Real estate investing remains one of the most efficient ways to create passive income and build long-term wealth. With housing affordability nearing an all-time low in the U.S., today’s consumers are renting over purchasing homes. Market saturation and rent increases–3.2% from May 2023 to May 2024–have made rental investing an even more bullish market than normal.
A bullish market is a period when prices are rising and are expected to continue to rise.
Long-term rental property investments help investors generate consistent cash flow from a consistently high-demand, appreciating asset–property. However, not all long-term investment properties are created equally. Additionally, investing in rental properties for beginners can be daunting when you don’t know what to look for and where; this is just one factor of becoming a successful landlord.
So, what makes a good long-term rental property?
Below, we will identify the market insights, tools, and considerations investors take to find and capitalize on successful long-term rental properties:
Evaluating Local Market Conditions
While it’s a good time to invest in rental properties, not all opportunities are advantageous. Researching local markets and demographics will help you identify the top rental locations and demographics to target.
Identifying the Top Rental Investment Locations
When buying an investment property to rent out, location plays a vital role in success. Properties located in areas with high vacancy rates or shrinking property values are red flags for investors. The best areas for rental properties have four key aspects:
- A bustling job market
- Housing affordability
- Residential growth
- Low unemployment rates
Properties in good neighborhoods with lower unemployment rates and ongoing or anticipated economic prosperity create higher demand from a more diverse and qualified tenant pool. If you’re looking to create long-term capital gains on rental properties, residential growth is a key indicator of ongoing demand for your rental property investment.
Understanding Your Tenant Pool Demographic
While bullish markets create broader tenant pools, identifying a more granular target demographic can help determine the most sought-after and attractive properties.
For example, if you are looking for a long-term single-family rental project, you’ll want to look for properties that cater to family demographics. Look for homes in good school systems, with family amenities and attractions around the property.
If you’re looking to rent to college students, multi-unit properties within walking distance of the school and public transportation will provide better opportunities. Additionally, locations that boast a fun nightlife scene will appeal to this demographic.
Property Conditions & Cash Flow Potential
Longevity should be included in any long-term rental definition, which is why a property’s condition is so important. While properties in less-than-ideal conditions cost less upfront, you must consider the time and costs to get the property on the market and rented. In many cases, properties in poor condition are not worth the hassle.
Fix and Flip Analysis
To identify worthwhile long-term rental property investments, perform a fix and flip analysis. A fix and flip analysis leverages cost estimates and secondary research to get an idea of a property’s cash flow potential. The cash flow potential is the amount of money an asset can generate after all renovation and rental management costs are considered.
Subtracting a property’s after-repair value (ARV) from its project costs (estimate) will give you an idea of its cash flow potential.
To find ARV, use local markets’ Competitive Market Analysis (CMA). Publicly available CMAs provide accurate rental income estimates for your property post-renovations based on similar properties in the area.
To get an accurate estimate of the project’s costs for a long-term rental property, you must consider the project’s renovation costs as well as property management costs.
Renovation Costs: When it comes to renovation costs, a home inspector and skilled contractor are two of several essential players every investor needs on their team. Thorough and knowledgeable home inspectors and contractors can best identify all of the obvious–and hidden–problems that will need to be addressed. They can provide the most accurate estimate for costs.
Property Management Costs: Unlike fix and flip sellers, rental investors must consider the costs to manage the rental, including marketing, application processes, insurance, taxes, and so on.
Many first-time rental investors wonder, “Should I hire a property manager?” Long-term rental property management requires substantial time, patience, and skills. While taking on landlord responsibilities yourself is cost-effective, property management long-term rental companies can save you from overwhelm. They bring industry experience and handle all of your rentals:
- Preparation
- Marketing
- Tenant screening and application processes
- Maintenance
- Rent collection & tenant communications
Today, du-, tri-, and quadplexes–and properties with ADU units–have become popular long-term rental properties due to their higher cash flow potential. With multiple units, investors create more revenue streams while protecting themselves from long-term vacancies. When you have multiple tenants, a property management company is a valuable resource.
Rental Laws & Regulations
An often overlooked factor in the success of long-term rental investment properties is local and state regulations. Evolving regulatory challenges in the residential rental property market have made knowledge surrounding landlord-tenant and licensing laws essential for property owners.
Work closely with zoning committees, local officials, and affordable housing organizations to ensure your property remains compliant, available, and profitable.
Rental Property Investment Financing
Securing reliable, flexible, and fast financing is critical to long-term rental success. Often, traditional lending avenues, like banks and credit unions, come with significant oversight, strict guidelines, and countless requirements–hindering their ability to provide the speed and flexibility necessary for investors to capitalize on opportunities and build long-term success.
Experienced investors, instead, turn to private lenders for long-term rental property financing. With less bureaucracy and more freedom, the right private brokerage firm can provide the speed, flexibility, and reliability investors need to acquire, renovate, market, rent, and maintain a successful and profitable long-term rental property.
Finance of America Commercial: Your Long-Term Rental Property Capital Partner
Finance of America Commercial (FACo) provides the most reliable and flexible long-term rental financing on the market. With several term, rate, and prepayment loan options available, our experts have the freedom to mix, match, and tailor the ideal financing for your unique needs.
Finance of America Commercial’s Rental Portfolio and Single Rental loan options offer:
- Competitive 30-year term loan options
- DSCR with no W2s, paystubs, or tax returns required
- SFR, warrantable condos, townhomes, PUD, and 2-4 units eligibility
Want to unlock reliable and flexible long-term rental property financing? CLICK HERE to schedule a FREE consultation with a FACo expert today!
