Buying rental property has been one of the most popular ways to invest in real estate as it allows investors to make money both in the short and long run. With the expected US housing market trends in the coming year, is rental property a good investment strategy as well? Is real estate still a good investment or should you look for other alternatives? Keep reading to find out.
To relieve you from the pressure, we’ll let you know right away that the answer to the question “Is buying a rental property a good investment?” is “Yes, it is an excellent strategy to make money in real estate.” But what are the reasons?
There Are Plenty of Affordable Markets
One of the main reasons why many are starting to speculate that buying investment property to rent out might not be an optimal option is the rising home values in the US housing market. It is true that property prices are skyrocketing in many US real estate markets such as New York, San Francisco, Boston, San Diego, Los Angeles, and others. However, many other best places to buy rental property remain relatively cheap with listing prices close to the national median home value of $231,000 (according to Zillow).
Some of the most affordable top-performing cities for real estate investing are expected to be:
#1. Cleveland, OH
- Median Property Price: $163,500
- Traditional Rental Income: $1,040
- Traditional Cap Rate: 1.7%
- Airbnb Rental Income: $2,020
- Airbnb Cap Rate: 4.5%
- Airbnb Occupancy Rate: 53.5%
#2. Memphis, TN
- Median Property Price: $215,700
- Traditional Rental Income: $990
- Traditional Cap Rate: 2.0%
- Airbnb Rental Income: $2,050
- Airbnb Cap Rate: 8.1%
- Airbnb Occupancy Rate: 65.2%
#3. Baltimore, MD
- Median Property Price: $250,500
- Traditional Rental Income: $1,540
- Traditional Cap Rate: 2.9%
- Airbnb Rental Income: $2,000
- Airbnb Cap Rate: 4.0%
- Airbnb Occupancy Rate: 52.1%
#4. Jacksonville, FL
- Median Property Price: $257,400
- Traditional Rental Income: $1,300
- Traditional Cap Rate: 1.8%
- Airbnb Rental Income: $2,130
- Airbnb Cap Rate: 4.1%
- Airbnb Occupancy Rate: 54.8%
#5. Philadelphia, PA
- Median Property Price: $319,800
- Traditional Rental Income: $1,460
- Traditional Cap Rate: 2.6%
- Airbnb Rental Income: $2,000
- Airbnb Cap Rate: 3.3%
- Airbnb Occupancy Rate: 54.0%
Note: The estimates above have been provided by Mashvisor’s investment property calculator which uses nationwide big real estate data and rental comps to analyze the investment potential of markets, neighborhoods, and properties.
As you can see, finding cheap investment property will be possible as one of the prerequisites for a high rate of return on a rental property. Moreover, the availability of reasonably priced investment properties for sale makes rental properties a good investment strategy for beginner real estate investors too.
Interest Rates Are Expected to Remain Low
Very few property investors are able to buy rental properties fully in cash, so the vast majority of them resort to mortgage loans and other financing methods such as private money lenders, hard money loans, and others. That’s why the interest rate is a major determinant of whether a rental property is a good investment or not.
The good news for those aspiring to start a rental business in the coming year is that interest rates are projected to remain low, at about 4%. This means that applying for a mortgage is an affordable and reasonable option as long as you have enough savings for a minimum down payment of 20% of the property price.
Moreover, the fact that interest rates are low points to the fact that – financially speaking – you are better off investing in rental properties than putting your money in a savings account. The former will generate you more return in the medium to long term.
Rental Property Investors Make Money from Real Estate in the Short Run
Some investment strategies only allow you to make money in the long term, once you have decided to sell your assets. This is not the case with owning rental property. With the rental real estate investment strategy you can start making money right away, through monthly rental income. As soon as you buy an income property and get it in a rentable state, you can find tenants and start charging them rent. If you buy a rental property, you will be making profit from it.
Furthermore, you have quite significant control over how much income you will make. The place you invest in real estate, the property type you choose, the property size you buy, the fixes and repairs you make to the income property, and the rental strategy you choose will all affect your rental property income. With rental properties, you are in control of your investing for income.
Real Estate Appreciation Makes Your Rich in the Long Term
According to US real estate experts, natural appreciation is expected to remain strong and stable in the US housing market and beyond. Home values in most of the best places for buying a rental property will continue going up to provide long term return on investment for real estate investors. However, the rise in real estate values is not expected to cause a housing bubble any time soon.
Since property listing prices are expected to increase with a few percentage points in the majority of locations, it is recommended to aim for buying investment property for sale early in the year.
Here are the 5 best places to buy rental property for real estate appreciation:
#1. Odessa, TX
- Natural Real Estate Appreciation: 9.7%
- Median Property Price: $343,000
#2. Idaho Falls, ID
- Natural Real Estate Appreciation: 9.4%
- Median Property Price: $285,100
#3. Midland, TX
- Natural Real Estate Appreciation: 8.0%
- Median Property Price: $410,100
#4. Pasco, WA
- Natural Real Estate Appreciation: 7.2%
- Median Property Price: $356,000
#5. Yakima, WA
- Natural Real Estate Appreciation: 7.2%
- Median Property Price: $315,300
The Residential Real Estate Market Is Undergoing a Shift
Still wondering is rental property a good investment? One more reason why this year is the best time to invest in real estate is the fact that the residential US market is starting to go through a structural transformation. The US housing market has been a seller’s market for a few years now, after recovering from the great recession. While a total shift towards a buyer’s market is not forecast to take place, small changes are starting to take place. Real estate development and construction activities are slowly beginning to catch up with demand for properties, appreciation is somewhat slowing down, and mortgage interest rates are low. These are all signs that the market is balancing. This is good news for beginner real estate investors who want to avoid entering into bidding wars at all costs.
