When buying an investment property, understanding what makes a rental property profitable is essential to success. But so many factors influence this that it is difficult without considerable expertise. At mbanc, we have helped people build generational wealth with rental property investing from passive income for years. Whether you need a DSCR loan or an interest-only jumbo mortgage, we are the premier lender for people who want to live and succeed on their terms.
Plus, with the cutting-edge short-term rental data intelligence powered by STR Verifi, a short-term rental calculator that forecasts ROI with unprecedented precision, identifying profitable properties has never been easier. Here’s how to determine profitability.
What Makes a Rental Property Profitable? Let’s Discuss
Determining the ROI you will receive from a property requires assessing several factors. The market, the property’s condition, property taxes, and amenities play an essential role. Here’s how to determine what makes a rental property profitable.
Mbanc Hack: What’s a good ROI on a rental? For long-term rentals, you want a gross rent of at least 12% of the purchase price, meaning each month should net you 1%.
When determining what makes a rental property profitable, the property condition is often the biggest pitfall for real estate investors.
If a property needs work, think about how it will look and function in its improved state. How much will you earn monthly after you fix it up? How much does it cost to repair and renovate it? These questions and more are crucial to ask yourself.
On the other hand, don’t be afraid of investing in a property with an enormous upside, no matter how ugly it may be now. You can often realize incredible value with cosmetic improvements. You also must consider ongoing property maintenance and cost.
“This is where we see the most self-sabotage from investors. In some situations, we see investors miss out on prime opportunities because they couldn’t see the potential in the property. In others, people over-invest in a property that will not provide the returns they want,” explained Desh Weragoda, mbanc CTO.
Mbanc Hack: If a property takes time to get to a ‘rentable’ state, this will directly impact your cash flow. Be sure to allocate reserves to make the monthly payments while renovations are taking place.
The Location and Market
Location is everything. Things like climate play a factor, but that is not the end-all-be-all. To determine what you can expect from a property, you have to look at what other properties are currently earning in that market. Look at other properties and compare:
- Bedroom counts
- Cap rates
- Cash on Cash Returns
- Property management fees
- Average daily rates
- Market ratings
- Occupancy rates
- Local economic trends
- And more
This is time-intensive and requires considerable expertise. With the help of short-term rental data powered by a short-term rental calculator like STR Verifi, you can access this information about any market and property in the United States easier than ever.
“Investment properties do not exist in a vacuum. What we mean by this is that honing in on what makes a rental property profitable hinges completely on its location and market,” explained Desh.
Taxes are like your shadow – no matter the financial endeavor, you cannot escape them. While this could sound discouraging, reframe this as an opportunity because you can use property taxes to your advantage.
In any given city, these taxes can vary and dictate profitability. Simply put, the higher the taxes, the smaller the gains.
“Choose areas with more lax property and income taxes for a high-quality investment property in an advantageous market. Depending on where you live, you could even be eligible for property tax exemptions,” added Desh.
Amenities are also huge when understanding what makes a rental property profitable. Features like pools, outdoor kitchens, and balconies significantly benefit the ROI.
But amenities extend beyond features like this. Amenities that make a significant difference can also include adjusting your policies, like minimum night requirements for short-term rentals and even your pet policy. Bedroom count is also a significant factor.
Local amenities are essential to assess, too. Is there public transportation nearby? Are there shops, restaurants, and things to do? What about hospitals, gyms, and other services? These factors and more are critical to consider.
Mortgage Lending for Rental Property Investing
Rental property investing offers a unique opportunity to build generational wealth on passive income alone. Still, effective investing is strategic investing. Fortunately, at mbanc, our passion is helping people like you achieve true financial freedom to live their American Dream through strategic rental property investments.
To learn more about STR Verifi and how our DSCR loans or interest-only jumbo mortgages can finance the start of your short-term rental investing journey with a fast and easy approval process, talk with our team today.