BUYING RENTAL PROPERTY IN THE PHOENIX MARKET
Buying an investment property is an exciting move. It’s a time to expand (or start) your investment portfolio and anticipate a future of returns on those investments.
However, there are many complexities to buying a rental property, so it’s best that you have all the right information from the very beginning.
In this guide, we’re covering what to look for in a great investment property, what to avoid, and how to buy an investment property in Arizona.
What to Look for in a Rental Property
When buying an investment property, you won’t want to go off looks alone. Just because a property seems clean, new, and inviting doesn’t mean you’ll make the best return on your investment.
There are several factors to consider before you make your purchase, including the expected value of the home and the tax benefits of buying an investment property. Here’s what to look for in a potential real estate investment.
Characteristics of a Great Rental Property
Wondering how to determine a “good” rental property? Simply put, the best type of investment property is one that earns you the greatest return on your investment.
Noting the characteristics below will help point you in the right direction:
- The property exists in a profitable rental market, earning at least 1% of the purchase price in rent per month
- Has 3 bedrooms and 2 bathrooms for maximum resale value
- Simple landscaping that requires little maintenance
- No major updates required; you won’t have to pay upfront for a bunch of costly repairs or upgrades
- No water or electrical issues
- Property is a family-friendly neighborhood with good schools nearby
- Property is in close proximity to a grocery store, major landmarks, and other comforts (ideal for vacation rentals)
- Low property taxes
- Low-maintenance exterior (like brick)
Checking off all of these boxes will help you get the most bang for your buck. Not only will your property be appealing to long-term renters, but you’ll be able to maximize your earning potential by offering it as a vacation rental during high seasons.
Risks of Owning Rental Property
On the flip side, there are risks to buying a rental property. These are important to consider in case you need to compromise on your “ideal” property, and so you are prepared for worst-case scenarios.
These risks may include:
- High vacancy: Struggling to find tenants during slow seasons
- Investing in a bad location: Tenants may not want to rent your property if they don’t feel safe or if there are no stores or schools nearby
- Fluctuating market economy: You must try to forecast the future to determine whether it’s a good time to invest or not
- Bad tenants: Tenants may be late on rent, meaning you’re unable to make your own payments on time. They may also cause damage to the property.
- Negative cash flow: If the expenses associated with managing your property are greater than the income you’re generating, you won’t turn a profit. Be sure to estimate your expenses, taxes, and mortgage payments to determine whether the income you earn through rent payments will be enough to offset the costs.
How to Analyze a Real Estate Investment
How do you know if buying a property is a good investment or not?
Well, you will need to crunch some numbers to determine whether your investment will generate a profit.
Rental Property Investment Analysis
The first step in this process is to run a Rental Property Investment Analysis. This will be based on the factors that contribute to the property’s overall property value.
Here is the information you’ll need to collect in order to run a financial analysis of your potential rental property investment:
- Purchase Info: The purchase price of the property and the cost of any improvements you’ll need to make (Investment Basis)
- Property Details: The square footage, number of units, overall design, etc.
- Financing: Your total loan amount, the down payment amount, closing costs, mortgage payment, and interest rate (Debt Service)
- Rental Income: How much money the rental property is expected to produce (via rental payments, etc.)
- Property Expenses: Maintenance, HOA, repairs, property management, taxes, insurance, etc.
Once you have this information, you’ll need to calculate NOI (net operating income).
You’ll add up the expected rental income of your property for a year, then subtract all of the expenses for your property (using the information above). The formula for NOI is:
NOI = Income – Expenses
NOI doesn’t necessarily give you all of the information you need to make an investment decision, but it’s the basis of what you’ll need in your Rental Property Investment Analysis.
Of course, you can get more accurate figures and insight through hiring a real estate investment professional. This is the best way to get the information you need to make a smart investment.
Some things to consider while deciding whether buying property is a smart investment include:
- Whether your cash flow will be positive, negative, or neutral (Cash Flow = NOI – Debt Service)
- Your expected rate of return (ROI = Cash Flow / Investment Basis)
- The capitalization rate (Cap Rate = NOI / Property Price)
- The Cash-on-Cash (COC) return (COC = Cash Flow / Investment Basis)
Calculate Total ROI
Ultimately, whether purchasing a property or not will come down to the Total ROI.
The formula for Total ROI is Total ROI = Total Return / Investment Basis. Your Total ROI should be greater than your investment to indicate that this is, in fact, a good investment that you will earn money on for years to come.
Is Buying a Vacation Rental a Good Investment?
