It is a common misconception that finding a property with high cash on cash return and positive cash flow will automatically result in a successful real estate investing business.
The truth, however, is that even though finding the best possible rental property is important, it is equally as important to adopt the best rental property strategy. But which should you go for? Traditional rental properties or short term rental properties? In order to ease the decision-making process for you, we’ve put together a guide on how to choose your rental property strategy. Interested? Let’s jump right into it!
#1 Long Term Rentals vs Airbnb Properties
Logically, before discussing how to choose the best rental property strategy for your real estate investment, we should focus on exploring the two main rental strategies. This will help you to better understand the similarities and differences between the two as well as allow you to judge which rental strategy will be a better fit for your unique business plan.
Related: Airbnb vs. Renting Out the Traditional Way: Which Rental Strategy is Better for You?
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Long Term Rentals
Traditional rental properties fall into the category of residential real estate. Such investment properties provide long term accommodation for tenants. In general, this means that tenants rent the property for at least half a year. However, many tenants stay in one property for several years.
Because of this, long term rentals can be seen as passive income investments. If the real estate investor chooses to take on the role of landlord, he/she should be available when a problem occurs and, of course, make sure the rental property is well maintained. But the actual day-to-day activities are kept to a minimum.
In terms of rental income, traditional rentals generate less income per night than Airbnb investment properties. Nevertheless, once occupied, they stay so for a long time. So, there is no need for constantly attracting new tenants.
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Airbnb Properties
Short term rental properties, on the other hand, provide accommodation similarly to hotels and motels. This means that these investment properties target tourists or business travelers and offer a stay for a few nights. These real estate investments typically provide higher rental income per night. However, they also require more time and effort for maintenance, attracting guests, and rental property management.
Related: Four Things to Consider Before Purchasing an Airbnb Investment Property
Now that you have a general idea about the types of rental properties, it is time to move on and discuss the main steps to choosing the right rental property strategy for your investments. Let’s start with the one tool that can be your best helper in the task- the heatmap analysis tool.
#2 Mashvisor’s Heatmap Analysis Tool
It is likely that you are already familiar with the concept of heatmap analysis. You have probably noticed heatmaps being used to present the best bars in town, the most interesting tourist attractions, weather trends etc. A similar concept is applied to the real estate market when using Mashvisor’s heatmap analysis tool.
Mashvisor’s Heatmap Analysis Tool
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What Is This Tool?
This unique real estate investment tool is simply a map with a color scheme based on the performance of different metrics. For instance, the color red indicates that a specific value is below average for that neighborhood. Orange represents a median performance, while green- higher than average. This visual representation will help you quickly and efficiently get all the information you need about a neighborhood before buying rental property there.
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What Does the Heatmap Analysis Tool Measure?
As previously mentioned, this real estate investing tool measures different performance indicators and is perfect for conducting neighborhood analysis. The tool measures the listing price of the properties in the area. Along with that, it presents the cash on cash return as well as the rental income separately for the different rental strategies. The heatmap tool also reveals the Airbnb occupancy rate at a specific location.
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How Is the Tool Useful for Choosing Rental Property Strategy?
As you can imagine, all the previously described metrics are extremely useful when deciding on a rental property strategy. For example, when viewing a neighborhood, if the traditional rental income exceeds the Airbnb rental income, then you know what the optimal rental strategy is for that location.
By comparing the data provided by the heatmap for the two rental strategies, you can easily choose which one will be more profitable and successful.
Learn More: How to Choose Rental Strategy: Finding Income Properties Using a Heatmap
#3 What Else Should You Consider When Choosing a Rental Property Strategy?
In order to successfully choose a rental strategy and end up with a profitable real estate business, there are 3 more things to consider before buying a rental property and renting it out on the real estate market.
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Location and Rental Property Demand
Inevitably, the location plays a huge role in determining a rental property strategy. Typically, a specific location will favor one of the two and that will reflect in the rental property demand for the area. For example, college towns or cities that offer many job opportunities are generally better for investing in traditional properties. On the contrary, cities full of leisure activities, exciting nightlife or business hubs make for a better location for owning an Airbnb.
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Local Laws and Regulations
It cannot be stressed enough how important it is to be consistent with the rules that apply in your investment location of choice. This is usually a bigger concern when renting out on Airbnb as Airbnb regulations can be quite strict. Many cities ban short term rentals or have severe restrictions on Airbnb properties. If that is the case, even with the perfectly chosen location and investment property, it might turn out that Airbnb is not the smartest choice. That is why we advise you to research the local laws and regulations beforehand.
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Your Own Business Plan
Last but not least, it is important to make sure that the rental property strategy you pick will fit in your investment plan and suits you as a real estate investor.
For example, if your real estate investment business plan requires consistent cash flow, then you might need to invest in long term rentals. What about how much time you plan to invest in the rental property? Airbnb properties require a lot of maintenance and work in order to make a profit. Review your plan and choose a rental strategy accordingly.
Conclusion
There are many steps to take when deciding on a rental property strategy for your investments. It is necessary to keep in mind the location and the demand for properties in the region, the local rules and regulations as well as your business ideas. Most importantly, make sure to use Mashvisor’s heatmap analysis tool as it will present you with extremely valuable real estate data and will save you time and effort in the process. To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.