Real estate investments have long been a popular way to earn passive income. An investment property, be it residential or commercial, is real estate specifically purchased to earn a return through rental income or appreciation. An investment should generate income, increase in value, or provide tax benefits—or better yet, do all three. Whether it’s a single-family home, a multi-unit complex, or an apartment, you can profit from an investment property through short- or long-term rentals. The work-from-home era is also ideal for current owners of investment properties, as many renters are renting year-round and for longer periods of time.
Wondering if an investment property is right for you? We asked several real estate experts and homeowners about the most important points to consider before you decide. Read on for the definitive guide to buying and managing an investment home (and how to choose the best property type for you!).
Do the math
Before you put any money down on an investment home, it’s important to determine whether you have the time, financial resources, patience, and commitment necessary to maintain it. Real estate investments don’t turn a significant profit overnight, and many investment property buyers wait years (or even decades) for their investments to appreciate. Managing a rental property (and acting as someone’s landlord) requires someone who is communicative, handy, and detail-oriented—especially if you plan to save money by helping with repairs yourself. It’s also crucial to ensure you have a margin of financial safety. Those with outstanding debt, student loans, or unpaid medical bills should think twice.
Hire a professional
Thanks to realtors and professional property managers, it’s possible to succeed even without knowing the ins and outs of a specific market. Joe Belz of Compass in Naples, Florida, who has more than 20 years of real estate experience, says that brokerages like Compass can guide you through the process even after you purchase an investment property.
For a fee, Compass, Sotheby’s International Realty, and other agencies can help you find renters for your investment property.
“For those looking for an investment opportunity, working with a professional real estate agent is crucial,” says Philip White, CEO of Sotheby’s International Realty. “They can help connect you with an expert who can advise on local tax laws and, especially if you’re looking to invest internationally, visa programs that might be available to you. Sotheby’s International Realty has a presence in 79 countries and territories, so our clients benefit from our vast referral program which enables our clients in California, for example, to be connected with a local expert in the Cayman Islands.”
Belz echoes this saying: “If it’s not in your skillset to run the numbers and know what cap rate you should be buying at, then your agent is even more important.”
Consider type and location
Residential real estate is usually more accessible and affordable than commercial real estate, which is why many invest in condominium units, single-family homes, or multi-family homes. Nancy, who wishes to remain anonymous, has been a realtor and avid real estate investor in Naples, Florida, for 17 years. She and her husband manage 73 rental properties across Southwest Florida including eight-plexes, four-plexes, duplexes, and single-family homes. She advises looking for nice neighborhoods and homes with no Homeowners Association (HOA) fees, and to not to be afraid of a fixer-upper if you have the time and resources. “Even if it’s not the most appealing house in a certain neighborhood, you can buy something for a reasonable price and fix it up inside and out,” she says.
Location is also important, and many sought-after investment properties are located in big cities, beach villages, mountain towns, or scenic destinations.
“Demand in Hawaii in the second-home market has not died down and Florida remains a hot destination,” White reveals. “The second-home market has seen dramatic price increases, especially at the high end. Resort markets in the U.S. are also continuing to see interest, while international, tax-friendly destinations such as the Bahamas and Cayman Islands remain popular as second-home destinations.”
Know the rules
No matter the type of property you purchase, it’s crucial to look into the various regulations and jurisdictions that exist in each state. Naples, for example, has fairly strict rental restrictions that can be worked around if you do your research.
“In the city of Naples, you can rent your property for a minimum of 30 days, three times a year,” Belz says. “But if you get just outside the city of Naples, we have a number of neighborhoods without rental restrictions where people are buying to do short-term rentals, including Airbnb. It’s very important for any investor to look into these laws and rules. We had a couple who wanted to buy a condo but ended up buying a single-family home in a neighborhood without rental restrictions, because they realized the condo restrictions weren’t going to make the money they needed to make.”
What about timeshares?
