How To Find The Most Profitable Investment Property (2024)

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25 Aug 2023

How To Find The Most Profitable Investment Property

Category: Investing 101, LeasingTags: How to Invest, Profitable Investment Property

Investing in a commercial property can offer fantastic tax benefits, low barriers to entry, and some of the highest return rates. Whether it’s an investment in a long or short-term property, investors can create positive cash flow with a high return on investment.

Here are tips to help when deciding what types of investment properties can help build wealth and equity and diversify your portfolio.

Research the Market

The first thing an investor should do is research, and a good tip is knowing the location of the property beforehand. Analyzing how much properties in the area sold for can help when determining cash-on-cash returns and cap rates. Many factors affect the price, rental expenses, tenants, and value of your property. As a result, if you want a decent return on investment, you should start your property search by analyzing the neighborhood to make sure it is a good real estate market.

Calculate the Value of Your Property

Calculating the value of your investment can help when deciding if purchasing a property makes financial sense. Some important metrics to add to an income property analysis include:

Net Operating Income – This refers to the total income of a property after all expenses are taken out. Investors can generally find this number by using monthly income and expense data, then multiplying that number by 12.

Cash Flow – By considering estimated rental income after rental expenditures, investors can judge whether a rental property will make money or require additional funds to be successful in real estate.

Cash on Cash Return – This is the annual pre-tax cash flow (NOI – annual mortgage payment) to the overall cash investment ratio (down payment, closing costs, any rehab expenses, and other loan charges).

Cap Rate – This is calculated by dividing the property’snet operating income (NOI) by the acquisition price or market value. Most investors strive for a high cap rate asset, typically between 7-12%.

What Types of Commercial Properties Are the Most Profitable?

High-Tenant Properties – Typically, properties with a high number of tenants will give the best return on investment. These properties include RVs, self-storage, apartment complexes, and office spaces. The more tenants there are—and the higher demand for your property—the more significant your income becomes and the less you will have to concern yourself with finding tenants with little notice.

Properties in Areas with Growth – High-traffic areas are particularly best in retail since they tend to bring in tenants who will renew their leases. These areas are also more likely to draw new tenants if current occupants leave for any reason. Another prime example of an area with potential growth is a newly developed suburb, which can be a magnet for investors.

Triple Net Lease Properties – Triple net properties are usually single-tenant spaces, but those tenants are more likely to sign long-term leases. They are also ideal for inexperienced investors, as they place the responsibility of paying real estate taxes, maintenance, and building insurance into your tenant’s hands. This makes it easier to have a stable income from your investment rather than estimating your payment based on projected maintenance costs.