Everyone knows that the best deals aren’t the ones being marketed where everyone can find them. This article explains how to find a rental property to buy and factors that influence the search. Looking for rental properties can be a challenge. However, getting a rental property can be financially rewarding. Location is one of the key things to consider when looking to find rental investment property.
Looking for rental property? Location, Location, Location!
When looking for rental properties to invest in, it’s never a bad idea to start first with a desirable location. Picking the location depends on a number of factors. Some of those factors depend on the investor, while other factors depend on the profile of the desired tenants. Here are some key factors to consider when deciding on a target location for a rental housing investment.
1. Tenant Household – Keep in mind if the desire is to attract single residents, families with kids, or households that include caregivers and their dependents. Each type of household could have different needs that impact the desired location. If attracting single professionals, the investor may want to look at more urban locations, business districts, or suburban locations near stable corporations. Renters who have children may want to be close to schools. Households with caregivers and dependents may want to be close to healthcare providers. Characteristics of the location can also be used as selling points when marketing the property to prospective tenants.
2. Tenant Income – When looking at the chart above from the Brookings Institution, you can see that buying property for rental income may be a good investment choice. According to Pew Research, about half of U.S. adults live in middle class households. A considerable amount of those households are renting. As income goes down, the percentage of renter households compared to homeowners goes up. Depending on which types of households are being targeted, affordability of the market rental rate may be a factor. It may be necessary to limit the property search to areas where the market rate favors prospective tenants in the investor’s target group.
3. Safety – A key for most people when looking for a place to live is safety and security. City-Data and NeighborhoodScout are two great resources to check out crime rates and statistics in the area that the investor is searching for properties. Property owners also need to consider the possibility of any risk to the property while vacant. Depending on the area, unscrupulous locals may attempt to take advantage of a perceived opportunity if a property is unoccupied.
4. Parking – Few things are more annoying than fighting neighbors for a parking spot, having to park too far away, or a junk heap of a car always parked on the public street in front of a home spoiling the view of a nicely landscaped yard. In urban spaces, parking for a rental unit can be limited or very tight. Urban parking alone is an acknowledged skill that many college students have been forced to master. For suburban areas, parking may be less of an issue, but could be a selling point based on whether parking is on the street, on-premise, or if a garage or other covered parking is available.
5. Area growth – It’s not a bad idea to scope out areas that appear to be expanding with businesses such as big box retailers like Target and Walmart, movie theatres, grocery chains, national restaurant chains, fitness centers and professional services. In today’s fast-paced culture, being close to the most frequented places of business is a real amenity for renters and homeowners. In addition to patronizing businesses, renters may want to be in close proximity to the places they work. Locations where a large corporation is already located, building a new headquarters, expanding sites, or coming soon to the area, are all good factors to consider.
Locations to stay away from
Identifying undesirable locations is just as important as choosing desirable locations when deciding how to find good rental properties to buy. Some of the factors below are the opposite of the factors mentioned in the previous section. Investors should consider these factors when excluding properties from their target buy list.
1. War zones – The #1 tip that most investor gurus will tell you is to stay away from war zones! Sure, many rental property investors have made a lot of money investing in properties within historical war zone areas. Rehabbing a property and then taking advantage of a neighborhood turnaround can deliver huge profits!
What’s a war zone? A war zone is an area that is typically low income and plagued by crime. There could be visible boarded up houses or buildings. Many businesses may have moved away from the area steadily over the years. The people who live in the area may be considered low income. If someone new comes to the area and asks about the side of town to stay away from, the answer is usually a war zone. War zone real estate typically is older (which makes them cheaper), probably needs some repairs, and may not attract the best tenants. The general rule is to stay away from war zones unless the investor already has experience and a track record of success with those types of properties.
2. High property tax rates – An area may be excellent with a good opportunity to find quality tenants. However, increasing tax rates can eat into investor profits if the property is not owned free and clear. In addition, if the average rents in the area don’t rise to match the growing tax rates, passive income will decrease. Most localities have an online database that will allow the general public to research property taxes to see how high they are, and if they are going up or down based on recent assessments. High property tax rates are only an issue if they present a roadblock to desired financial goals.
3. Declining home values – In economics, a general principle is that if demand increases and supply decreases, prices will go up. The opposite is true. If people aren’t looking to buy in an area, and a lot of sellers have homes on the market, home prices and home values will decrease. If people are leaving an area because the local economy is struggling, less people will be in the market to buy, and those who are leaving will sell their homes. Some may even leave the home and let it go into foreclosure. If foreclosure rates rise in an area, even more supply will be added to the market.
4. Declining population growth – Similar to declining home values, if an area is seeing people move away instead of moving in, the demand for rental properties now and in the future will be less. A smaller population means a smaller workforce to attract businesses and smaller local tax dollars. An area that does not have a healthy business community may suffer from depressed wages which will cause average rents in the area to be low. If local tax dollars are increased to cover losses caused by a declining population, property taxes could be raised.
5. Declining employment or rising unemployment – The biggest impact of declining employment or rising unemployment is loss of rental income! Tenants can’t pay what they don’t have. Even if you sue for rents owed, there is no guarantee of recovering all or even a portion of unpaid rent payments. With a little research, recent unemployment rates for states and counties can be found.
Summary
In conclusion, the best way to find investment properties is to think seriously about the location that will be targeted before making offers. Buying a house as a rental property requires a focus on tenant demographics and needs. It also requires getting data about the desired area to understand any trends in population or the local economy.
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