A savvy real estate investor always buys investment properties that yield a good return on investment. After all, the main goal in real estate investing is making money. Thus, what’s the point of investing your money in something that brings little or no profits? Beginner property investors often ask themselves “With the thousands of rental properties available in the market, how do I determine which ones make profitable real estate investments?”
Demand for Real Estate Investments
Location is an important factor that property investors should take into account before making any investment decision if they want to succeed in the business. Location determines many aspects related to real estate investments, mainly supply and demand – which is the first thing that affects the profitability of rental properties.
The best locations to buy an investment property are where demand for real estate investing is higher than the available supply of properties. In such locations, a real estate investor enjoys high occupancy rates which further lead to a high rental income. Therefore, if you live in a real estate market with these characteristics, chances are you’ll find profitable real estate investments that are worth investing in.
Successful property investors conduct a real estate market analysis to evaluate the demand for real estate investing in their location of choice. Alternatively, Mashvisor’s investment property calculator provides detailed neighborhood analysis and numbers regarding the occupancy rates, the median property price, etc. Using this tool, a real estate investor can easily compare different neighborhoods and find out whether or not a certain neighborhood is good for real estate investments! To start out your 14-day free trial with Mashvisor, click here.
Related: Mashvisor: A Real Estate Investing Tool for All Your Investment Needs
Type of Real Estate Investments
The real estate investing business offers numerous types of investment properties, some of which are more profitable than others. There are residential real estate investments, commercial real estate investments, fixer-uppers, etc. However, what determines the profitability of a certain type is also closely related to its location. For example, a real estate investor investing in a market increasing in population might find residential rental properties (like multi-family rentals) more profitable than commercial rental properties.
Another factor to keep in mind is the rental strategy. For example, say you’ve bought a single-family home to rent out. Should you rent out this investment property as a traditional (long-term) rental or an Airbnb (short-term) rental? Each rental strategy will yield a different return on investment, which is why it is one of the factors that affect the profitability of real estate investments. Successful property investors determine the optimal rental strategy based on the type of their investment properties and real estate market.
Related: Airbnb Investment or Traditional Investment: How to Determine the Optimal Strategy
Real Estate Appreciation
Appreciation is an important term that you’ll hear throughout your career as a real estate investor. In simple words, appreciation is the increase of investment properties’ value with time. Meaning, the longer you hold an investment property, the more value it’ll gain and, thus, the more profits you’ll make if you decide to sell it. As a result, appreciation determines the profitability of real estate investments over the long-term.
In order to find investment properties with a high appreciation rate, look for areas where land is becoming limited, infrastructure development projects are being planned, are major business hubs, tourist destinations, and are expecting major economic growth. Real estate investments may not be worth much at the moment, but they can be very profitable 10 years from now.
Note: Did you know that Mashvisor helps property investors find the best investment properties using a property finder tool? Click here to find rental properties in your city and neighborhood of choice in a matter of minutes!
Return on Investment
Since profitable real estate investments are those that yield a high return on investment, property investors need to know how to calculate the ROI to make smart investment decisions. There are a number of calculations needed to determine the ROI, most importantly are:
- Cap Rate: Dividing the net operating income (annual income – annual expenses) over the property’s value. Property investors are advised to invest in real estate investments with a cap rate of 10% or more.
- Cash on Cash Return: Dividing the NOI over the total cash investment to see the expected return on investment if an investment property was purchased with all cash vs. with a mortgage. Generally, rental properties with CoC return of 8% are good investments.
- Cash Flow: The difference between monthly rental income and monthly expenses of an investment property. It comes in the form of monthly rent collected from tenants and it could be positive or negative. Obviously, as a real estate investor, you always want to invest in positive cash flow investment properties! Negative cash flow means you can’t keep up with your expenses to make profits.
Related: Real Estate Investing 101: How to Find Positive Cash Flow Properties in the US Housing Market
Mashvisor’s investment property calculator allows property investors to estimate the cap rate, cash on cash return, and cash flow of rental properties before buying them. Additionally, this real estate investing tool provides readily calculated and accurate results for thousands of investment properties across the US housing market. This allows property investors to easily compare between different real estate investments and identify the best and most profitable ones.
To search for and analyze rental properties in any city and neighborhood of your choice, click here!
Final Words
A successful real estate investing career starts with finding profitable real estate investments! Keep the above factors in mind when searching for an investment property to ensure finding the best one with high returns. Not sure where to invest? Sign up with Mashvisor and use our Property Finder and Property Calculator to find properties in different locations, analyze, and easily compare between them to see which has more profitability!
To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here.