How To Find The Most Profitable Long-Term Rentals

Dated: July 16 2020

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bedroom with window

Basically, long-term real estate investment involves purchasing a property only to rent it out to tenants for a long time. Since real estate investors do hold the property for a long period (at least for five years), the method is also referred to as buy and hold strategy. Among the starters and experienced fellows in the real estate investment, long-term rental investment (also known as the traditional rentals) is a common investment method. In this piece, we will discuss some useful tips on how to find the most profitable long-term rentals.

Select the right areas for investment

Mostly, you will find the best rental properties in middle-income and working-class neighborhoods. Some of the conditions with which you can identify such areas include good schools, excellent transportation system, multiple shopping centers, and areas where people care about their environments. Intense demands for long-term rentals are usually found in areas with such attributes. In most cases, you will find cheap investment properties in wrong locations; endeavor not to fall for it as it will cost you a lot in the long run. Bad neighborhoods are usually characterized with little chance of real estate appreciation, which may cost investors significantly over time. For this reason, choosing the right neighborhood is crucial to the success of real estate investment.

Find profitable Investment Properties

After getting a suitable location to invest in, you have to understand the kind of property which you would like to purchase. If you want, you may consider multi-family homes, a condo, single-family house or a townhouse. While most starters often find it challenging to choose a specific property to invest in, most experts have agreed that single-family home is the most recommendable for beginners. Advisably, long-term rentals should be started with small properties. Even though certain benefits often come with luxury property investment, it will cost a considerable amount of money to execute. In fact, you can experience a negative cash flow due to mortgage costs, cost of property maintenance, property taxes which may exceed the rental income. Eventually, you may have little to nothing to gain. Hence, you are best advised to stick with the single-family house as a starter.

Ensure that the figures make sense

Lastly, there is a need to evaluate the investment properties found to discover the most profitable traditional rentals. As a smart real estate investor, you should perform a rental property analysis to ensure that the properties will generate the expected income. For such analysis, you will need to collate the following data, then make a comparison.

Expenses: This covers insurance, interest, professional services, maintenance or repair, and taxes. An excellent real estate investor will assess the expenses monthly.

Cash flow: With this data, you may determine the profitability of the property in the long run. Depending on the rental incomes and expenses accrued, the cash flow may be positive or negative. The cash flow can be calculated by subtracting the expenses incurred from the gross rental income.

Vacancy rate: This information states the percentage of time in each year during which there is no occupant in the investment property. The vacancy rate is considered as an expense. Across the US, the average vacancy rate is 10-15%, which suggests that a rental unit is vacant for approximately one month. Any figure higher than the average rate is not advisable for long-term rentals.

Cap Rate: This metric shows the profitability of property in percentages. Cap rate reveals the amount which you are likely to make compared to the market value of the investment property. With the cap rate, it is assumed that rental property was purchased completely with cash, so it doesn’t consider its financing.

Cash-On-Cash Return: Unlike cap rate, this metric expresses the profitability of a property while considering the property’s financing source (All cash against mortgage). Hence, it shows the actual amount of money to be made compared to the overall amount of money invested in the property.

Final Thoughts

Finding a profitable long-term rental is not a complicated process as long as you can calculate the numbers for all the investment properties which you have in mind. Once you complete and compare the outcomes of your analysis, you will be able to determine the most profitable long-term rental to invest in.

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