A few types of income properties for new real estate investors stand above the rest. Even though the market is full of homes for sale right now, that doesn’t mean you should move to the first house you see down the street. Instead, looking at the homes through a few filters is best to know if they’d make a great starter investment property.
Here are the best income properties and rental investments to consider, primarily because of the positive cash flow potential.
1. Multi-Family Homes
Perhaps the best way for new investors to get started is with multi-family homes. There’s a reason why it’s usually not easy to find them for sale! Fellow investors know these are great investments, thanks to the diversified risk.
Here’s why multi-family rentals have become a popular real estate investment strategy:
- Consistent Rental Demand – People always need places to live and rental demand tends to be more consistent across markets compared to other real estate. Vacancy rates are usually lower than other commercial properties.
- Income Growth Potential – Multi-family properties can generate rental income that rises with inflation over time through raising rents. More units mean more rental income potential.
- Lower Purchase Costs – The purchase price per door tends to be lower for a 100-unit apartment than buying 100 single-family homes. There are some economics of scale.
- Management Efficiencies – Single location and common facilities allow operating efficiencies compared to scattered single-family rentals. Centralizing maintenance and management is easier.
- Financing Advantages – Multi-family buyers can often put less money down, utilize commercial debt terms, and get better interest rates than with single-family homes.
- Tax Benefits – Depreciation, deductions for operating expenses, and 1031 exchanges help defer/lower tax bills for commercial-style multi-family.
For investors who want to scale up beyond single-family rentals, multi-family properties provide a way to build a larger income-generating portfolio from fewer but higher-value property purchases. The hands-off management, income growth, leverage, and tax perks make it an attractive sector.
2. House Hacking
House hacking is a real estate investment strategy where the investor lives in one unit of a multi-unit property and rents out the other units. This allows them to live for low or no cost while generating rental income from the tenants. Here is a brief overview of house hacking and why it is among the best income properties:
- Low Down Payment – An owner-occupant often only needs to put down 3-5% for an FHA loan instead of the 15-20% typically required for investment properties. This allows investing in real estate with less capital.
- Mortgage Helped by Rental Income – Since rent from the other units helps cover the mortgage, the out-of-pocket housing costs for the investor are reduced or eliminated. This improves cash flow.
- Tax Advantages – Expenses associated with the rental units can be written off, and depreciation further reduces taxable rental income. Lowered taxable income helps investors early in their careers when income is higher.
- Forced Savings & Wealth Building – Monthly mortgage principal paydown builds equity, acting as a forced savings account. Appreciation over time increases net worth.
- Better Financing Terms – Owner-occupied multi-unit properties often qualify for better lending terms than non-owner-occupied investment properties.
By living on-site, house hackers benefit from lowered living costs and accelerated wealth building early on. The dual components of home and investment property make house hacking popular with first-time or early-stage real estate investors.
A REIT, or Real Estate Investment Trust, provides a way for individuals to invest in income-producing real estate without having to buy, manage, or finance properties themselves. Here is a quick overview of why REITs can make a good real estate investment:
- Professionally Managed – REITs purchase and operate various property types. They provide the institutional management experience individual investors often lack.
- Income Focused – REITs must pay out 90% of taxable income as shareholder dividends. This provides steady income for investors.
- Market Diversification – Many REITs hold diverse portfolios with hundreds of properties across sectors like apartments, offices, malls, and warehouses.
- Liquidity – As publicly traded securities listed on stock exchanges, REIT shares can be bought and sold easily.
- Low Investment Threshold – For a few hundred dollars, an investor can gain exposure to multimillion-dollar property portfolios.
- Tax Advantages – REIT dividends often qualify for preferential tax rates under certain holding periods.
For hands-off real estate investment, REITs offer easy access to income-generating property along with the convenience and liquidity of stocks. Their significant property holdings, professional management, and focus on distributions can provide good diversity and returns.
4. Detached Single-Family Homes on Sale
Investing in detached single-family homes involves purchasing stand-alone houses and renting them out to tenants. Here is a brief overview of why they can make attractive rental investments:
- Appreciation Potential – Single-family housing often appreciates faster than inflation over time, allowing investors to build long-term wealth.
- Ability to Add Value – Investors can create value through renovations and repairs that allow raising rents.
- Tax Benefits – Expenses like property taxes, maintenance, and mortgage interest can be deducted to offset taxable rental income.
- Loan Access – Financing is easier to obtain for standard single-family homes versus other commercial properties.
- Flexible Exit Strategies – Properties can be sold, traded up via 1031 exchanges, or refinanced thanks to high liquidity.
- Lower Tenant Turnover – Tenants often rent houses for longer stretches than apartments. This lowers vacancy rates and replacement costs.
While detached homes do require active landlord and management, the wealth-building potential through appreciation makes them a foundational piece for many real estate investors. By maximizing operating income and leveraging tax perks, savvy investors can see strong returns on houses purchased at good valuations.
5. Mobile Homes
Investing in mobile homes involves purchasing manufactured housing units and the land they sit on, then renting them out to tenants. Here’s a quick rundown of why they are among the best income properties:
- Lower Purchase Costs – Mobile homes are less expensive to purchase than typical single-family houses, allowing investors to get into the market with less startup capital required.
- Affordable Housing – There is high demand from tenants seeking affordable housing options. Vacancy rates tend to be lower than standard rentals.
