{"id":14979,"date":"2020-03-12T09:35:01","date_gmt":"2020-03-12T16:35:01","guid":{"rendered":"https:\/\/www.homelight.com\/blog\/?p=14979"},"modified":"2024-03-06T08:00:35","modified_gmt":"2024-03-06T16:00:35","slug":"buyer-where-to-invest-in-real-estate","status":"publish","type":"post","link":"https:\/\/www.homelight.com\/blog\/buyer-where-to-invest-in-real-estate\/","title":{"rendered":"Where to Invest in Real Estate: 8 Factors That Make a Location Great for Rentals"},"content":{"rendered":"

The location of your rental property is the one thing you can\u2019t change. Sink investment capital into a neighborhood where you\u2019ll have difficulty keeping tenants, or in a location where you can\u2019t charge enough rent to cover your monthly expenses, and you\u2019ll live to regret the decision deeply.<\/p>\n

\u201cYou do have to consider the whole picture before investing in real estate. Look for locations where there’s a housing need that hasn’t been met, or where rent affordability is an issue,\u201d says top-selling Ephrata, Pennsylvania, real estate agent Jennifer King<\/a>, who also specializes in investment properties.<\/p>\n

So what makes a real estate market a great place to invest? Here are eight indicators that reveal key insights about an area, like whether it\u2019s attracting new residents, if the rent you charge will cover your expenses, and how desirable the surroundings will be to potential tenants.<\/p>\n

\"A<\/a>
Source: (Rob Curran \/ Unsplash)<\/figcaption><\/figure>\n

1. Rising population<\/h2>\n

Every month you go without a tenant paying rent, you\u2019re stuck covering 100% of the mortgage, utilities, and upkeep \u2014 which will quickly put your investment into the red.<\/p>\n

That\u2019s why the first statistics that savvy investors look at are the population trends in the areas where they\u2019re interested in making a rental property investment.<\/p>\n

The U.S. Census Bureau generates reports that track state-to-state migration<\/a>. Migration rates show what states are gaining or losing residents, which can be telling of an area\u2019s overall activity and growth. For example, the national population growth rate is 3.5%<\/a>. When the area you\u2019re looking to invest in has a higher than the national average population growth rate, say 4% to 7%, that\u2019s a good sign for general interest in the area which should often translate to rental demand.<\/p>\n

2. Steady job growth<\/h2>\n

If a location\u2019s most recent population statistics aren\u2019t showing signs of growth, that doesn\u2019t mean it won\u2019t soon see a boom. Before passing on the location, do a little research into its job growth<\/a> track record. Simply put, job growth tracks the number of jobs created in the country on a monthly basis.<\/p>\n

Money makes the world go \u2018round, so it\u2019s only natural that people will soon flock to areas where jobs are available \u2014 and those employees will need a place to live.<\/p>\n

\u201cThe businesses in the area can impact your investment location, as well, whether you\u2019re in a college town, or you’ve got factories in the area,\u201d explains King. \u201cSome industries or companies bring in employees for only a year or two, so it\u2019s a better option for them to rent a house rather than buy.\u201d<\/p>\n

You can turn to current employment statistics<\/a> tabulated by the U.S. Bureau of Labor Statistics \u2014 numbers which are tracked nationally, by state, and by metropolitan area \u2014 making it one of the best indicators that a city is a good candidate for rental property investment.<\/p>\n

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Source: (U.S. Bureau of Labor Statistics)<\/figcaption><\/figure>\n

Consider this chart of job growth patterns from December 2018 to December 2019. Areas with 0.9% growth or less are considered to have flat, or negative, growth. Areas with 2% to 3% growth are considered to have steady or high job growth.<\/p>\n

3. Demand for rental homes and low vacancy rates<\/h2>\n

Population and job growth spikes won\u2019t guarantee that you\u2019ll have a pool of tenants clamoring to lease your rental home \u2014 especially if the location is already saturated with vacant apartments and other rental properties.<\/p>\n

