Buying investment rental property is an evergreen strategy that will always yield good returns. As long as you zero-in on the best rental investment markets, you are guaranteed to generate high rental income. So what is the simplest way to find the best rental property investment? In this article, we will go over the process of finding investment rental property and share with you some of the best practices that will ensure you buy profitable real estate.
Finding Investment Rental Property
Investing in rental properties in 2020 means navigating through a fairly promising landscape. In fact, the strong economy and record-low unemployment rate will ensure a healthy demand for rental properties. Moreover, the low investment rental property mortgage rates and tight housing inventory will invariably contribute to an overall bullish trend. To take advantage of these conditions, here are the steps to buying rental property in 2020.
1- Choose a type of rental property
Before delving any deeper into your rental property investment strategy, you must first specify which type of rental property you are willing to invest in. As a matter of fact, this is the first thing that you should include in your business plan for rental property investment. Each property type has its own set of pros, cons, and challenges. Needless to say, understanding the implications of each one is paramount for every real estate investor.
Here are some of your options:
- Single-family homes: A house that accommodates one family. These investment properties offer the highest appreciation potential.
- Multi-family homes: A house that is made up of multiple living spaces. These homes generate higher cash flow than other types of rental property.
- Condos: A living unit that is situated in a building with shared spaces and amenities. Condos have low-maintenance requirements and are easy to manage for a beginner real estate investor.
2- Pick a location to invest in
The next thing you need to decide is the location of the investment rental property. Whether you are planning on investing in your area or out of state, you will need to carry out an in-depth analysis of several neighborhoods in order to identify the ideal location to invest in. Here are some of the features that you should be looking for when making a rental property investment:
- Opt for a location with solid economic fundamentals and a low unemployment rate
- Focus on trendy neighborhoods that boast a good public transportation system
- Invest in a rental property that is within close proximity to schools and shopping centers
The real estate heatmap is a valuable tool that can help you find the perfect location in a matter of minutes. In fact, the heatmap will allow you to find the neighborhoods with top-performing rental properties in each location and can even help you pick the optimal rental strategy. Check it out here.
3- Understand your rental property financing options
Financing is a crucial factor when it comes to ensuring the profitability of your real estate investment. In fact, obtaining an affordable loan with good terms can be the difference between turning a profit and incurring a loss. Most rental property investments are financed through what is known as conventional loans. These are the traditional mortgages that are obtained through a bank after meeting a number of credit and financial requirements. However, there are several other financing instruments that you can resort to when looking for investment loans for rental property. For example, you can apply for asset-based loans or home equity loans. Depending on your credit score and the property’s earning potential, you might be able to get more favorable terms with these types of loans.
Related: What Are the Best and the Worst Investment Property Financing Options?
4- Determine if the property is a good investment
Knowing how to determine if a rental property is a good investment is an integral part of the buying process. Being able to identify a property’s potential or lack thereof will enable you to make the right decision before committing any resources to the venture. Here is what you should focus on when assessing the viability of an investment rental property:
- The investment property needs to have a clear title with no liens or back taxes
- Its purchase price should be comparable to or lower than the appraised value
- The investment is located in an area with lax rental regulations
- No structural issues are found after a professional inspection
- The rental income that the property generates should be at least 1% of its purchase price
Another variable to take into consideration is the cap rate. Profitable rental properties tend to have a higher rate relative to the neighborhood average.
You can find high cap rate properties for sale anywhere in the US housing market here.
5- Calculate the return on investment
The only way to land a high return on investment rental property is to accurately assess its profitability beforehand. Figuring out how to calculate return on investment rental property might seem quite complex upon first glance. But in reality, it is very simple. The easiest approach is to determine ROI. The formula is as follows:
ROI = (Annual Rental Income – Costs and Expenses) / Purchase Price
The annual rental income is the sum total of the monthly rental payments that the tenant makes. The costs include one time only expenses such as closing costs as well as recurring ones like taxes and property management fees.
A more effective way of carrying out a rental property investment analysis is to use Mashvisor’s rental property investment calculator. This interactive tool employs predictive analytics to provide you with highly accurate profit estimates. Furthermore, it calculates metrics like cash on cash return and cap rate which are more useful than the basic ROI formula.
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6- Hire a real estate agent to handle the closing process
Even if you are an experienced real estate investor, working with a real estate agent can save you a lot of time and effort. The closing process, in particular, involves dealing with a myriad of paperwork. More importantly, an agent will help you navigate any real estate contingencies that might be in place and ensure that you’re not signing off on anything that could result in issues down the line.
Related: Working with a Real Estate Agent: What Investors Should Expect
The Importance of Staying Organized
It is natural for first-time investors to feel overwhelmed. After all, real estate investing involves several moving parts. This is why it is important to say organized throughout the process and maintain all the relevant data in a structured manner. While you may think a rental property investment spreadsheet made with Excel is the best way for comparing the different properties that you could invest in, there are better tools out there. Use Mashvisor’s investment property calculator and download reports that have all the info you need in an easy-to-read PDF.
Buying Investment Rental Property: The Bottom Line
As it is the case with every investing venture, proper planning and thorough due diligence are the safest ways to ensure a profit with real estate rental property investment.
Use the property finder and start looking for rental investment property for sale right now! Whether you are looking for a standard rental property or a vacation rental investment property, the tool’s advanced AI will help you find investment property for sale that matches your criteria.