Similar to analyzing the ROI on a long-term rental property, you’ll be able to determine whether buying a short-term rental property (or vacation rentals) is a good investment if the return outweighs your investment.
Without knowing the exact details of your property, we can’t calculate the ROI in this guide. However, our real estate investment professionals are available to walk you through the process based on your unique situation.
If you’re considering buying a vacation rental – whether a casual short-term rental or several luxury vacation rentals – you’ll want to run a financial analysis on your potential investment. If the analysis determines that you’ll earn a hefty return on your investment, then you can be confident that buying a vacation rental will be a good investment.
Buying Investment Property in Arizona
Maybe you already know that you want to buy property in Arizona – or are at least considering this state for your investment property. We’re here to say buying a rental property in AZ would be a great choice.
In fact, the Arizona housing market is strong in 2019 and might be considered one of the best states to invest in at the moment. This is due to its affordability and thriving economy.
Plus, Airbnb is legal – making this a great spot for short-term vacation rentals.
If you’re considering buying property in Arizona, here are the top cities to consider:
- Median Property Price: $59,900
- Monthly Traditional Rental Income: $1,190
- Traditional Cash on Cash Return: 11%
Sierra Vista (short-term rentals)
- Median Property Price: $214,609
- Monthly Airbnb Rental Income: $2,295
- Airbnb Occupancy Rate: 61%
- Median Property Price: $217,320
- Monthly Traditional Rental Income: $1,200
- Traditional Cash on Cash Return: 12%
- Median Property Price: $135,646
- Monthly Traditional Rental Income: $1,385
- Traditional Cash on Cash Return: 8%
- Median Property Price: $188,064
- Monthly Traditional Rental Income: $1,240
- Traditional Cash on Cash Return: 8%
Page (short-term rentals)
- Median Property Price: $328,243
- Monthly Airbnb Rental Income: $3,053
- Airbnb Occupancy Rate: 54%
Have your heart set on investing in Phoenix, Arizona instead? Here’s what you need to know about the Phoenix real estate market.
The State of the Phoenix Real Estate Market
One of the most common questions we get asked here at Century 21 Northwest is “How is the real estate market in Phoenix AZ?”
That, as you can imagine, is a rather loaded question because the nature of the real estate market anywhere is that it’s constantly changing
For that reason, it’s best to speak to a real estate investment firm in Arizona directly when you are getting close to making an investment.
Want more information? Give us a call!
Why You Should Invest in Phoenix Real Estate
That being said, there are some factors that stand the test of time. Knowing what we know now, here are some good reasons why you should invest in Phoenix real estate:
- Phoenix real estate is predicted to be in high demand come 2020
- Phoenix has seen a 140% increase in the number of companies moving to the city
What are the Investment Opportunities in Phoenix?
If you love Arizona as much as we do, you’re likely to see the value of investing in real estate in Phoenix and other neighboring cities.
While the opportunities tend to shift over time, here are some opportunities to keep your eye on for 2019 and 2020:
- Glendale annexing land and opening it up to new commercial buildings, including the Red Bull Factory.
- Intel’s new manufacturing plant in Chandler.
- Microsoft investing in Buckeye/Goodyear.
Best Places to Buy Rental Properties
If you’re still shopping around and aren’t dead-set on investing in Arizona, then you’ll want to consider some of the best cities to buy rental property in 2019.
We’ve determined that the best cities to buy rental property in are based on three things: population growth, job growth, and affordability.
Based on these criteria, these are the best places to buy rental properties in:
- Orlando, Florida
- Median Sales Price: $201,000
- Median Rent Per Month: $1,398
- 1-Year Job Growth Rate: 4.17%
- Unemployment Rate: 2.9%
- Tampa, Florida
- Median Sales Price: $193,000
- Median Rent Per Month: $1,400
- 1-Year Job Growth Rate: 2.05%
- Unemployment Rate: 3.4%
- Jacksonville, Florida
- Median Sales Price: $171,000
- Median Monthly Rent: $1,225
- 1-Year Job Growth Rate: 3.16%
- Unemployment Rate: 3.4%
- Pittsburg, Pennsylvania
- Median Sales Price: $141,000
- Median Rent Per Month: $1,115
- 1-Year Job Growth Rate: 0.68%
- Unemployment Rate: 3.8%
- Huntsville, Alabama
- Current Median Home Price: $151,000
- Median Rent Per Month: $1,121
- Unemployment Rate: 3.5%
Buying rental property may be a smart investment for you once you determine how much profit you could earn on your investment.
Let us help you crunch the numbers. Contact the real estate investing professionals at Century 21 Northwest for more information.