- Steady Cash Flows – While appreciation lags standard homes, monthly cash flow is the primary return.
- Less Maintenance – Construction techniques and smaller spaces make upkeep costs lower than traditional single-family rentals.
- Stable Tenant Base – Longer leases are common in mobile home parks, reducing turnover costs. Retirees often create consistent occupancy.
The lower startup costs, combined with solid ongoing returns from rent make mobile home parks worth considering for investors comfortable with the dynamics of manufactured housing. While capital appreciation trails other options, cash flow in the near term can deliver good recurring returns.
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With the right property and tenants, they can be a fairly hands-off investment as well. Returns ultimately hinge on buying at an attractive valuation.
6. Airbnb Rentals
Investing in Airbnb involves utilizing the popular vacation rental platform to generate income from short-term guests rather than long-term tenants. Here is a quick rundown of why Airbnbs can deliver strong returns:
- Higher Nightly Rates – Airbnb allows charging hotel-like prices far exceeding monthly rents, with dynamic pricing to capture peak travel demand.
- Utilizes Existing Housing Stock – Converting current housing or underused second homes allows taking advantage of Airbnb demand.
- Lower Vacancy Risk – Weekend and seasonal travelers provide more consistent bookings than relying on full-time tenants.
- Upfront Design & Amenities – By designing units for the short-term experience, higher rents can be commanded.
- Hybrid Model Potential – Properties can still be rented traditionally during slower booking periods to manage cash flow.
- Scalability – Once systems are in place, managing multiple units has become easier to scale up.
For investors able to tap into the demand for lodging alternatives, Airbnb provides a way to maximize returns beyond the norms of long-term buy-and-hold rentals. However, hands-on effort is required, from ensuring regulatory compliance to managing rapid tenant turnover.
Factors to Consider When Buying an Income Property
Are you looking to purchase a residential rental property to boost your investment portfolio return? Investment properties can be exciting and very rewarding if you make the right choice. But income and other rewards aside, investing in real estate can be daunting for a first-time investor.
Real estate is a tough business and the field is peppered with land mines that can obliterate your returns. That’s why it’s important to do detailed research before you dive in so you’re on top of all the pros and cons of real estate investing.
Here are the top 10 features to consider when shopping for the right income property, plus some additional information to make your search easier and more productive.
The neighborhood in which you buy will determine the types of tenants you attract and your vacancy rate. If you buy near a university, chances are that students will dominate your pool of potential tenants and you could struggle to fill vacancies every summer. Be aware that some towns try to discourage rental conversions by imposing exorbitant permit fees and piling on red tape.
2. Property Taxes
Property taxes are one of your costs and they can vary widely across your target area. High property taxes are not always a bad thing—for instance, in a great neighborhood that attracts long-term tenants. But there are unappealing locations that also have high taxes.
A municipality’s assessment office will have all the tax information on file, or you can talk to homeowners in the community. Be sure to find out if property tax increases are probable in the near future. A town in financial distress may hike taxes far beyond what a landlord can realistically charge in rent.
Consider the quality of the local schools if you’re dealing with family-sized homes. Although you will be mostly concerned with monthly cash flow, the overall value of your rental property comes into play when you eventually want to sell it. If there are no good schools nearby, it can affect the value of your investment.
No one wants to live next door to a hot spot of criminal activity. Online state and municipal sites, the local police, and the public library should have accurate crime statistics for neighborhoods. Check the rates for vandalism and for serious and petty crimes. Don’t forget to note if criminal activity is on the rise or declining. You also might want to ask about the frequency of police presence in your neighborhood.
5. Job Market
Locations with growing employment opportunities attract more tenants. To find out how specific area rates for job availability are, check with the U.S. Bureau of Labor Statistics (BLS) or visit a local library.
If you see an announcement about a major company moving to the area, you can be sure that workers in search of a place to live will be interested in rentals. Bear in mind that the type of business involved may cause housing prices to go up or down. You can assume that if you don’t mind having the company in your area, your renters probably won’t either.
Tour the neighborhood and check out the parks, restaurants, gyms, movie theaters, public transportation links, and all other perks that attract renters. City Hall may have promotional literature that can give you an idea of where the best blend of public amenities and private property can be found.
7. Future Development
The municipal planning department will have information on developments or plans that have already been zoned for the area. If there is a lot of construction going on, it is probably a reliable sign of growth. Watch out for new developments that could hurt the price of surrounding properties. Additional new housing could also compete with your property.
8. Number of Listings and Vacancies
If a neighborhood has an unusually high number of listings, it may signal a seasonal cycle or a neighborhood in decline. Find out which it is. In either case, high vacancy rates force landlords to lower rents to attract tenants. Low vacancy rates allow landlords to raise rents.
9. Average Rents
Rental income will be your bread and butter, so you need to know the area’s average rent. Make sure any property you consider can provide enough rental income to cover your mortgage payment, taxes, and other expenses.
Research the area well enough to gauge where it might be headed in the next five years. If you can afford the area now but taxes are expected to increase, an affordable property today could mean bankruptcy later.
10. Natural Disasters
Insurance is another expense you will have to subtract from your return, so you need to know just how much it’s going to cost you. If an area is prone to earthquakes or flooding, insurance coverage costs could eat away at your rental income.