Are you considering investing in rental property but don’t know how to choose the right location? When you're searching for the right rental property to purchase, you should realize that the property's location is the number one consideration that determines the property's performance and success as an investment.
When searching for a rental property, you need to determine if the location:
- Has low supply and high demand.
- Is close to amenities such as schools, hospitals, grocery stores, parks, and transit.
- Is safe with low crime.
- Has appreciating property values.
- Has reasonable taxes.
- Has a big enough population to maintain a steady stream of tenants.
Here are nine essential factors to keep in mind when choosing the right location for your local rental property investment
- Low supply and high demand - Before deciding on the neighborhood, you want to research the area to determine if an adequate supply of rental property is available. You don’t want to go for a location with many properties available for rent. The ideal is a neighborhood where people want to live but has minimal vacancies. This will take time to watch as you’ll need to pay attention to when vacancies occur and when the properties fill. Throughout the summer, June - August, which is typically the busy season for rentals, you can track when tenants move.
- Neighborhood - The neighborhood you choose for your rental property investment determines what types of tenants will be attracted to your property. If you buy in a residential area with access to transportation or interstate access, you could attract a business person who commutes. If your rental is closer to schools and parks, you could attract a family to your property. If you buy near a college, you’re likely to get students who rent only during the school year.
- Amenities - Long-term tenants prefer good in-city transportation options, close to grocery stores, highly-rated schools, and hospitals. In contrast, month-to-month tenants prefer rentals with access to public transportation, restaurants, and tourist areas.
- Safety and crime - No one wants to live in a high-crime area. When considering purchasing a rental property, you want to research the location to see what is reported. A tool like AreaVibes will allow you to research an area and compare it to other cities regarding crime rates. Don’t be fooled; an area may have a reputation but no criminal activity. This location may be a diamond in the rough for rental property.
- Job market and development - Areas with growing employment opportunities attract more tenants. You can check the U.S. Bureau of Labor Statistics (BLS) or visit a local library to see the unemployment rate in the area. Watch for announcements of large employers moving in and needing employees or development plans as building new buildings require builders. Workers searching for a place to live will flock to places with good employment options. This may cause housing prices to go up or down, depending on the type of business involved.
- Taxes - Property taxes can vary widely throughout the neighborhoods in one city. When you consider purchasing a property, you’ll want to consider the amount you’ll pay in taxes each year. High property taxes may not be an issue if the property has long-term tenants and is in a higher-quality neighborhood. Local county offices have taxes online as public records; you can search for your property to find the current tax rates.
- Property appreciation - When searching for properties, you want to look in areas with strong growth in their employment rates, a household income where spending 30% of your earnings on rent is comfortable, or big development projects taking place, such as new transportation. Buying a rental property in these markets can result in large profits on your investment.
- Average rents - Cash flow is the lifeblood of any rental property. If the average rent does not cover all of your operating costs and debt service, it’s not worth owning. However, if the average rents cover all costs and leave you with a cushion of net income, you now have a profitable rental. Run a rent estimate report to see the current asking rents. You can then determine if your subject property can earn the same by having a similar layout, amenities, and features, more because of upgrades or updates, or less due to a lack of features.
- High insurance area - Things outside the owner’s control can also affect the property location, like natural disasters. When considering a rental property location, you need to see if you’ll pay higher insurance premiums due to a history of bad weather. Repeated flooding, tornadoes, and earthquakes can cost you higher insurance premiums and chip away at your earnings.
Managing the rental property
Your location options might be limited depending on your intent to hire a property management company or actively manage the property yourself. If you plan to hire a property management company, the location is less of an issue. If you’re going to take on the daily management, you don’t want the property too close or too far from where you live. Decide how far you’d be willing to drive to fix an issue and look for a property within that radius from your home or office.
Rental property comparative market analysis
Once you’ve determined the property is worth considering, it’s time to analyze properties in the area thoroughly. The rent estimate report from RentSpree will show you current rental estimates and give you vacancy rate estimates, a detailed snapshot of the local market showing you the rents of comparable properties, and rental saturation benchmarks. You’ll be able to determine if the rental in your chosen location is right for you with access to mapped listings of local rentals with property details and rent prices to understand the surrounding area better.
Determining the rental pricing
How is the rental pricing determined? The rent estimate report can give you all the pricing information to rent the property reasonably. The report will show you what factors affect the local market and help you decide if your property fits into that market. Setting the rent too high and your property could stay empty; too low, you’ll pay for rental expenses out of pocket. Start with the average rent on the rent estimate and see how the numbers work with your estimated costs.
Subtract your expected monthly costs for your mortgage payment, property taxes, insurance, maintenance, repairs, and vacancy allowance. If you've thought of hiring a management company in the future, add those estimates to your costs. 10% is a safe average to use as a property management estimate. A newer property may cost more upfront but will likely require less work than an older property. If everything comes out positive with some leftovers, your purchase price makes sense.
Finding the right rental property location is the key to successful real estate investing. These nine factors can help you determine if an area is worth pursuing or if you should continue your search. RentSpree is here to help you with comparative market analysis, rent estimation, rental applications, lease signing, tenant payments, and tenant screening.