Each month, the passive income I receive from rental properties reminds me why investing in real estate is worth it. When I was looking to leave my full-time, corporate job and become my own boss, there were many investment avenues I considered pursuing, but buying rental property turned out to be the best decision for me.
If you’re considering investing in real estate, buying rental property could be a smart move but you’ll first want to understand rental market trends, know how to choose the right location, and understand how to calculate your potential ROI.
Understanding Rental Market Trends
The rental market is a $169 billion per year industry. In 2020, there were approximately 43 million rental housing units in the United States. This has been holding steady for about six years, but represents a plateau in a line skyrocketing upwards since 1975. Why? Properties have become more expensive and wages haven’t risen commensurately. This has led to more people wanting to rent before buying—or never buy at all.
So, while there are fluctuations in factors such as pricing and stock across different states and cities, in general, rental properties can potentially be good investments. Trends in remote working have shown employees that they can do their jobs from anywhere. It’s freed them up to try living in a new city for six months or a year, before moving to another—making the rental market boom.
Rental properties can be good investments if they’re in line with your career goals. As a landlord, you have to understand all the legal ins and outs, maintain the property quality to ensure they meet all codes and regulations, and keep your tenants happy. Though, it is important to know that there are risks involved, such as not being able to find renters.
But risk aside, there are reasons why investors are buying rental property over making other investments. The best way to ameliorate the risks is to understand the market.
How to Choose the Right Location for Potential Tenants
While timing is one factor to consider when buying a rental property, location is likely the most important. Not every property will be in an ideal area to attract renters. To determine if a location is right for buying a rental property, you’ll need to have an ideal tenant in mind. Who is looking for homes in this neighborhood?
Consider the following tenants and their potential rental location needs:
- College students: They’ll likely want to rent-by-the-room in an area close to their college campus.
- Families with children: They’ll likely want to live within a top-rated school district and in a safe area within close proximity to shops and parks.
- Business professionals: They’ll likely prefer transportation ease, being close to public transportation and having easy access to highways.
A property’s location also has the ability to determine how much you can charge for rent. You’ll want to assess the average rent in the area and determine how much you can charge to see an ROI.
Calculating Costs and Potential ROI
Speaking of ROI…
Passive income from a rental property allows you to pay off any loans from the initial investment, maintain upkeep, and, hopefully, have extra left over.
How can this be determined before buying a rental property? Well, I’m glad you asked. There’s a simple formula for understanding if a property is worth it. It’s called the capitalization rate (or cap rate.
The cap rate is the most common metric for measuring the value of a potential real estate investment. It’s a calculation of the returns the property will produce each year, or net operating income (NOI) in relation to its operational costs.
Here’s the formula:
Net Operating Income / Current Market Value = Capitalization Rate
There are many variables to consider when calculating the cap rate, but doing so can be crucial to understanding if buying a rental property is a good investment. It’s best to consult with a professional financial advisor to determine if it’s a smart financial decision. They’ll likely be able to tell you about any potential tax benefits that can add to your bottom line.
Establish the Right Price(s)
About a decade ago, I invested in an independently owned and operated HomeVestors® franchise. That’s when my rental property business went from good to great. Why? Well for one, I was able to take advantage of their unmatched national marketing campaigns, which led to quality leads. I received proprietary real estate tools and technology to make evaluations easier and more accurate. And, by using these resources, I saved a lot of time.
As a franchisee, I benefit from the nationally-known We Buy Ugly Houses® marketing campaign. When someone wants to sell fast for cash, they call HomeVestors, and I get the lead. That saves me a lot of time and effort. And sometimes, these are houses with a lot of potential, and that are ready (or nearly ready with a little work) to rent out. I just have to do the evaluation, and make my decision.
It’s a good time to start buying rental property. And it’s an even greater time to give yourself the advantage of plugging into a powerful network of professionals who will give you the training you need to maximize your investment.
If you’re considering buying rental property, request information about becoming a franchisee today.