Start Investing in Rental Properties the Right Way, No Better Time Than Now
By Space Coast Daily // October 25, 2018
As the property market continues to reel from the 2008 financial crisis, there is no better time to invest in rental properties than today.
One thing’s for sure, there will be a rise in rental inventory in the coming years. This is on account of increasing demand from both the millennial as well as “baby-boomer” markets.
This should provide the best conditions to invest in rental properties. For first-timers in this area, transitioning from single-family homes won’t be difficult, although there is a need to understand the dynamics when it comes to owning apartments of vacation rentals in the best cities.
If you aim to take advantage of the current climate in the rental property sector, it’s important to approach it the right way in order to get the best returns in effect.
Here are a few pointers you will need to know:
1. Outline your goals
Of course, careful planning is essential when investing in rental properties for the first time. So, the first thing you may want to do is to set goals. These will form the foundation of your investing strategy and allow you to identify any specific actions to support it.
Obviously, the first thing you will need to prioritize is cash flow, but this would be too broad to begin with. That being said, you will need to set up non-specific and specific goals. The former provides the motivation, while the latter provides the mechanics. By joining these two together, you are able to create a business plan that works!
2. Be familiar with the metrics
Whether you are focusing on apartment complexes or duplexes, it’s best to understand the numbers behind these rental properties.
Rental properties generate income unlike single-family homes. As such, they require a different set of metrics to calculate value. Net operating income or NOI is one such metric that tells you how much a property is earning on a quarterly or yearly basis. Rental properties that post a healthy NOI are essentially more profitable, hence promising consistent cash flow.
Another important metric to take note of is the capitalization rate, which is commonly known as the cap rate. To calculate the cap rate, simply divide the NOI by the sale price of a rental asset. A high cap rate would mean that a property has low value, hence a lower selling price. However, it can also mean that the property isn’t generating higher revenue compared to a similar property with a lower cap rate.
Understanding these metrics is crucial to developing your investing strategy—that and doing ample research about local markets.
3. Invest in emerging markets
To put it simply, emerging markets are places where there’s increasing job growth, an influx of private and public investment, and generally faster economic growth.
If you aim for great cash flow, it’s best to focus on these emerging markets, since they usually indicate higher demand for rental housing. In this case, it’s important to stay up to date by working with a realtor or forge connections with insiders in these local economies. This way, you will be able to find rental properties that promise greater returns.
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