Rental Property

Adding rental property to a real estate investment portfolio is a sound strategy for many investors. It offers benefits ranging from long-term cash flow the ability to profit short-term on investment property intended for “flipping.” 

With the current market climate, it’s a favorable time to purchase rental property as well. Due to tightened lending criteria, there is a more favorable pool of highly qualified renters and an abundance of properties to choose from in desirable areas. 

Rental property can cover a fairly wide gamut of options. Real estate investors often consider the following types of residential property to lend value to their overall strategy: 

• Single Family Homes
• Multi-family (i.e. four-plexes) 
• Apartment Buildings 
• Condominiums
• Commercial rental property (can include such things as retail and office locations or warehouses and mini-storages)

 
There are several criteria an investor should consider when evaluating a rental property. Aside from the initial cash required to acquire the property, top real estate analysis considerations are: 

• Historical rental rates in the area 
• Area demographic
• Cash flow potential
• Cash on cash return 
• Current real estate market climate (i.e. buyer’s market or seller’s market)

 
If you’re buying a rental property for long-term cash flow potential, you want to make sure that you’re able to cash flow on the property given the purchase price versus the amount of rent you can reasonably obtain each month. In other words, if your monthly mortgage note, taxes, insurance and other expenses are going to exceed the rental payments on an annual basis, your cash flow will be negative. However, you should consider the property’s equity and appreciation potential before steering away from a potential investment property because of a small negative cash flow. 

Investment property that is purchased for short-term hold or “flipping” can pay its own way in your portfolio if you can afford to break-even on them or even cash flow a bit negative. Rental rates may not keep pace with property appreciation rates in certain areas. 

This allows real estate investors to purchase properties in areas that may be on the rise and receive rental income for the short-term to cover a portion of the expenses. If you decide to enter a negative cash flow situation for the short term, make sure that you can endure a longer-term ownership in case of unanticipated market conditions. 

Given current market conditions, it’s also a good time to review foreclosure listings for potential rental properties. These properties can often be obtained at a substantial discount to fair market value and be found in areas where there is a desirable rental demographic with lower vacancy rates. 

You can use InvestorLoft’s patent-pending FinancialDynamix real estate analysis software to analyze any potential rental property listed on their site. To use this innovative and easy to use software, just register for your free account and then search their database for a wide variety of properties including those that could be potential cash-flowing rentals. When you find a property of interest, just click on the “Financials” tab. You’ll be able to review all of the criteria listed above for your potential rental property and the numbers will tell you if it’s a real estate investing scenario that makes sense for your cash flow and investment goals.

The information contained herein is for educational purposes only and not intended to replace the experience counsel of your real estate professional, attorney, tax professional or other advisor. Before initiating any transaction, InvestorLoft recommends you seek professional guidance and perform the necessary due diligence in order to make the best possible decisions for your specific situation.