How to Decide Where to Invest in Rental Properties
Now that you know how to buy your first rental property, you’ll need to decide where exactly to invest.
As the industry always points out, location is one of the most important factors in real estate investing. That’s the whole reason for our deep dive series on the diverse areas in Metro Detroit, where we evaluate the financial viability and liveability of each city and neighborhood in Michigan’s well-known rental investment hotspot.
So, what makes an area “good” for investing in residential rental properties? What factors should you look for when deciding where to expand your rental portfolio?
Let’s start by learning how to look at the big picture.
Scan on a Macro-level
There are certain areas that people flock to as residents, and there are other areas that people flock to as investors.
While the factors that reach either category might overlap, investors need to put more importance on the following factors, more than a prospective resident would:
Population Growth: The larger the population of an area, the higher demand there will be for homes. This simple supply-and-demand law can be beneficial to a rental investor in areas with a growing population. When the demand outpaces the supply of homes, home values and prices will increase.
Crime and Safety: Safer areas are more attractive to prospective residents. As a result, these areas have higher property values. You can make money in high-crime areas, albeit with more risk to manage. Hire the right property management company and budget for possible damages in relation to the crime and safety rate of the area.
Rent vs. Own: An area with more renters than owners means a larger tenant pool and faster turnovers. The housing stock of a market with plenty of renters does tend to have more wear and tear, so work with a professional inspector prior to a home purchase and have your property management company help with the upkeep.
Average Rent Amount: The higher the rent you can charge, the more returns you’ll pocket from your investment. You want to invest in places that are already charging the rent amount you seek, lest you get stuck in an area that can’t meet the rental income you expect to generate. You can always charge lower rent to be competitive, but it’s difficult to charge higher than the average.
Unemployment Rate: An area with a low unemployment rate will likely have renters with more stable income, and who therefore will be more capable of paying rent regularly. This area may also have plenty of job opportunities, which will attract quality tenants. In searching for potential areas, look for a manageable unemployment rate that won’t harm your chances of securing income-stable tenants.
We’ve covered neighborhoods for areas in Metro Detroit according to these factors in our Deep Dive series mentioned earlier. If you’re doing your own research for other areas, databases such as Data USA and US Census, and websites such as Niche and Zillow will give you a wealth of information.
Research on a Micro-level
Once you’ve narrowed it down to a specific area or city, do research on smaller neighborhoods, blocks, and streets. Your goal is to find properties that tenants would find attractive and convenient—perhaps for their children to go to school or for them to go to their workplace.
Here are some questions to ask yourself:
1. Is the property in a walkable neighborhood?
2. Are there many amenities, parks, beaches, or greenery nearby?
3. Are there many restaurants, cafes, stores, or supermarkets around?
4. Will it be easy to access public transportation on a daily basis?
5. Is the location part of the catchment area of a school?
6. Is there a college or university in the area?
7. Is the home close to plenty of job opportunities?
You can find all this information on websites such as NeighborhoodScout, AreaVibes, and BestPlaces. For cities and neighborhoods with more diverse areas, you’ll need to do extensive research—ideally with a local property management company or real estate agent.
For example, the City of Detroit itself has 57 zip code areas with their own real estate market scene, greatly varying from one block to another. You’d need a guide to know exactly where to look and insider tips on the specific areas you’d like to invest in.
Expanding your rental portfolio will never be easy, but choosing the right location from the start will put you on track to success. With thorough research and professional guidance, anybody can continuously invest in more and more rental properties, reaping great returns from one location to another.
If you need more help, feel free to reach out to our team in Logical Property Management. We’ll be more than willing to guide you in your next rental investment property.
Where are you currently interested in investing? Do you have any questions you’d like to ask?
Image courtesy of Karolina Grabowska