One type of property that hasn’t typically proven to be a true investment property is a timeshare (for the uninitiated, that’s a condo, typically within a hotel or resort community, with several owners who are each granted a guaranteed amount of time at the property each year; these include homes at resorts like the Marriott Vacation Club, Ritz-Carlton Vacation Club, Club Wyndham, and similar locales). Contrary to what you might think, timeshares aren’t a great investment for generating a return, as they present higher-than-typical expenses. In addition to the cost of a timeshare, most require yearly maintenance fees.
But Mike Kennedy is trying to change that: Kennedy founded Koala, a platform that helps timeshare owners securely rent their unused timeshares. “Nobody should purchase a timeshare looking to create revenue out of it,” Kennedy says. “The intrinsic value or the actual value of the marketplace is completely determined by supply and demand of said timeshare. However, owners that have a really high-quality product can be a desirable vacation rental for young families or groups because timeshares combine the best of hotels and vacation rentals. You have this hybrid model sitting in the marketplace that, in many cases, isn’t fully utilized by its owner. From that perspective, owners can certainly monetize their unused properties and, to some degree, turn a profit.”
So, you took the plunge and purchased—now to make the most of your investment. You’ll need to think critically about how the property can be used and how much effort you want to put into it–and for how long. Here’s where to start.
Determine how you want to use the property
There are several ways you could go about an investment property. First, it depends if you will utilize the property or if it will exclusively be for rental purposes. For example, Belz says that many people buy second homes to enjoy the property themselves but also generate income via rentals when they aren’t there.
“Many people who have one or even a few properties aren’t in it for massive returns,” Belz says. “They’re in it to cover a good portion of their costs.”
Calculate how much you should charge per month
With that in mind, you’ll want to think about how to charge for rentals. A general rule of thumb, Nancy says, is that monthly rent must be equal to or no less than 1% of the purchase price in order to generate income. Of course, high-season prices in certain destinations, like ski season in Lake Tahoe or summer in the Hamptons, might surpass that percentage.
For an investment property to turn a profit, the amount you charge for rent per month should exceed 1% of the price you paid for it.
Cut costs by being more hands-on
Nancy says that to eliminate costs on her end, she manages the properties herself. This is convenient because she lives in the same area as her properties and can quickly stop over to homes if there is an issue. “If you don’t mind taking calls and going to check on your homes, you can save yourself money by not using a third-party management company,” Belz says. “But people on both ends of the spectrum, no matter how hands on or hands off they are, can be successful. I know people who manage properties themselves and give really good service, and the same people just want to come back to rent each year.”
…or boost revenue by hiring a property management company
However, a property management company might help you earn more revenue in the long run, especially if you are doing shorter term rentals for a weekend or week. It also helps alleviate some of the pressure of being on-call while guests are using the property. East West Hospitality, founded 30 years ago, has experience running hundreds of vacation rentals and manages homes for owners around the country.
“As a property management company, we will work with the buyer to provide revenue estimates based on our experience in the market,” says Theron Gore, CMO of East West Hospitality. “There are many conversations we have with buyers about their goals with properties, and we can give them advice on how to make the most return or simply cover their costs.”
Amid inflation and relatively low interest rates, real estate remains a sure investment, White explains.
“Luxury real estate, with all its ups and downs, has held value—and even grown in value,” he says. “In fact, The Wall Street Journal recently reported that in this booming housing market, many homeowners earned more last year from home appreciation than from their jobs.”
Put on a good show
Design and visual presentation are also important. “By far the best way to maximize your return is having a really well-kept property,” Belz says. “It sounds obvious, but it’s critical. I also advise hiring a great professional photographer, which we do whether it’s a $100,000 condo or a $15 million condo on the beach. The first showing is always online.”
Gore says that East West units generating the most revenue are usually the ones that are more recently renovated with a bit more modern decor, but it always comes down to individual taste and budget.
“When someone moves out, we clean it up professionally, but we also try to do upgrades,” Nancy says. “Whether it’s a countertop that needs new quartz or granite, we constantly are trying to improve the value of the properties when we do have a chance of getting in there in between renters before we fill it up again for another year or five years. You never know how long they’ll be staying.”
Plumbing leaks, a pesky neighbor, or a broken dishwasher…the list goes on. Despite the money you can make via renters’ income or appreciation, managing a property still comes with headaches.
