In today’s increasingly complex investment landscape, real estate is a viable and valuable resource. By investing in property, you can increase your monthly income through rent, benefit from increasing property costs, and secure a spot in tomorrow’s real estate market. But how do you know which property to invest in, and whether it will be worth the time and money?
Many investors, especially those that are buying their first investment property have these, and many more questions. We will clarify what an investment property is, the pros and cons of investing in this resource, and factors to consider when buying a short or long-term investment property.
What is an investment property?
In short, an investment property is a real estate property that someone purchases in order to generate a return. This return usually comes from rental income, resale of the property, or both. Generally, there are three types of investment properties: short-term, long-term and flip investments.
Short-term investment properties are what buyers refer to when they talk about buying a home for vacation rental income. Short-term rentals are often called vacation rentals and usually house tenants for a few weeks maximum. These properties are rarely considered for long-term living for the buyer, but instead serve as a form of supplemental income.
Long-term investment properties are usually properties that an investor buys and intends to hold for years. Long-term rentals are properties that allow tenants to stay for months or years. These properties can also generate supplemental income because the investor can rent out the property or sell it in the future for a hopeful profit.
Flip investment properties are usually bought below market then rehabbed and resold for a quick profit.
Each of these types of investment properties have their strengths and weaknesses, and it is up to each individual investor to decide which is right for them. Let’s look at the pros and cons of each type of investment property, as well as the general landscape of investment properties.
The Benefits of a Short-Term Investment Property
In the last few years, the popularity of short-term investment properties has exploded. Thanks to vacation rental apps like VRBO and Airbnb, more and more investors are turning to short-term investment properties to supplement their income.
Short-term investment properties as vacation rentals are also a way for investors to increase their cash flow and grow their equity. Sites like Airbnb allow homeowners to rent out their space for weekend or short-term stays. Depending on where you live, this can be quite the lucrative market.
The Disadvantages of Short-Term Investment Properties
For beginners, investing in a short-term property can be intimidating and expensive! Unless you have an intimate understanding of the area, you may find yourself lacking some important resources before investing in this project.
In terms of short-term properties for vacation rentals, you never know how a tenant will treat the property and while most organizations offer some form of insurance, this can be scary for first-time investors.
The Strengths and Weaknesses of Long-Term Investment Properties
Long-term real estate investing (sometimes called “buy and hold” real estate) is another way to increase your cash flow and equity over a longer period of time. Some financial experts consider real estate like this one of the best ways to build your wealth passively. If you have the capital to spend on real estate, many of these experts would say go for it.
Real estate is not all rainbows and butterflies, though. You must consider the long-term expenses of these properties, such as paying a property management company, HOA fees, or dedicating your own resources to fix up the place. While you can control who lives in your property and how much they pay, you can’t always control what will happen to the home.
Also, long-term investors won’t see the fruits of their labor for a while. If you are planning to buy and hold a property for increased value down the road, you may have to hold it for tens of years.
The Strengths and Weaknesses of Flip Investment Properties
Thanks to television shows like Flip or Flop and a distressed real estate market flipping properties has become very popular.
The main benefit of these types of properties is that you can increase your cash reserves rapidly. For example, let’s say you buy an investment property for $100,000. You then put $20,000 of renovations into it to “flip” the home, and because of these improvements you are able to sell the property on the market for $200,000 (given that comparable houses in the area are selling for that price point). Minus the time and labor dedicated to the project, you just made $80,000 (before closing costs, commissions, etc.)
As you can see, a professional house flipper could do this a few times a year and increase their net worth substantially.
Real estate is an industry that is always fluctuating, meaning that if you flip a house, that doesn’t mean it will sell anytime soon. Your project may sit on the market for months, time during which you are incurring costs for staging, maintenance, and other expenses.
Factors to Consider When Choosing an Investment Property
Real estate is usually a good investment, but some investors find themselves reconsidering their choice to buy if they haven’t done proper research. There are many factors to consider when deciding on your property, including location, amenities, size, and of course — cost.
Location is crucial when thinking about buying an investment property, especially if you plan on renting it out on sites like Airbnb. Location can make or break a property and even if it is newly renovated and turn-key, location can turn away possible renters.
