generator.
Analyzing Income Properties – Cash Flow Is King
Let’s discuss how to analyze positive cash flow income properties. Cash flow is typically what most real estate investors want from a new rental property. If you are a buy and hold investor planning to invest cash and park equity, this story is not ideal for you. We are focusing on those who want to generate revenue with the least investment practical.
The basic premise of a cash flow positive income property analysis is to determine which of the choices you have available to you will return you the most cash flow with a given investment of your money upfront. We could dive deeply here on how to calculate your costs, how to calculate your potential rental income, and then show you an algorithm to create the answer. There is no need to do so. Mashvisor has already created a cash flow tool – our income property calculator – to make your life simple. Why reinvent the wheel?
Good Income Property – Size and Type
Let’s review what we now know; What makes a good rental property has been defined. We know how to locate and quickly analyze rental income property for sale. We now know where one can find a tool to determine if an income property has a good ROI. What remains is sorting out what type of property might make a good rental.
Among the various choices of rental property are single-family, duplex, multi-family, condos (also called apartments), and vacation properties. There is no single perfect answer for which of these is ideal for you today. If you are trying to break into the world of rental property investing, an owner-occupied duplex or multi-family has huge advantages for you. You can live in one half and still use federal low-interest loans to finance the entire investment property. While this type of investing has some easy to understand rules, it is a gateway many investors use to start in this industry.
If you already have a home and also have enough of a down payment to obtain a bank loan on a rental, your budget may drive the next pair of choices. Your percent return on investment may be better with a small single unit like a condo. However, if you can stretch the budget to purchase a multi-family, you may earn a higher overall return on investment. In addition, multi-family units are small businesses in themselves. They also offer great cost-side efficiencies. For example, one yard to maintain, one roof to repair, and one set of vendors for things like trash removal and other such costs.
Good Income Property – Classic Rental vs. Airbnb
One final consideration when searching for an investment property is how you plan to rent it. Will you use a classic one-year lease? Will you rent shorter term to tenants in transition using a month-to-month plan, or will you opt for the new trend, short-term Airbnb renting?
There is certainly no right or wrong answer. Many first-time real estate investors who already own their own home find that a rental property they can themselves use, and also rent short term is ideal for their lifestyle. Many investors in the Northeast opt to own a vacation home in a warm area like the Florida real estate market and rent the home out for the hot half of the year. Only you know which type of investing will work best for your current lifestyle. We offer just one last tip in this section; Be certain that the investment property can legally be used as a short term rental, or a rental at all, if you opt for a newer, less traditional plan.
Mashvisor has all the tools you need to determine if an investment property is a wise choice for you. Use these tools to full advantage, but don’t forget to involve your network. Your realtor, your home inspector, and your contractor are the three you should always consider “partners” in your investment plan.
To get started on your search, try Mashvisor today.