Investment properties are the foundation of many great real estate investing companies, including my own. Without the steady influx of money from my rental units, I’d have a much harder time keeping the lights on by paying recurring bills for my employees. And without plenty of hard-earned experience (plus a healthy dose of failure), I’d never have as much capital to throw into larger projects as I do today.
The trouble is that most new investors don’t have a clear idea of what makes an investment property a potential flop or a potential flip. When I first started out, I thought that the only type of investment property that could repay itself was a condominium in the most expensive part of the city. I was completely wrong, but that didn’t stop me from trying to make a few costly projects work when there wasn’t much hope to begin with.
As it turns out, you don’t need to invest in a complicated or luxurious unit to reap the benefits of owning investment property; you just need to find a place that matches your business. If that sounds complicated, don’t worry—I’ll explain a handful of the benefits of buying rental property and why they matter. So let’s get started.
Top 3 Investment Property Benefits
Once you have an investment property up and running, it can yield a multitude of advantages for your business. Let’s take a look at the three biggest investment property benefits and advantages so that you can get a few ideas about what they can do for you.
1. Generate Passive Income and Cash Flow
The most obvious investment property benefit is that it generates rental income over time, and that income goes into your company’s bank account every month.
The passive income you get from rent will doubtlessly be used to repay the costs of buying and operating the unit, but getting additional residual cash flow is almost guaranteed. That residual cash flow can be used to pay your staff, the interest from loans you took out to buy other properties, or to make improvements to properties that you own.
The more profitable your rental unit is, the more excess cash flow you have to throw into other projects needed to grow your business.
2. Build Equity
Building equity in a property is another major investment property benefit. When your tenants pay rent every month, you’ll typically pay out most of it to cover your borrowing costs and operating costs, as discussed previously. But when you pay off the lending instrument you used to buy the unit in the first place, you’ll build equity which can then be leveraged for borrowing larger amounts of money later.
Plus, equity opens up a galaxy of other financing options that can save your tail in a pinch. It’s sometimes even possible to sell equity back to the bank to generate more money each month. As a fringe benefit, the amount of equity you have will contribute to your business’ balance sheet, making its total value larger. And that’ll help convince other investors that your company is of sufficient size for the deals that they might want to make with you as a partner.
3. Diversify Your Portfolio
Rental properties are a great way to diversify your investment portfolio or your portfolio of other types of properties. If your company typically does fix-and-flips, buying an investment property benefits your bottom line by creating a source of revenue that isn’t directly linked to the recently renovated housing market. Therefore, if the market declines and it’s suddenly hard to find the right type of homes to buy for renovation, your business will still have some residual cash flow to survive.
Likewise, if you have a lot of investments in things like stocks, bonds, or other financial instruments, holding an investment property means having an asset that won’t stop yielding money even when the market is in turmoil. The income from just one unit probably won’t be enough to balance your books, but it’ll put you in a better position than having nothing.
Options for Investing and Common Challenges
If you’re interested in reaping the benefits of an investment property, you’ll need to pick the right type that aligns with your capabilities and needs.
Most real estate investors think of the following types of properties as suitable for holding as investments:
- Detached single-family homes
- Apartment units
- Multi-family homes
- Commercial storefronts
But it’s more about how you plan to use the cash flow from the unit rather than the property type. If you could buy a campground where people rent space by the month, it could be a suitable investment property for you. In most cases, you’ll do better by buying a type of property that you expect the local market to have little of despite there being demand for over the next few years.
Just remember that investment properties aren’t a free lunch. Bad tenants can make your life quite difficult, and you’ll need to set aside money each month for maintenance, repairs, and taxes. Furthermore, you’ll need to be prepared if the unit sits empty after the current tenants leave abruptly or refuse to pay. And in some markets, it can take time to find renters interested in your unit.
Without planning ahead, all of the above issues can destroy your profit margin on investment properties. You should expect to devote some time each week to make sure that everything is on track.
Getting Your Foot in the Door With Investment Properties
Getting investment property benefits means being trained in finding and operating them effectively. In that vein, one of the best moves I ever made for my investment business was to become an independently owned and operated franchise owner with HomeVestors®—a leading national real estate investing franchise.
HomeVestors® helped me learn how to approach and evaluate investment properties, how to price my monthly rents, and how to screen tenants for quality. It also sent me a regular supply of leads for investment properties, and it even connected me to a hard money financing portal that I used to borrow the cash I needed to close on homes. Without the help from the mentors I worked closely with, I would have never known about the subtleties of the rental property market in my local area.
The icing on the cake is that franchise owners become members of a nationwide investing network, so you’ll get plenty of opportunities to team up with other people who are looking to buy and operate the same types of properties as you. When it comes to stacking the deck with opportunities for your business to grow, it’s hard to do much better than teaming up with HomeVestors®.
Learn more about investment property benefits and how to buy and operate them by requesting information about joining HomeVestors® today.
Each franchise office is independently owned and operated.