CREATING A RENTAL PROPERTY INVESTMENT STRATEGY
Rental properties can be a fantastic type of passive income. They allow you to take some measure of control over your financial future by investing in properties that are less volatile than the stock market but still provide a great return on investment.
Before you start investing, though, having a strong rental property investment strategy is a must. By doing so, you'll allow yourself a chance to maximize your future profits and minimize your risks. If you can get the help of seasoned property investment managers, you'll stand an even better chance of being successful.
To maximize the potential of your strategy, you'll need some important information on a few key areas:
Find Out How Much You Can Rent Your Home For?
TYPES OF RENTAL INVESTMENT PROPERTIES
There are several different types of rental investment properties.
Depending on your rental property investment strategy, some might be a better fit for you than others.
One of the most common types of rental property, the single family unit has quite a few benefits. These include:
- Typically lower initial investment costs
- Longer leases and less roll-over
- Reasonable maintenance costs
As you might imagine, though, there are some very real downsides to renting out single family homes. These include:
- Potential lost revenue between renters
- Higher per-unit price
- More demanding renters
Multi-family units can also be the key to a successful property investment strategy. The benefits to these units include:
- Higher overall payouts
- Less loss revenure from tenant move-out
- Lower per unit investment cost
No investment property is perfect. As such, you might encounter the following problems if you invest in multi-family units:
- More tenant turnover
- More capital needed for the inital investment
- More maintenance
Short-term rentals have become incredibly popular over the last few years. The benefits of these properties include:
- High potential profits
- Lower overall maintenance fees
- Variable pricing to take advantage of trends
There are, however, significant downsides to trying this type of investment as well. These include:
- Liability Issues
- Potentially lengthy vacancies
- Changing regulations
Condos and townhomes can be a good middle ground between multifamily units and single family homes. The benefits of this type of rental include:
- Lower maintence costs
- HOA fees prevent major changes in the neighborhood
- Typically brings a higher rental rate
As with other types of rental units, there are downsides to renting out condos and townhomes. These include:
- Condo Fees can and will rise, often unpredictably
- Potential future restrictions on leasing
- Potential monetary loss if there's a break between tenants
Section 8 Housing, which is government subsidized, can be a fantastic option for some would-be landlords. It's an ideal way to get a constant stream of renters who are usually quite good about paying rent on time. The benefits include:
- Tenants tend to pay on-time
- Housing is advertised for free on government websites
- A fairly constant stream of pre-screened tenants
There are, of course, also downsides to renting out Section 8 housing. These include:
- No security deposits
- Can discourage non-Section 8 tenants from moving in
- Frequent government inspections
IF YOU'RE READY TO BUY A RENTAL PROPERTY, DON'T DELAY.
You can schedule a free consultation with CENTURY21 Northwest's Property Management Team and they will generate a customized list of the ten best investment properties for your needs.
SHOULD I BUY A NEW HOME AND RENT OUT MY CURRENT PROPERTY?
This is a very common strategy among investors, one that tends to have some fairly reasonable benefits. After all, moving into a new home gives your family the benefit of moving into a (theoretically) better space while still allowing you to rent out a known property. You may not have to factor the cost of paying a mortgage into turning a profit on your old home and even if you do, the older property's mortgage may be able to be paid off more quickly.
While chaining properties like this is common, it's not without its risks.
If your old property can't fetch a good price, you'll be stuck with two mortgages. You'll also be in the position of trying to rent out a less attractive home when other homes (like the one you just bought) are still on the market.
Done correctly, though, you'll be able to use your current property as a rung in the ladder of success.
RENTAL INVESTMENT PROPERTIES: CAP RATE AND RISK
The capitalization rate is one of the most important factors to consider when choosing a rental property. Your cap rate is a shorthand that can tell you whether or not a potential rental property is worth the risk of investment. There are some risks associated with rental properties, ranging from potential downturns in the rental sector to liability on the part of the landlord.
Everything from rising property tax rates to changes in local employment statistics will impact the homeowner's ability to make money off of the property, so having a realistic idea of the cap rate will help you to determine if a given property is worth the risks.
HOW DO YOU CALCULATE CAP RATE ON A RENTAL PROPERTY
Calculating your cap rate on a rental property involves doing a bit of math. You'll need access to a few pieces of information to get a reliable cap rate statement. First, you'll need the gross annual rent for the home. Next, you'll need the gross annual expenses - utilities, maintenance, etc. You'll subtract the latter from the former to get your net income. Once you've got your net income, you divide that number by the current market value (or purchase price, if you're buying the property) of the home.
WHAT IS A GOOD CAP RATE FOR RENTAL PROPERTY?
As you can imagine, there's a fairly wide range of cap rates that work for different investors. Generally speaking, though, most in the real estate world would suggest that you find a cap rate somewhere between four and twelve percent. At four percent you do run the risk of having any major problems with the home erasing your profits, though - the higher you are able to get the cap rate, the better.