Experienced rental property investors look to the national vacancy rate<\/a>, which gives a snapshot of the overall profitability of rental property investing.<\/p>\n

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Source: (ipropertymanagement.com)<\/figcaption><\/figure>\n

These national stats are also broken down to vacancy rates on the state and city level<\/a>. When a location has a low vacancy number, it\u2019s a good indicator that the demand for rental properties is high in that area.<\/p>\n

High demand for rental properties means that you\u2019ll have an easier time finding a tenant. While the benchmark for high or low vacancy rates varies<\/a> by area and property type, in general a 4% vacancy rate or less is considered low (i.e. a good place to invest), while a 7% vacancy rate or higher is considered high (i.e. a high-risk place to invest).<\/p>\n

Once you narrow in on your top-potential markets, you\u2019ll need to determine your target price-point and property type. And while it might seem practical to purchase smaller, economy, or midrange homes that\u2019ll appeal to the widest pool of buyers, you shouldn\u2019t discount luxury properties without doing your research on market trends.<\/p>\n

\u201cIn Lancaster, Pennsylvania, there aren\u2019t many high-end properties available for rent, and we have industries here that are constantly bringing in people looking for executive rentals,\u201d explains King.<\/p>\n

\u201cIn markets like ours, it makes sense to think outside the box and consider the untapped luxury market, versus buying two or three smaller properties.\u201d<\/p>\n

4. Solid return potential, either from a rent or appreciation perspective<\/h2>\n

One hard and fast rule property investors play by is this: Only buy properties that will rent out for more than the monthly housing expenses<\/a> (mortgage, utilities, upkeep, etc.).<\/p>\n

After totaling the housing costs on your rental property, you\u2019ll have an idea how much you\u2019d need to charge to cover your expenses and still turn a profit in each location you\u2019re considering. Next, you\u2019ll need to check the rent trends in those locations, which you can find on sites like Apartment List<\/a> and Apartment Guide<\/a>.<\/p>\n

However, not all real estate investments pay off in the same way. One big decision you need to make before picking a location is how you want your investment to earn for you: in monthly income or overall appreciation.<\/p>\n

\u201cSome investors prefer to purchase in urban areas where the property appreciation isn\u2019t as great based on location, but the rental rates are significantly higher than in suburban areas,\u201d explains King.<\/p>\n

\u201cOn the other hand, sometimes investors go for locations where the rent is lower and the mortgage is higher, so your monthly income isn\u2019t as good, but the property appreciation is better.\u201d<\/p><\/blockquote>\n

If you\u2019re more interested in choosing a location based on the potential for property appreciation<\/a>, it may make sense to invest in a property where you\u2019re barely breaking even each month. While you won\u2019t make as much on a monthly basis, you\u2019ll make it back in equity when you sell the property.<\/p>\n

Plus, as the owner, your monthly mortgage payment will stay the same, but as the landlord, you\u2019ll be able to make annual rent increases<\/a> to grow your monthly profit margins over time.<\/p>\n

\"A<\/a>
Source: (Peter Gonzalez \/ Unsplash)<\/figcaption><\/figure>\n

Where to invest on the neighborhood level<\/h2>\n

Picking the right city with a hot real estate market is only half the battle. Once you\u2019ve selected the general location, you need to figure out which neighborhoods will be the most attractive for renters or the most likely to appreciate long-term. The four main factors you need to consider when picking a specific location for your property investment are: Desirability, centrality, future development plans, and neighborhood\/house aesthetic.<\/p>\n

5. Access to local activities and offerings\u00a0<\/b><\/h2>\n

As a rental property owner, you\u2019re competing for tenants with apartment complexes and condo associations that have an attractive assortment of onsite amenities like exercise rooms, swimming pools, and active communities.<\/p>\n

You don\u2019t have to install features like these to compete, but you do need to choose a rental house in a desirable neighborhood. Search out locations that have features like these:<\/p>\n