First, they require a solid amount of time; however, less so if you hire a third-party professional property management company. Still, this can get expensive and cut into your return. Nancy says that even owning one, two, or three properties can be like a part-time job, especially if you’re managing it all yourself.
Know the difference between managing a short- vs. a long-term rental
Investment properties are great for both short- and long-term rentals, but they require different amounts of time on the owners’ end. For example, short-term rentals might be more profitable in the long run, but incur more costs like cleaning fees or repairs as the facilities are being used more, while long-term rentals require less week-to-week or month-to-month maintenance.
“It’s hard to say how many hours per week,” Nancy says. “If you have as many properties as we have, around 73, it’s a full-time job. You have to show the property, get the renters in, manage it, be able to fix things, be available to update it, and so on. If you do update it, it might take several weeks or months.”
On the flip side, if you’re willing to pay a property management company, like an East West Hospitality, it’s much easier to manage properties from afar, especially if you don’t live in the same city or state. It cuts down on time, but might cut into your finances.
Do your homework
While you don’t need to be an expert in the market you’re purchasing in, you do have to have some wherewithal and business acumen.
“Having a reliable agent is best, but you do have to be really familiar with a certain neighborhood you’re buying in,” Nancy says. “It has been helpful for us to drive around looking for sales by the owner, checking Zillow, or having an agent look out for you. You never know what you’ll find driving around—somebody might throw a for sale sign in their yard.”
Don’t get emotionally invested
Another golden rule of an investment property is to never get too attached. “Investment properties are not your home,” Belz says. “If you get too emotionally attached to a property, you might not look at the numbers correctly. The numbers have to make sense—and if they don’t, you have to be willing to walk away.”
Your return is also dependent on the market climate—although thanks to remote work, many markets that thrived in the high season are now popular year-round. South Florida, usually popular in the winter, is now a year-round destination for those seeking to escape cities, Belz and Nancy say. Gore says that the length of time people spend at mountain town rentals have also been increasing year after year.
“While demand is still high, rising mortgage rates and low inventory may impact buyers’ ability to purchase as quickly as they did during the pandemic,” White says. “In the U.S., demand for second homes showed signs of cooling during the spring of 2021, as some offices began reopening, and mortgage-lending rules for vacation properties were initially tightened. Yet even as the number of transactions declined in some markets, price appreciation remained strong due to low inventory.”
Despite the desire to get people in your home immediately, be wary: Some of the biggest lessons Nancy has learned over the years are to incur high security deposits, high pet deposits—and above all, good background checks. Screening tenants thoroughly can save you money and time, even if they look like the most well-to-do individuals on paper.
“Pets can absolutely trash a place, and it’s been unbelievable what we’ve had to deal with,” she says. However, building trust with clients might help alleviate some of the work on the owners’ ends.
General maintenance should cost about 3% to 5% of rental income.
“We find renters that are reliable and trustworthy, and we might even offer them a discount in rent in order for them to help lightly manage the home,” she says, adding that all of her tenants are long-term renters who stay for a year on average. “Of course, we get the more desperate calls if there is something going on, but a lot of them are happy to do their own lawn care.”
Nancy says that general maintenance, which might include a thorough cleaning, pest control, and new paint, should cost about 3% to 5% of rental income.
“One of the biggest challenges that we make sure owners are aware of is that over time there is wear and tear,” says Kevin Graham, COO of East West Hospitality. “We want to make sure that they are informed as to when they would likely need to have the residence repainted and have carpets and major appliances replaced. That way they can have in mind at the very least a mental reserve, if not a financial reserve, to cover those items.”
Properly caring for any property requires keeping up with landscaping; ensuring mechanical systems, electric, and plumbing are in good operations; preserving structural items, like roofing, sidewalks, driveways; pest management; and maintaining a comfortable and clean interior environment.
The bottom line
While rental property investments can be beneficial in the long run, keep in mind that their profitability is dependent on several external factors including housing market demand and supply, which are always fluctuating. That said, it’s important to be able to let go of a property too, as soon as it stops growing in value. That’s what smart investing is all about.
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