Is Rental Property Considered a Good Investment - Part 1
With the massive rise in Air-bnb and similar services of the last decade, many more people are dipping their toe in the rental property market. Is this specific to vacation rentals or can any rental property be the right investment tool?
There are unique features about rental properties that are not shared with other investment tools. As an owner, you have direct control of your investment and how it is managed.
Consider also that real estate has always been considered one of the most solid investment tools; a reliable stable return on investment while also being our primary residence. But not everyone can become a homeowner, or not right away.
So, real estate is stable primarily because all people need a place to live. They will need to rent from someone.
With the premise that rental properties are stable as safe investments, that will provide you with income based on that demand, they are also filled with unusual requirements that need your attention regularly, and your intervention on occasion.
You aren’t just going to sit back and wait for the flow of that return on your investment. And, some of these requirements need to be considered in advance, to prevent your investment from resulting in a financial mistake.
How to Identify a Great Investment Property
It seems a simple mathematical task to decide whether a rental property is considered a good investment or not. As with other investments, there will be factors that can influence and change the profitability of this kind of investment, that is unique to this investment tool. All investors typically make such decisions based on the potential return on investment (ROI).
- You will have options about what type of real estate to buy and where to buy that will affect your ROI.
- You will need to know what costs you’ll incur before, during and after you buy. We have suggestions on how to determine if your costs will more likely result in the best ROI.
What To Look At
Let’s first consider some of the kinds of real estate investment choices out there.
First on our list of options are vacation rentals; these are short-term rentals and come in all shapes and sizes, mostly in highly desirable, high traffic destinations.
You may want short-term rentals rented as frequently as possible between your short-term ‘tenants.’ Vacation rentals eliminate the location concerns, as they are usually in areas with a certain demand already established.
They also have an important difference from other rentals; one that will occur far more often than with long-term rentals. Their potential for many and possibly long gaps between tenants existed even before the current travel restrictions. Those potential gaps will mean you will need to increase the rent, to close those potential income gaps. Keep reading to find a great rule-of-thumb to determine how your rental income should be calculated!
Next on our list are the classic long term rentals. They too come in all shapes and sizes. And also similar to short-terms, some are turnkey properties and others will require time, effort and/or money to prepare (and repair) to make it ready for a tenant (and produce income). That time spent becomes an important consideration as your property cannot bring income, but you will still have to carry its financial burden.
Some rental properties will require this extra time and expense, to varying degrees, even between tenants. When considering your first-ever rental property, you may want to go for a turnkey property first, that way, you have the best conditions to start renting immediately.
Both short and long term rental properties vary from single-family homes, multi-family units (duplex, triplex, apartment buildings), commercial space, industrial space, and farmland. Each has its own set of special needs and considerations.
It is recommended that for those on their first rental property venture, a single-family home, especially one you have relatively easy access to, is your simplest option. It has the best chance for financing, if you need that, and will come with one set of stable tenants at a time.
Where To Look
You’ve probably heard the saying that in buying real estate, it’s all about location, location, location! That’s still true, but as a rental property owner, your criteria for what makes a good location will depend on the type of real estate market, and the kind of tenant you want.
For instance, If you’re interested in ideal single-family home-rental locations, you’ll need to identify the criteria important to that kind of tenant. They look for proximity to good commuting roads and highways, or public transit, with good elementary schools in the area. Even post-pandemic, many tenants will continue to travel to their workplace.
Be aware of negative conditions in the real estate market you choose so you aren’t caught with an empty rental. Or at least, to guide your negotiation in your purchase. If you come across a sudden surplus of below-market home prices in an area, this might result from a recently-closed factory in the area or long-term construction disruptions. Conversely, you may also learn that new public transit will become available in such an area, so your long-term prospects for that area will make it worth a second look to get into that market before it peaks.
Check back soon for part 2 of our rental series!