WHAT IS THE AVERAGE CAP RATE ON INVESTMENT PROPERTY?
As an investor, it's important to remember that the average cap rate isn't always that great. In Arizona, you're looking at an average cap rate of around six percent. In fact, you'll be looking at even lower rates anywhere that have an HOA or added fees. It's important to remember that not every home you find will be worth your investment.
This is why it’s so important to team with an experienced property manager and real estate brokerage who have the experience to find properties with higher than average cap rates.
TYPICAL CAP RATES FOR RENTAL PROPERTIES BY CITY IN THE METRO PHOENIX AREA
WHY SHOULD I INVEST IN A RENTAL PROPERTY IN THE PHOENIX AREA?
Phoenix is a fantastic area for rental property investment. It not only has a growing population but a growing number of businesses moving to the area. In fact, Phoenix added over fifty-one thousand jobs last year, with an unemployment rate among the lowest in the nation. Real estate prices are slowing down a bit, at a rate of just under three percent, making it easier than ever to afford a property - and with a decrease in construction in new properties in the state, competition for housing will be as fierce as ever.
If you're looking for an area with a reasonably high median rent, a working population and a great deal of growth potential, Phoenix is a great place to start.
WHICH FEATURES AND AMENITIES ARE RENTERS LOOKING FOR IN THE PHOENIX AREA?
Quite a few people who move to the Phoenix area do so because of the area's natural beauty. As such, any home that has a good view of the desert - or that can replicate a desert landscape - is in high demand. Both landscaping and location matter quite a bit here, driving up the curb appeal of homes and helping to secure more interest.
Tile is quite important in a place like Phoenix. Not only does it look great, but it's also quite functional. In an area where cooling is often at a premium, being able to step barefoot onto cool tiles is vital. Tiled floors both inside and out can be major selling points.
Surprisingly, many Phoenix residents don't want to deal with a pool. Not only can water be problematic during dryer seasons, but pools require a great deal of maintenance. That, coupled with the higher insurance rates, makes renters a bit skittish around pools.
A lot of bedrooms
More bedrooms are always better for renters. It makes the house feel less like an apartment and allows families to grow into a space. If you've got the most bedrooms on the block, you're sure to be able to rent the house for more.
While gated communities are popular, most renters don't like HOAs. It's not just the fees, which tend to drive up rent prices, that matter here - it's the idea that someone else is controlling how your live in your home. Between overzealous enforcement and the reputation of HOAs in general, renters are usually willing to pay a premium to get away from HOAs.
While Phoenix's population is starting to skew younger, it's still a major destination for retirees. Having a place to park an RV - and an easy way to access the vehicle - is a major amenity. If you can provide an RV gate, you'll find it easier to attract tenants who are looking to travel.
CAPITAL GAINS TAX ON REAL ESTATE INVESTMENT PROPERTY
Capital gains taxes are, simply put, the taxes that you pay on the profits you make on major investments. For those who have rental properties, capital gains taxes are assessed when you sell the property. These taxes are significantly higher than what you'd pay when you are making a profit on the rental itself, and they must be factored into your decisions when it comes time to flip the property.
HOW DO I AVOID PAYING CAPTIAL GAINS TAX ON RENTAL PROPERTY?
As a word of warning, this is neither accounting nor legal advice. If you need that kind of advice, it's recommended that you speak with CENTURY 21 Northwest's team of property management experts. There are, however, very common strategies used to help rental property owners to avoid a high tax burden when selling their properties.
There are a few different strategies you can use to offset the taxes. If you have other properties or investments you don't mind selling at a loss, you can undertake a process called tax loss harvesting.
If you aren't planning to sell for a few years and don't want to rent out the property any longer, you can move into the home for two years and claim an exemption. You can even roll your investment into a new property through a “like kind exchange.”
WHAT IS A 1031 EXCHANGE?
A 1031 Exchange is an instrument by which a property investor can roll his or her profits from one investment into another. It's important that this is a "like kind" exchange and that both properties are located in the United States. Beyond that, it requires that you sell one investment and roll that money into a second investment. This process can be complex, so it's important to speak with our real estate experts about how these exchanges work and the timeline to which you must adhere.
WHY YOU NEED TO WORK WITH A REALTOR WITH PROPERTY INVESTMENT EXPERIENCE.
As you might imagine, there are many reasons to work with a realtor who has property investment experience. He or she not only knows the types of properties that tend to attract renters but how to position yourself in a way that will help to maximize your profits.
Realtors know the ins and outs of property management, rental agreements, and investing and can help to ensure that you're always working towards a reasonably profitable goal. Whether you need to know about local regulations or you need legal advice, a realtor with property investment experience can point you in the right direction.