Is there ever a time when buying rental income properties doesn't make sense? With mortgage rates falling and the economy potentially picking up in the second half of 2024, investors might be considering purchasing rental properties. Additionally, mortgage refinancing emergencies could provide more opportunities to buy homes, condos, and apartments. Industry experts predict a surge in listings in 2024, making it an opportune time for institutional investors and real estate enthusiasts to search for investible rental properties.
The best type of rental property varies depending on your budget and investment goals. Different price points are available through mixed-use buildings, student housing, multifamily blocks, mobile homes, and homes for Airbnb rentals. However, it's crucial to find the best properties in desirable neighborhoods and cities with low tax rates. As more people move from high-tax states, lower-priced opportunities may emerge in other locations.
Fundamentals to Find that Great Property
Buying rental properties involves assessing the price-to-rent ratio and selecting properties that can be financed and maintained cost-effectively. While owning a mix of properties across a city or state might seem manageable, the logistical challenges can be overwhelming. However, digital property management software can significantly reduce costs, improve cash flow, and help landlords avoid poor tenant selection. It assists in identifying high-performing properties and finding suitable tenants.
When analyzing rental properties, it's essential to consider the type and quality of each property. Inspectors and realtors can offer objective insights into the properties and neighborhoods. Some critical features of investible properties include a great neighborhood with conscientious neighbors, low property taxes, schools nearby, low crime rates, local amenities, high occupancy rates, low rental listings, a lower price-to-rent ratio, and fixer-uppers that won't require substantial financing.
The good news for investors is that rents are rising in certain cities, and the job market remains robust with consistent wages.
It's a matter of finding properties that can be renovated or cleaned up to generate increased capital gains, reliable cash flow, positive yields, and sustainable tenants. For some buyers with the necessary skills, investing in run-down properties in reasonable neighborhoods might produce the best results.
How to Evaluate Opportunity
The focus in 2023 is on rental income strategies, as capital appreciation is expected to be weak to negative for the first half of the year. However, economists anticipate some economic recovery in the next five years. Rental properties are in high demand, with offices being converted into residential units. Therefore, investors should concentrate on properties that promise the best rent yields.
How to Assess Rental Property Performance Potential
While determining the best type of rental property to buy is important, it's equally crucial to evaluate a property's Return on Investment (ROI) or Gross Rent Multiplier (GRM). The GRM is the ratio of a property's market value to its annual gross rental income. It helps investors avoid properties that won't generate sufficient returns. Once you have the GRM evaluation, you can start looking for great houses, apartments, condos, or townhomes that align with your investment goals.
Which Type of Property to Buy?
The type of property to buy depends on rental demand and market trends. Rental houses are always in high demand due to the severe shortage. Some investors are considering manufactured modular homes as worthy rental investments. However, houses can have lower GRMs compared to apartments, condos, and multifamily buildings. High rent prices are only feasible in the best neighborhoods of upward-trending cities.
When considering houses, factors such as the number of bedrooms and bathrooms, lot size, square footage, rentable units within the property, yard space, and the condition of roof, plumbing, wiring, HVAC, flooring, windows, and appliances should be taken into account.
Other Buying Considerations
Even if a property has desirable qualities, other factors come into play. These include the best cities to buy in, proximity to retail, public transit, and schools, neighborhood quality, utility costs, tax districts, and rent laws in certain districts. After considering your finances, risk tolerance, property management skills, and the current rental housing market, you may decide differently than your initial plan.
2 Bedroom Houses and Large Low Rise Condos
There is a wide range of rental property types to choose from, such as apartments, condos, townhouses, semi-detached houses, detached houses, and student housing apartments. However, 2 bedroom houses and low rise condos have been the most sought-after rental types. The number of bedrooms is a key factor, with some Millennials demanding more than two bedrooms. Higher-priced properties with three or four bedrooms may be ideal if the purchase price is reasonable. However, finding renters at high prices might be challenging.
If you plan to live in the rental property you buy, consider how the building is divided and how many units it can accommodate. Some large old houses have been divided into as many as six units, while modern duplexes may have basement apartments. Crunching the numbers for each option may reveal surprising results.
Which Do Institutional Investors Buy?
Corporate institutional buyers are active in the single-family and multifamily markets and often focus on condo and multifamily developments due to their ability to buy more units, generate higher rent revenues, and enjoy easier management. However, they have also been buying houses. Cash flow is their primary concern, which is why they prefer apartments and condos in working-class neighborhoods.
Individual investors, on the other hand, may prefer condos and houses in affordable neighborhoods where they can manage the properties themselves and save on costs. Therefore, there is competition among investors with different preferences.
Benefits and Pitfalls of Different Properties
Let's examine the benefits and potential pitfalls of various property types:
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Multifamily Apartments: Owning multiple apartments in the same building can lead to lower management costs. However, high homeowner association (HOA) fees can be a disadvantage. Some investors have solved this issue by owning the HOA or community association.
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Single Family Houses: Detached houses have appreciated strongly in recent years, making them potentially expensive investments. However, there is a high demand for houses. Single-family homes are typically bought for price appreciation, although this might not be significant in 2023/2024. Nonetheless, the National Association of Realtors expects house prices to increase by 5% in 2023.
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Student Housing: Despite the potential challenges due to government policies on immigration and free trade, student housing has experienced significant growth. The lack of student housing supply and the ability to accommodate more beds per unit make student housing a lucrative investment.
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Hi Rise vs Low Rise Apartments: In a market with low supply, apartments located in buildings over four stories might be worth considering. These high-rise units are often more affordable and located near employment hubs, transit, and amenities.
Low-rise apartments, up to four stories, are in high demand and may experience strong rent price growth. They are easier to maintain and renovate compared to condos located 25 to 60 floors up. Additionally, having more units can lead to lower property management costs and better financing options.
In property markets such as San Jose, Toronto, Los Angeles, Miami, New Jersey, Chicago, or New York, investments are more likely to be in high-rise condos. Efficient, cost-effective, and digital solutions are crucial to profitability when managing a portfolio of more than 50 properties. Platforms like ManageCasa can help streamline lease processing, accounting, online rent collection, bank reconciliation, and maintenance processes.
Consider the current rental market, your financial situation, risk tolerance, and property management skills when deciding on the best type of rental property to invest in. With careful evaluation and market insights, you can make informed decisions that lead to successful and profitable investments.
For more information and resources on property management, rental trends, and investment strategies, check out ManageCasa's platform.
