Updated November 2, 2021
Real estate is promising to remain a top investment strategy for wealth building. If you are looking for a way to earn money in the new year, you should 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?
Location is undoubtedly the most important determinant of return on investment for rental properties. The market where your prospective rental property is located will determine its purchase price, the rental demand, and occupancy rate.
These three factors 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.
Despite 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 the location 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.
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 compromise between rental demand and rental rates.
Last but not least, you should consider locations that 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 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 passively once you decide to sell your investment property.
Another one of the characteristics of the best rental properties and the 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.
Beginners need 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 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.
You should also conduct a comparative market analysis of the neighborhood where you are planning to invest in, knowing the fair market value of the type of property you intend to buy. Look at a few properties of the same type and size that sold in the past couple of months and 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.
As a beginner real estate investor, don’t get tempted into buying a large, luxurious, sophisticated property. You will run into several problems.
Thus, as a first-time investor, you should stick to a property that is easy to rent out, straightforward to manage, cheap to maintain, and quick to sell.
Another one of the top characteristics 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 in a good general state and don’t exhibit any significant problems such as the foundation, roofing, etc.
Buying an investment property in good condition gives you two major benefits as a beginner.
It’s time to start planning for your first rental property to take advantage of the numerous benefits this real estate strategy provides. Just focus on the 4 top characteristics of the best rental properties 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.