Real estate is promising to remain a top investment strategy in 2020. If you are looking for a way to make money in the new year and beyond, you should definitely consider investing in rental properties. However, just as any other beginning, starting to invest in real estate sounds intimidating. Where do you even start? What property do you buy? In which market? To help out those of you who aspire to become successful real estate investors, we’ve put together a list of the 4 most important traits of your first rental property to make it a profitable one.
1. Located in a Top Real Estate Market
Location is, no doubt, the most important determinant of return on investment for rental properties. The market where your future rental property is located will determine its purchase price, the rental demand and occupancy rate which it can attract, the rental income you can expect, and ultimately your profitability, whether you look at cash on cash return or cap rate. The best locations for traditional (long-term) rental properties are characterized by a strong economy growing at an above-average rate, positive population growth, and reasonable property prices. In spite of what you might have heard from other real estate investors, as a beginner, you should consider the option of investing out of state, especially if you live in a hot, overpriced market.
Other factors related to location which you should pay attention to when buying your first rental property include proximity to transportation, amenities, public infrastructure, and shopping opportunities. It is much easier to find good tenants for a house located next to a subway station, a good school, and grocery stores than not. In addition, as a new investor, you should aim to buy a property in a market with a moderate price to rent ratio. If you are unaware of this term, this is simply the average property price in a market divided by the average annual rent. Cities and neighborhoods with a moderate price to rent ratio – between 16 and 20 – allow investors to find a compromise between rental demand and rental rates.
Last but not least, you should consider locations which benefit from a high real estate appreciation. One of the most important advantages of investing in rental properties over other investment strategies is that you get to make money both in the short term – through rental income – and the long run – through appreciation. Thus, you should focus your real estate market search on places that are expected to experience above-average natural appreciation in the next few years and decades. In this way, you will make a significant amount of money absolutely passively once you decide to sell your investment property.
2. Fairly and Reasonably Priced
Another major determinant of return on investment in real estate is the price at which you buy a rental property. After all, the purchase price is present in all return on investment metrics, in one form or another. Generally speaking, the lower the property price, the higher your return, all else equal.
For beginners, it is particularly important to find a modestly priced property as they rarely have a lot of savings and face fewer financing options. Cheaper real estate property is easier to finance, which means that you will feel less pressure from lenders as a first-time investor.
Before starting to search for investment properties for sale, sit down and make a budget. Calculate how much exactly you can afford to spend on an investment property and figure out a financing plan. Once you start looking at real estate listings, make sure to stick to your budget no matter what. That’s the only way to avoid a default on your mortgage and to assure a profitable investment.
In addition, you should conduct a comparative market analysis of the neighborhood where you are planning to invest in order to know the fair market value of the type of property that you intend to buy. Look at a few properties of the same type and size which sold in the past couple of months as well as at some current listings. This will give you a good idea of how much it makes sense to pay for your first rental property. Remember that overpaying will bite into your profit.
3. Small and Simple
As a beginner real estate investor, don’t get tempted into buying a large, luxurious, sophisticated property. You will run into a number of problems. First of all, such properties cost a lot more which will mess up your financial plan and pose financing challenges. Second, luxury real estate is a limited niche which attracts only a handful of renters, so renting out your property will be significantly more difficult. Third, large and cutting-edge properties are harder to manage, and repairs and fixes cost a lot. Finally, once you decide to sell your first rental property, it will be more challenging to find a buyer for a luxury real estate property.
Thus, as a first-time investor, you should stick to a property which is easy to rent out, straightforward to manage, cheap to maintain, and quick to sell.
4. In a Good State
Another top characteristic of the best rental properties for beginners is the current condition of the listing. Unless you are going for a fix and flip, you should look for properties which are in a good general state and which don’t exhibit any major problems such as the foundation, the roofing, etc. Buying an investment property in a good condition gives you two major benefits as a beginner. First, you don’t need to spend your limited financial resources on fixes and repairs, which can also be very time-consuming and complicated for a non-professional. Second, buying such a property means that you can start renting it out immediately, and the sooner you start renting out, the sooner you will begin to make money from rental investing.
2020 is looking great for investing in rental properties. To take advantage of the numerous benefits which this real estate strategy provides, it’s time to start planning for your first rental property. Just focus on the 4 top traits described above, and you will be on the path to a successful real estate investing career.
About the Author: Daniela Andreevska is Marketing Director at Mashvisor, a real estate analytics tool that helps real estate investors quickly find traditional and Airbnb investment properties. A research process that’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.