When you decide to add rental properties to your portfolio, how do you know if it’s a solid investment? It doesn’t matter whether you’re new to real estate investing, or a seasoned owner. Before pulling the trigger on any rental home purchase, smart investors ask themselves: Do the numbers for the investment property deal make sense for me?
Figure out Your Strategy
Before beginning your search for a new property, consider what it needs to achieve for you and how you plan to maintain it. There are two main questions you need to ask yourself before you search for the right property to buy.
First, do you want the property to cash flow, or are you buying the property for a long-term asset appreciation?
Second, do you want a short-term rental (STR) or a long-term rental (LTR)? Answering those two questions is critical in finding the right property for you and for your situation.
Cash Flow or Appreciation
Are you buying the property in cash, or will there be a mortgage? With current mortgage interest rates and home values, it is more difficult to find properties with a high cash flow number unless you purchase in cash. Cash flow is the money left after paying the mortgage and other property-related expenses. If you need to increase cash flow right away, you’re going to be looking for a specific type of investment property deal, or likely have to pay a higher down payment.
It may be cliche, but “Location. Location. Location.” It isn’t just about the house itself, but where it is located is extremely important as well. Buying an investment property deal in an area with strong projected growth can lead to large equity gains in a short period of time.
Long-Term or Short-Term Rentals
There are pros and cons to both short-term and long-term rental strategies, which is why it is important to fully analyze the property as it pertains to your goals, before purchasing a property. Short-term rentals can generate more cash flow, but it also typically requires more work and has more competition, than a long-term rental.
Before making plans to post a short-term rental on Airbnb or VRBO, make sure you are aware of local ordinances and state laws regarding short-term rental units. For example, Orange County does not allow short-term rentals (less than 30 days), but other central Florida counties now allow them (with proper licenses).
Long-term rentals are rentals with a six-month or longer tenancy. If you decide to rent long term, what type of tenants do you want? Some rental property owners prefer Section 8 housing for the guaranteed revenue, but that can come with more challenging tenants. Others prefer to have young professionals or families occupy their rental property.
Short-term rentals may be permitted in an area now, but could that change in the future? Some areas are zoned specifically for short-term rentals, while in others it is neither permitted nor prohibited. If it is not explicitly permitted, that means the county or city could enact legislation to prohibit or limit short-term rentals.
If you decide that short-term rental is your preferred strategy, unless it is in an area zoned for STR, you should still do a long-term rental analysis. You want to ensure the property is still a viable investment for you if the laws change and you have to transition the property to a long-term rental.
Do Your Research
After you know what you need your property to achieve, consider the best locations to search for properties for sale. Depending on the strategy, short-term rental or long-term rental, there are different considerations to be taken into account regarding the property and location.
Long-Term Rental Considerations
School Districts
For example, if you’re looking to attract families, you must offer amenities that would appeal to them. This includes a rental house in a desirable school district. It pays (literally!) to know the areas with the highest-rated school districts that would attract families.
Job Opportunities
If you don’t reside in the area, how do you know which industrial parks have been recently approved? Are you keeping track of plans for large companies to add a new site in the Orlando area? Staying informed about economic factors that will create new jobs will help you determine neighboring areas with strong rental demand.
Countdown to Move In
Some rental property owners prefer to look for turn-key properties. All they need is a fresh coat of paint and maybe some landscaping before listing for rent.
Others plan to buy an investment property that needs a light rehab because of the lower purchase price or the use of the BRRRR Method (Buy, Rehab, Refinance, Repeat). If you go this route, research what you can do yourself and where you may need extra help.
If you are using the BRRRR method, do not forget the importance of location and having the property reflect the neighborhood. You do not want the most expensive property in the neighborhood. A key component in the BRRRR method is the after-repair value (ARV). Rehabbing a distressed property in a bad neighborhood will lead to a lower appraised value, and thus, lower equity.
Short-Term Rental Considerations
Did you know in 2022, 74 million tourists visited the Orlando area? Sounds like a great place to own a short-term rental, right? Well, it can be.
What’s in the area that would attract short-term renters, and what is the demographic of those clients? If there is no real reason for someone to visit the area, the property is not likely a viable short-term rental option. Central Florida is an extremely saturated short-term rental market with more than 31,000 short-term rentals in the Kissimmee area alone, so what will you do to make your property stand out?
Conversely, as the migration data indicates, people continue to move to Florida in droves. Many people rent first while acclimating to their new state. This creates a strong market for the investor wanting to rent their investment property.
The Numbers
So what “numbers” are we referring to? Primarily purchase price, net operating income, expenses, and cash flow.
Which strategy did you choose, short-term rental or long-term rental? Your gross income and expenses can vary widely depending on the property and strategy. What is the market rate for a long-term rental in that area? What is the occupancy rate and average daily rate (ADR) for short-term rentals in that area? Knowing what kind of income properties in that area will generate will help you determine if it is a viable investment.
How much money do you have to purchase the investment property? Will there be a mortgage? What are the total monthly expenses for the property? If the property does not generate enough cash flow, it may not be a sound investment.
Note: we do not recommend purchasing an investment property that will be cash-flow negative unless you have the overall portfolio to support it.
How much does the property cost? Is it overpriced, priced in line with the market, or underpriced? Generally speaking, you want to find the undervalued properties, but there are times when it may be beneficial to pay at, or above, the market value for a property. For example, a well-performing short-term rental property, with an established and proven income record may be worth acquiring not only for the cash flow, but for the appreciation as well.
The Verdict
Some investors will look for the “deal” first, while others will search for a property that matches their strategy. Neither is right or wrong, as long as you do your research and the numbers make sense. If you are a new investor, make sure you do not purchase an investment property deal that you cannot afford if you have a vacancy period, or if your short-term rental has a slow few months.
Ultimately, only you can decide if a real estate investment deal makes sense for you to add to your investment portfolio. If you plan to self-manage as a hands-on landlord, be prepared for the responsibilities it entails. On the other hand, if you decide to hire a property manager for your rental, know what to look for in a good property management company.
A Realtor well-versed in rental property sales can help you find an investment that addresses your strategic goals. Get in touch with our in-house Realtor by calling 321-947-7653 or completing our online form.