Rental Properties Are Low Risk Investments
Real estate has been and continues to be one of the safest investment strategies. A good balance between risk and return is one of the most important features of a good investment. Unlike with stocks, with rental property investment, you can’t just lose everything.
Even if the real estate market takes a downturn, as it happens every few years, it is bound to recover and even exceed the previous performance. After all, people will always need a place to live, and the positive population growth pushes demand in the US rental market to continue going up, keeping in mind the high proportion of renters vs. homeowners. Moreover, real estate properties are built on land which is a very limited resource, which means that their value is guaranteed to increase in the long term.
As long as you conduct careful real estate market analysis and thorough property search, investing in rental properties is one of the best options for making money.
Property Investment Is a Hedge Against Inflation
In the past few decades, the annual rate of real estate appreciation has exceeded the annual inflation rate in the US market. This trend is predicted to continue. This means that buying rental properties protects your money from the negative impact of inflation. No wonder there are millions of Americans who choose income properties as their preferred investment strategy.
You Can Make Money Passively with Investment Properties
Many people might choose to stay away from investing in rental properties because of the erroneous assumption that income properties require lots of hard work. It is true that becoming a landlord or an Airbnb host is associated with many different responsibilities such as screening tenants or guests, collecting rent, dealing with evictions, maintaining the property, etc. However, this does not have to be the case. Actually, the ever-increasing number of professional property management companies in the US housing market makes it easier than ever to be a real estate investor making passive income from rental properties. All you need to do is to find a top-performing property, buy it, choose the optimal rental strategy, and hire a property manager to deal with it.
So, is rental property a good investment for passive income? Yes, it absolutely is.
Related: Passive Real Estate Investing for Beginners: 8 Strategies
Income Properties Offer a Choice of Rental Strategy
Some real estate investors know what rental strategy they want to go with, while others are simply in search of the most profitable option. Both those interested in traditional rentals and Airbnb rental properties will be able to find money-making opportunities. While many major US cities are prohibiting non-owner occupied short term rental properties and imposing all sorts of other Airbnb rules and regulations, buying investment property for the sole purpose of renting it out on Airbnb or another homesharing platform remains fully legal in many of the best markets, such as the Dallas real estate market, the Atlanta real estate market, and the Philadelphia real estate market.
If you want to start an Airbnb business, remember to check the local short term rentals legislation carefully.
To find out the best places for both traditional and Airbnb rentals, see what cap rates by city to expect.
Real Estate Investment Tools Make Buying Rental Properties Easy and Accessible
In the 20th century, success in the real estate industry was mostly possible for full-time experienced investors who had the time, knowledge, and skills to identify the best places to invest in real estate and find the most profitable properties for sale before anyone else. This is no longer the case in the 21st century.
Investing in a rental property will be all about working smart and not working hard which boils down to having access to the best real estate investment tools. There is no more need to conduct manual comparative market analysis, neighborhood analysis, or investment property analysis. Big data, predictive analytics, and machine-learning algorithms can lead you to the most profitable investment properties for sale in any US housing market in a matter of minutes. This means that real estate investing for beginners will be easier and more profitable than ever before.
Some of the must-have real estate investment tools include:
Below you can see a screenshot of Mashvisor’s heatmap neighborhood analysis of the Dallas real estate market by traditional rental income:
Mashvisor’s Heatmap: Dallas Neighborhoods by Traditional Rental Income
The heatmap analysis tool helps investors find the best neighborhoods for traditional and Airbnb rental property in any US market by property listing price, traditional rental income, traditional cash on cash return, Airbnb rental income, Airbnb cash on cash return, and Airbnb occupancy rate.
Below you can see a screenshot of some of the most profitable investment properties for sale in the Dallas housing market according to analysis by Mashvisor’s Property Finder tool:
Mashvisor’s Property Finder: Profitable Dallas Rental Properties for Sale
With the Property Finder tool, even beginner real estate investors can find the top-performing rental properties for sale in any US city based on their budget, preferred property type and number of bedrooms, and optimal rental strategy.
Below you can see a screenshot of the rental property analysis conducted by Mashvisor’s rental property calculator on a listing in the M Streets neighborhood in the Dallas real estate market:
Mashvisor’s Investment Property Calculator: Dallas Rental Property Analysis
An investment property calculator conducts all the investment property analysis necessary for buying profitable income properties. This real estate investing tool will calculate for you the startup costs, recurring expenses, rental income, cash flow, cash on cash return, cap rate, and occupancy rate for any property in the US housing market, whether rented out traditionally or on Airbnb.
Is rental property a good investment? Yes, it is for all of the above-listed reasons. To start making money in real estate early, sign up for Mashvisor now to find a top-performing rental property in any market of your choice.