When investing in real estate, the most common type of investment properties that you will come across are rental properties.
A rental property investment can be a very lucrative way for making profits or generating a passive income for you. There are a number of rental property investment options that are available to real estate investors. So, how can you decide on the best rental property investment strategy for you?
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The best way for me to help you decide on the optimal rental strategy for you to use is to help you learn about the different rental property investment options, and what the advantages and disadvantages are when using each of these strategies.
Rental Properties – What are they?
Before getting into the different types of rental properties, I will first explain what is meant by rental properties. These are investment properties that a real estate investor purchases with the purpose of renting them out to tenants in exchange for rent. Rental properties are the most common and oldest type of investment properties that people have used for profits throughout the ages.
Related: The 6 Hidden Costs of Owning a Rental Property
Traditionally, there was only one type of rental properties that people would invest in. Nowadays, however, there are new and more creative ways that real estate investors are utilizing to profit from rental properties.
Below are the three most common types of rental properties that you can invest in and start making a passive rental income when investing in real estate.
Rental Property Investment – Long-term (Traditional) Rentals
Traditional long-term rentals are the most common and ancient type of rental properties in the world of real estate. Traditional rentals are investment properties that are rented out to tenants for long periods of time, which can go from several months to several years.
The biggest advantage of long-term rentals is stability. Due to the long-term of the lease agreement, finding a tenant for your traditional rental property means that you won’t have to search for new tenants until the duration of the lease is over, which can last several years.
This rental strategy is best used with buy-and-hold properties that have a high potential to appreciate as it would allow you to make a rental income or a passive income from the property as long as it is being rented out, and after a number of years, the property will have appreciated and you can sell it for an even larger profit.
Another major benefit of traditional rentals and rental properties, in general, is that you can use the rental income that you get from the tenant to pay off any mortgage payments on the property. This can be used to effectively let your tenants pay off the mortgage on the property, and any money left over will be going straight into your pockets.
Lastly, one of the advantages of owning a traditional rental property is that it is much easier to manage (if you haven’t opted in for hiring a professional property management company) because there will be less tenant turnover, and the tenants staying in the property will consider it as a home and will be less inclined to cause any damage to the property.
Rental Property Investment – Short-term (Airbnb/VRBO) Rentals
Short-term rental properties are a relatively new concept in real estate investing that was made popular by companies such as Airbnb or VRBO.
Short-term rentals are investment properties that can be rented out for short periods of time, typically on a nightly or a weekly basis. Most short-term rentals are listed and managed through websites such as Airbnb and VRBO, both of which are global companies, allowing you to invest in any rental property anywhere in the world and start enjoying the passive income that it will generate.
The biggest advantage of short-term rentals is their very high potential for profits.
In many areas, short-term rentals can generate much higher profits than any other type of rental property because people are willing to pay more for a nightly or a weekly stay than they would for a long-term stay.
Related: Where Can You Find Airbnb Properties for Sale?
Short-term rentals, however, come with a very large disadvantage depending on the area that you’re investing in. In several cities around the world, short-term or Airbnb rentals are illegal or have severe laws and regulations to restrict their performance.
In some areas, for example, Airbnb rentals can only be rented out for a limited time each year, and the owner will have to actually live in the property for a set duration in order to be able to rent it out on Airbnb.
Before purchasing an investment property for renting it out on Airbnb, make sure to do your research and learn about all the laws and regulations related to short-term rentals in the city that you’re investing in.
Rental Property Investment – Home-sharing
Home-sharing is a strategy that revolves around renting out a room or a part of your own primary residence for an extra rental income. This strategy is gaining more popularity, especially among younger investors and college students who are looking for ways to make some cash from properties that they already own and live in.
The biggest advantage of home-sharing is that you’ll be making an extra income without having to pay any extra costs or a down payment for purchasing a new property.
The biggest disadvantage, however, is that you will have to share your own primary residence with a tenant. Although in many cases, and especially between college students, this tenant can be a close friend of yours or a relative, which can make it easier to endure than having to share your own personal space with a complete stranger.
Related: Owning a Rental Property: Hearing From an Investor
Bottom Line
All of these rental property investment options can be great choices for making profits or a passive income.
Before deciding on a rental strategy, make sure to consider all of the available options to choose the optimal rental strategy and achieve the goals that you were hoping for.
To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.
Need help locating the perfect investment property to purchase and rent out either traditionally or through Airbnb? Mashvisor can help you analyze each investment opportunity and determine the amount of profits that can be realized from investing in it.