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Investing in rental properties is an effective strategy for individuals looking to build wealth over time. A good rental property is an asset that provides owners with regular monthly income and they can grow in value over time with appreciation, making them very desirable investments. However in today’s competitive real estate market, low inventory and high rates make finding profitable rental investments harder than ever. In order to find good properties you will need to know what to look for, where to look, and which metrics to consider. Continue reading as we cover the key techniques used for analyzing and identifying lucrative rental property investments.
Market Analysis
Before you start looking at properties, you should have a good understanding of the markets you’re looking to invest in. Know that every market will be different, and some will be more profitable than others. By taking a look at key factors like job growth, property values, and population trends you can get a better idea of a market’s health. Due diligence always pays off in real estate, and taking the time to research a variety of markets will help you avoid less profitable investments.
Gathering Property Information
Once you have selected a good market you can begin the search for a property. For any listings that pique your interest, you should take a look at the basic property information to determine whether it fits your criteria. The size and number of units will depend on your personal investment goals, but you would do better to avoid large multifamily properties if you aren’t experienced with managing rentals. From here, you can compare the listing price to those of similar properties in the same area to determine if it’s priced appropriately. Knowing fair market value will allow you to secure a better deal in the negotiation process.
Key Metrics for Property Analysis
There are some key metrics you can use to calculate exactly how profitable an investment property will be, allowing you to easily compare various options.
- Cash Flow: This is how much money the property generates for owners each month after all related monthly expenses are paid.
- Net Operating Income (NOI): This is found by taking the property’s gross income for the year and subtracting all operating expenses.
- Capitalization Rate: Also called cap rate. Take the property’s NOI and divide it by the purchase price. This tells you how many years it will take for the investment to break even, and is a useful way of determining a property’s return on investment.
A healthy cap rate will fall roughly in the 5-10% range. A lower cap rate means less profitability, but a cap rate that is too high indicates a very risky investment.
Due Diligence
You will need to take time to perform due diligence before signing any paperwork and moving forward with a purchase. Taking the time to properly examine a home can prevent you from making a bad investment decision. Consider hiring a professional home inspector to uncover any hidden issues that you may not have been able to spot yourself. Certain fixes, like those from flood damage or a cracking foundation, are very costly and will ruin your investment’s returns. By identifying these issues beforehand, you may be able to negotiate a more fair price or just decide to avoid the investment entirely.
This step also involves properly identifying the risk associated with the area a property is located in. By selecting a good market early, you may be able to avoid some risk, but the neighborhood itself is also a factor to consider. A desirable area is one that is safe, with access to good schools and other amenities like stores or restaurants. This will determine whether people are moving to or away from the location, and can affect how difficult it will be to fill vacancies.
Negotiating Based on Analysis
Hopefully, if you have taken the time to analyze a deal it will put you in a favorable position for negotiations. Given market conditions, you may be competing with multiple buyers for any given property. Having more knowledge will help you find those hidden gems and set you up for profitability. You may also be able to use the information gained from property inspection to your advantage in securing a better deal. Be firm but fair, and know that a back-and-forth dialogue is a natural part of negotiations. When you understand your position and are armed with knowledge, it will allow you to work towards a mutually favorable agreement.
RCN Capital
The easiest way to save on rental property financing is to find a trusted lender that can get you the best leverages and rates. RCN Capital lends to real estate professionals, commercial contractors, developers & small business owners across the nation. We provide short-term fix & flip financing, long-term rental financing, and new construction financing for real estate investors. RCN Capital also has flexible and competitive loan options available. Are you looking to purchase or refinance a long-term rental property? Connect with us today.