What is the best type of investment property in the real estate market? If you’re looking for a straightforward answer, you won’t find one.
In order to determine the answer to that real estate question, you will first need to learn about the advantages and disadvantages of each type of investment property in order to decide on the best type of investment property for your particular needs and preferences as a real estate investor.
Best Type of Investment Property
When trying to determine the best type of investment property, the answer will always be relative based on the specific situation of the real estate investor who’s asking the question. There are many things to be taken into consideration when trying to determine the best type of investment property for your investment goals and plans. Your financial situation, your short-term and long-term investment goals, and your knowledge of the real estate market are some of the most important factors that will greatly affect your decision with regards to the best type of investment property in your case.
While some investors plan their real estate investment strategy around long-term profits and property appreciation, others choose to invest in an investment property with the hopes of making profits at the soonest opportunity. And while some real estate investors’ financial situation allows them to invest in a property with all cash, others might have to rely on a mortgage to finance their investment property, limiting their options and requiring them to plan their finances and profits accordingly.
So, based on each individual real estate investor’s preferences and preferred investment strategy, you can determine the best type of investment property.
Below is a list of each type of investment property, its advantages and disadvantages, and what makes it optimal for the different types of real estate investments.
Rental Properties
While the idea of owning a rental property and becoming a landlord might lead some real estate investors to believe that a rental property will immediately result in them earning a passive rental income, in reality, that is rarely the case.
A rental property might be the best type of investment property, but only in the long run. This is because most of the rental income that you will be making off of your rental property will be going towards your mortgage payments, property tax, maintenance costs, and possibly professional property management.
Some real estate investors might consider a rental property that could generate $1,500/month in rental income, for example, thinking that they can immediately quit their day job and solely live off the passive rental income that they are making. But the fact is, most rental properties have very high running costs associated with them, especially if you’ve taken a mortgage loan to finance your purchase, which is the case for most real estate investors.
If you take that $1,500/month rental income from your income property, and you discount all the expenses that you would have to pay in order to keep the rental property running, you might end up with something close to $150-$200 of cash flow, or profit, each month. This is after paying your mortgage payments, taxes, property management fees, and property maintenance, and you will still need to save some money for any unexpected home repairs to keep your investment property in a good shape and your tenants happy.
Related: The Best Rental Real Estate Strategies for Beginners
You might be thinking: “Why would anyone invest in a rental property then?”
The answer is simple: For the long-term benefits.
In the long run, and after you’ve paid off your mortgage, which makes up the largest portion of your rental property expenses, you will have finally reached a point where your investment property is making the profit that you’ve always dreamed of.
The best part is that while it may take you 15-30 years based on your type of mortgage before you reach that point, you won’t be the one who’s actually paid off the mortgage, your tenants will have paid it through rental income. Additionally, at this point, your property will probably have appreciated, and its value will have increased, allowing you to sell it for a hefty amount without any further costs, which can earn you a very high profit.
Vacant Land
Vacant land can be considered the best type of investment property for a large number of real estate investors. This is due to the typically low prices of vacant lands and the almost non-existent running costs of owning vacant land.
Typically, the only expense of owning land would be in property tax. This tax, however, is very low and manageable. Nevertheless, in the long-term this tax might mount up to thousands of dollars, so you will have to make sure that the profit you’re making out of selling the land is higher than the price at which you’ve bought it as well as the costs of taxes that you’ve paid. Additionally, it is possible in many cases to make a slight profit from the land by either using it for farming or even renting it out to hunters.
The major downside of investing in vacant land is the difficulty of finding a lender who would be willing to give you a loan for your investment. This means that the vacant land market is mostly a cash only market, and you will need to save up a large amount of money in order to make your investment.
Related: 6 Reasons to Buy Land as a Real Estate Investment Strategy
Finally, in order to make the most out of your vacant land investment, you will need to have great knowledge of the market and the area, and be able to forecast the area’s development and make sure that in the long run this vacant land’s value will increase and there will be a number of buyers interested in using the land for real estate development projects.
Fix-and-Flips
The final type of investment property, which is considered as the best type of investment property by a large number of real estate investors, is properties that are in a bad shape and need renovation. Fix-and-flip properties are among the best short-term investments in the real estate market. They involve the process of purchasing a real estate property that is in a bad shape, renovating or fixing it, and selling it back at a higher price-point.
While fix-and-flips are among the best types of investment property for making very high short-term profits, they usually have very high costs associated with them and require extensive planning in order to pull off.
Although fix-and-flip properties generally have very low price-points due to the sub-optimal conditions of the property, there are several costs that will arise after you’ve purchased the property. This includes the costs of renovating and repairing the real estate property in order to get it back into a habitable and attractive condition, in addition to several other costs such as property inspection, which are all crucial to the success of your real estate investment.
Related: Considering a Fix & Flip? Ask Yourself These 3 Questions First
Finally, fix-and-flip properties have the highest rate of unexpected costs and expenses that may arise during the renovation as well as during the closing processes. Thus, a real estate investor will need to get the property inspected at the different stages of the investment in order to avoid unexpected expenses which should all be taken into consideration when trying to plan your investment and its expenses.
Bottom Line
There isn’t a single way to determine the best type of investment property. The number of factors that play a role in the suitability of a real estate property for an investment is numerous, and they can only be assessed and determined by the individual real estate investor who’s looking to buy an investment property.
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