When searching, first, think about how close the potential property is to points of interest. A few questions to ask yourself when considering location are:
- Where do tourists like to spend time? This answer may vary depending on your area. Some cities thrive on their downtown nightlife, while others offer seclusion and space.
- Are there restaurants or points of interest within walking distance of the property? Many vacationers won’t have cars and will want to walk to popular places.
- How much will you charge for a property in that location? You can charge renters more for a better location, but ask yourself if the increased upfront cost is worth it.
These are just a few questions to consider when thinking about renting out an investment property. If you are looking to buy a property to flip or hold, you will face different location questions, such as:
- What are the schools like in this area? Will they draw families in or scare them away?
- Are there parks in the area?
- What demographic will the area attract? For example, if you are trying to attract young Millennials, you might want to consider a property closer to downtown and nightlife.
- What is the crime rate in the area?
These questions will help you find the right location for your needs. There are no right or wrong answers, but a multitude of considerations.
Again, the amenities your investment property needs will depend on your goal for the property, so it’s vital to know the area and what people are looking for.
For example, if you live in a rural area that tourists seek out for an escape, it might be nice to look at properties with more acreage and distance between neighbors. These guests might not need access to public transportation, but will require a kitchen to do their own cooking.
On the other side of the spectrum, imagine a city weekend for a bachelor or bachelorette party. These guests would likely appreciate adequate public transportation and lots of place to sleep (such as pullout couches). Different properties will have different amenities, depending on your guests’ needs.
By knowing your guests and their needs, you will be able to search out properties that are right for them.
Investment properties come in all sizes, and each size offers its own benefits and weaknesses. Think about the end goal when looking at investment properties. Do you imagine a couple growing older and starting a family in your rental home? Or do you want to make a quick buck and get college kids in and out every weekend? For the former, you would look at a three- or four-bedroom home. For the latter, a two-bedroom condo or studio apartment might do the job.
No matter what the location, size, or amenities of a property, it ultimately comes down to cost. Before considering buying an investment property, you must know how much you can spend, both upfront and for ongoing costs.
Many properties have hidden costs that a first-time buyer might not consider. For example, you may face higher HOA fees for condos, or might need increased insurance in a certain area of town. In addition, different taxes and fees apply to vacation rentals that don’t apply to permanent housing.
Some cities are limiting the amount of vacation rentals allowed in its jurisdiction, so before investing too much into a property, consult with local lawmakers and lawyers to understand your options.
Other Financial Considerations
In addition to the cost of a property, it’s important to consider other financial opportunities, and disadvantages, of investment properties. For example, vacation rentals require different insurance than long-term rentals. Banks are also more hesitant to provide mortgages to investors looking to buy investment properties, so you may need a bigger down payment, or may even need to pay in cash. Lastly, you need to consider the ongoing cost of maintenance of both short and long-term investment properties.
One benefit is that you can deduct the depreciation expense of an investment property from your taxes. This non-cash expense enables you to alleviate some of your investment property income over time without any out-of-pocket expenses.
Ready to Find the Perfect Investment Property for You?
In today’s market, with growing populations and rent prices, real estate can be a very viable investment. When looking for an investment property, consider the type of investment property you need, your goal, and what you are looking for when shopping for a place.
- Long-term investment properties are properties that investors buy in order to increase their cash flow and rent out to tenants for longer rentals. Investors may also want to buy and hold these properties with the hopes of selling them in the future for a profit.
- Short-term investment properties are properties that investors buy to rent out to short-term tenants. These short-term investment properties are likely to serve as vacation rentals on sites like Airbnb.
- Each of these types of investment properties have their pros and cons. For example, a short-term property can generate quicker and higher income, but is more risky. A long-term property will take longer to pay off and may require work throughout the period of ownership, but is less risky and serves as a consistent income.
- There are many factors to consider when looking at investment properties, such as location, amenities, size, and cost.
- In order to find the right property for your goal, you must understand who you want to rent to and what their needs are. Younger vacationers will want different things than an older, growing family.
- Before diving too deep into investment properties, study up on your local code on vacation rentals. Some cities limit short-term housing.
At Revestor, we help investors looking for investment properties find the right ones for them. We break down our data into long-term and short-term rentals and show users how much monthly cash flow they can expect from specific properties. Users can quickly check out how much properties are going for in their local area today.