The Ultimate Guide to Know Where to Invest in Rental Properties
You’ve already got your first rental property—or a few—and now you want to broaden your portfolio. Should you stick to the same area, or expand into new locations to diversify? And if you want to look to greener pastures, what critical factors should you keep in mind?
If you’re looking for a hot rental to invest area in 2023, there are a few things you should be focusing on to narrow your search. After all, not all markets are the same—only the good ones will give you the promised returns. In this article, we provide a guide to aid your decision-making process.
1. Budget and Property Class
First things first, your budget. Lying out a budget and plan is essential when expanding your business, as it will dictate the kind of property and location you can afford. These are the property classes that you can look into based on your budget:
- Class A Properties: These properties are typically brand new or renovated with high-class features and amenities. Only the richest of the rich can afford these rental houses. They attract white-collar tenants that wouldn’t have any problems paying rent and maintaining your property.
- Class B Properties: These kinds of properties are more affordable than Class A because they’re not as fancy or luxurious. They might need minor repairs but are overall well-maintained. They attract tenants who are a mix of working-class families and higher-income earners. You generally won’t have any problems with these tenants, as they are generally financially responsible.
- Class C Properties: Class C properties may have some depreciation and outdated features due to property age. They might require renovations to bring it back to rental standards. They attract tenants who are blue collar-workers in mid-to low-income jobs. These kinds of tenants live paycheck to paycheck and are negatively affected by recession due to the nature of their jobs.
- Class D Properties: These kinds of properties go beyond 40 years and will need major renovation. They are definitely not for beginner investors, and often attract lower-class tenants with unstable income streams—likely requiring you to hire property managers to handle them.
Moreover, know that the property management required for each property class will differ. So you’ll have to take that into consideration when finalizing your budget.
2. Location, Location, Location
Location is still one of the most important factors when investing in properties.
You can invest in an urban area or where “city life” thrives. You can also invest in a suburban area, which is the outskirts of cities and primarily residential. And there are rural areas as well, which are known to be driven by agriculture (also known as “the middle of nowhere”).
Choosing your kind of location comes with advantages and disadvantages. These are the things you need to take into consideration:
- Environment: Choosing the environment of your property will affect who your potential tenant will be. For example, if you want to attract young professionals who are determined to build their careers, opt for a budget apartment building near the city. If you want to attract families with kids, choose a bigger property in a suburban area near good schools.
- Local Rental Laws: There are rules and regulations put into place to protect both the tenant and the landlord. Know the local rental laws to see if this is something that aligns with your standards as well. You won’t want to invest in an area where tenants have the upper hand.
- Amenities: Research the available public and private amenities available for the residents. The more amenities available, the more appealing it would be for people to live in that area. Amenities include a community center, parks, gardens, playgrounds, and other important public amenities—whatever your target tenants will want and need.
- Safety: Areas with low crime rates and a strong sense of community are more attractive to prospective tenants. More importantly, as a landlord, this will indicate the safety of your property. We recommend visiting the block itself though because crime rates will greatly vary from one street to another—don’t just trust generalized scores.
Your chosen rental property area can either earn you a steady profit throughout the years or bog you down with multiple costs to make up for location risks and hazards. So do your due diligence!
3. Key Factors that Determine Profitability
Lastly, do the math to see if the property or neighborhood you’re eyeing will be financially viable. After all, money is still at the heart of every investment. There are more than a few factors to evaluate an investment opportunity, but here’s a quick list for you to start with:
- Average Rent Amount: Select a location where you can charge a competitive rent amount to maximize your return on investment. A good way to do this is by researching the average rent amounts in the area to get an idea of how quickly you can recover your costs and start generating a profit. Check out the 1% Rule as well.
- Appreciation Value: Consider the potential for equity growth. This means that if you decide to sell your property down the line, you could make more profit than what you initially paid for. Research the market to identify properties that show positive growth trends.
- Population Growth: The population of an area is another factor to consider in the success of rental investments. When there is a higher demand for homes than there is a supply, this will drive up the prices of homes and property values. Population growth will affect both your occupancy rate and the market rent prices.
- Unemployment Rate: Areas with low unemployment rates would have residents who are more financially stable. Also, look at other economic indicators such as worker productivity and the number of annual job openings. You will then know if the area has enough work available for those looking for employment, increasing your tenant pool with stable renters.
The list above should help you shortlist options. Don’t waste time in an area or with a property that doesn’t pass these factors—remove them from consideration and focus your efforts on the ones that do.
You can also check out our Deep Dive series if you’re interested in the Metro Detroit area, where each report dives into all the investment information you need. (There are a lot of hotspots there to find opportunities with a good balance of short- and long-term gains!)
Expand Your Portfolio Wisely
By taking the time and effort needed to decide where you want to invest next, you can focus on creating value through smarter purchasing decisions—ultimately reap greater rewards through successful investments. Keep yourself updated with the market trends, and you’ll safeguard your investments regardless of the market’s stability (or lack of!).
Do you want to learn more about investment opportunities in Metro Detroit? We talk more about the area’s forecast and potential in our other blog. And get in touch with our team if you need more help!