When you become a real estate investor, you’ll notice that the real estate market offers many types of investment properties. One important investment decision is deciding which type of rental property to invest in – a single-family home, multi-family home, condo, townhouse, etc. As the goal of every real estate investor is to make money, real estate investors have to look for the most profitable investments in real estate. But with all the available types of rental properties, how do rental property investors identify those?
In this article, we will go through the important factors that make investment properties profitable. So, to learn how to identify the most profitable investments in real estate, keep reading!
Most Profitable Investments in Real Estate – Location
Location plays an important role when it comes to everything real estate! In fact, many real estate experts would say the three most important factors for a successful real estate investing career are location, location, and location. Why so? Simply because where the investment property is located affects everything related to it including the purchase price, operations costs and expenses, rental income, cash flow, and appreciation – all of which determine the profitability of the investment property. Thus, the most profitable investments in real estate are found in profitable locations.
Now you might be wondering “What makes certain locations profitable?”. One of the things that locations determine is how much rent a real estate investor can charge. If investment properties in your neighborhood are rented out for a certain price, then you’ll have to charge a rent in the same price range. Thus, profitable locations are those with a high rental income, good insurance, and reasonable property taxes. Real estate investors will find the most profitable investments in real estate in such locations.
Moreover, profitable locations are those in which demand for real estate investing is high. So, even if a real estate investor found the most profitable investments in real estate in a certain neighborhood, he/she won’t make money if there’s no demand for rental properties – i.e., no tenants to rent the investment property! Therefore, the most profitable investments in real estate are in locations that attract tenants. For instance, if your target tenants are families, look for safe locations with low crime rate, near schools, with job opportunities, and near public facilities. The most profitable investments in real estate in these locations are single-family homes since they attract your target tenants.
Click here to find the most profitable investments in real estate in your location of choice.
Most Profitable Investments in Real Estate – Positive Cash Flow
It goes without saying that the main reason why people enter the real estate investing business is to make money from investment properties – which is why property investors are always looking for the most profitable investments in real estate. In real estate investing, property investors make money from positive cash flow and appreciation – both of these will be discussed as features of most profitable investments in real estate.
Cash flow is simply the difference between the rental income and the expenses of the investment property. Cash flow could be positive or negative. Obviously, the most profitable investments in real estate are those generating positive cash flow. Negative cash flow means that the expenses exceed the rental income, which is the opposite of profitable.
To identify the most profitable investments in real estate which generate positive cash flow, property investors have to conduct a real estate market analysis, calculate all possible expenses (rental property taxes, property management fees, water and electricity bills, repairs, etc.) before making a purchase. In addition, after buying the investment property, real estate investors have to plan their finances accurately and spend wisely to ensure that the rental property will generate and maintain positive cash flow.
Related: Real Estate Investing 101: How to Find Positive Cash Flow Properties in the US Housing Market
Most Profitable Investments in Real Estate – Appreciation
As mentioned in the previous point, property investors make money from real estate investing from positive cash flow and appreciation. Appreciation is the increase in the investment property’s value over time. The most profitable investments in real estate are those with high expected appreciation. Why? Simply because as these investments properties increase in value over time, the real estate investor will be able to make money by selling them in the future for a price much higher than the initial purchase price.
In real estate investing, appreciation is linked to the location of the investment property. Thus, property investor will be able to find the most profitable investments in real estate in areas in which land is becoming limited, infrastructure development projects are being planned, and which are major business hubs, tourist attractions, and expecting major economic growth – these are the factors that ensure high appreciation.
Related: Real Estate Investing for Positive Cash Flow vs. Appreciation
Most Profitable Investments in Real Estate – Return on Investment
Since the main goal of every real estate investor is to make money from the rental property, it’s a no-brainer that the most profitable investments in real estate are those with a high return on investment (ROI). As a result, to determine if a rental property is profitable, rental property investors have to estimate the ROI by calculating the capitalization rate (cap rate, for short) and cash on cash return (CoC return). Here are the formulas to do so:
Cap Rate = Net Operating Income/Current Market Value
CoC Return = Annual NOI/Total Cash Invested
Related: Cap Rate versus Cash on Cash Return: Which One Is the Ultimate Metric to Measure ROI in Real Estate?
In terms of cap rate, anything above 10% is a profitable return on investment. As for CoC return, some consider 8-12% of return is good, while others would only recommend investment properties that promise 20% of ROI. Overall, real estate experts agree that the most profitable investments in real estate generate at least 15% ROI.
Mashvisor’s investment property calculator allows real estate investors to estimate the cap rate, cash on cash return, and positive cash flow of the investment property before buying it. In addition, this real estate investing tool provides real estate investors with readily calculated and accurate results regarding these metrics for thousands of investment properties across the US housing market to compare between different investment properties and identify the most profitable investments in real estate in order to make the best investing decisions!
Click here to analyze and find the best investment properties in your city and neighborhood of choice!
Most Profitable Investments in Real Estate – Investing Strategy
One important decision that real estate investors have to make is their investing strategy (or rental strategy): invest in traditional real estate properties (long-term rentals) or Airbnb real estate properties (short-term rentals). While some investments properties are only suitable for traditional real estate investing and others for Airbnb real estate investing, the most profitable investments in real estate are those suitable for both!
The real estate market is unstable. Everything from the local economy to the supply and demand in a certain market can change in the future and, thus, affect the optimal investing strategy. As a real estate investor, the best way to respond to these changes is by investing in a rental property that works as both a traditional and Airbnb rental. These are the most profitable investments in real estate because they allow rental property investors to switch from one investing strategy to the other without facing financial burdens or affecting their profits.
Related: Investing in UK Property
Most Profitable Investments in Real Estate – Final Thoughts
Now that you know how to identify the most profitable investments in real estate, it’s time to apply your knowledge and start investing! Mashvisor is an online platform which provides real estate investors with the best tools to search for and analyze thousands of investment properties across the US housing market.
Sing up for Mashvisor to find the most profitable investments in real estate, or click here to start out your 14-day free trial with Mashvisor. And don’t forget to visit Mashvisor’s blog section for more information on real estate investing!