Choosing an investment rental property is very different from choosing your dream home. While it is easy to mix in your personal preferences and emotions when purchasing residential rental property, learning how to set those aside can very much help you get the most out of your investment. If you are able to choose the right location to invest in, your property’s value will steadily increase, while there will also be plenty of opportunities to sell if it ever comes to that.
What to Know Before You Invest
So what makes a certain city or county ripe for real estate investment? There are a lot of signs that will point to growth in an area’s real estate market, and as an investor, you need to keep them all in mind before you buy. Here are some of the major factors to consider:
The math here is pretty simple: when more people move to a city, they need more homes to live in. And because a large portion of the population prefers to rent, owning a house in one of these areas means you can expect a higher occupancy rate. This is crucial for your investment. With rental income, keeping up with the property taxes as the value increases will be much easier.
The projected job creation in an area is equally important to the value of your property over time. High-paying, long-term jobs will keep people in the area and give them money to spend on rent. Areas with diverse employers can help add stability to the local economy, so if one particular industry sees hard times, there will be plenty of other jobs keeping renters afloat.
Even if a local economy is strong, too many empty houses can make things difficult for you. Demand for housing will be an important factor that affects the value of your rentals. If there are plenty of places to choose from average rent will continue to be driven down, causing rental properties to be less lucrative as a source of passive income. However, in a market with a higher demand for residential rentals, you can rent your property out for a good price and still afford to make repairs as needed.
This one goes down to the neighborhood. Are house prices in the area on an upward or downward trend? How do crime rates compare to other parts of the city? What kind of school district does it provide? What local spots or amenities are in the area? For example, nearby universities might draw a consistent flow of tenants that are students, but may lead to a lower tenant lifetime. On the other hand, trendy neighborhoods with a lot of new businesses may bring in working professionals or families with higher quality tenants. Location is one of the major factors that will keep tenants in your property. Additionally, local real estate legislation and taxes can vary by state or county and it’s important to consider how those policies affect you as an investor.
Unfortunately, real estate is one area in which expenses don’t necessarily determine the rent you can charge. The local market will set the rates and renters won’t overpay just because you’ve saddled yourself with an expensive asset. Between insurance, tax, local HOA fees, mortgage, and upkeep, a lot of expenses add up to determine your upfront and overhead costs. Before you buy, you need to know how much you will be able to charge for rent and do the math to see if it’s enough to be worth it. Ask yourself whether you’re looking for a short-term investment or a long-term hold and align your personal investment goals to the type of residential property you purchase in a specific area.
Some Cities with Great Traits for Real Estate Investment in 2020
Now that we’ve laid some groundwork, let’s look at some of the best current areas to get started in real estate. You’ll see examples of the factors listed above working together to make an exciting opportunity with a lot of potential growth.
Raleigh-Durham, North Carolina
The Raleigh-Durham area has a strong economy with a lot of big employers. Median incomes in the area are on the rise, and unemployment is relatively low. The area is known as the Research Triangle, in part because of the three big universities in the area, but also because of all of the tech companies. There are also plenty of government and military employers in the area, rounding out the opportunities for good-paying jobs.
Because there is a diversity of employers in the area, the economy stays relatively stable. This will be a major factor in the event of any nationwide market downturn. Cities with stable employment are less affected by a bad housing market and the presence of different universities presents a big market for available tenants. Plus, a recent Redfin analysis puts the area in the top five places least likely to be affected by a potential recession. Buying in the area is a safe bet even if the home values might not climb as high as some larger cities.
The housing market in Raleigh-Durham has regularly ranked as one of the top five places to invest in the past few years. There are currently more homes for sale in the area than there are buyers. Combine this with the fact that property prices are a little under the expected market values, and you have an enticing opportunity to purchase homes at an under-market value price. Projections show these investments could increase by 25% within three years.
Orlando is currently considered one of the most lucrative cities in the country to own property. Employment growth has shot up, holding the number one spot in the country for most new jobs in the last four years. Additionally, it hasn’t just been jobs from tourism. Science and Technology jobs are being created faster in Orlando than they are in California’s Bay Area.
Orlando also claims the number one spot for population growth (and it’s not just retirees). These are working people, many of whom will prefer to rent. That being said, it is a little more expensive than some places as a starting-off point for retail investors. The average price of houses sits at over $230,000, but projections show a 35% increase in your investment within three years, so it has a lot more potential to pay off than some of the cheaper areas.
Because the pay scale for most of the new jobs is on the lower end of the range, Orlando is mostly attracting young professionals at the beginnings of their careers. Finding a property that you can rent out for below the average rent in the area will be key to keeping your property rented. This will maximize your passive income, so you can get the most out of your investment.
San Antonio, Texas
The economy in San Antonio has been growing strong for the past few years, getting a significant boost from technology and cybersecurity companies. Overall, property value has increased by 44% in the last ten years. Last year alone it increased by 7% and is projected to keep rising at a steady rate.
The city also has a constant stream of visitors, which keeps many of the residents employed through tourism. However, there are many other employers that make it a stable area to buy property in, with jobs in oil and gas, government, finance, and military rounding it out.
San Antonio has one of the fastest-growing populations in the country and a large portion of them being retirees who prefer to rent. Thanks to the low cost of living, nearly half of the population is renters with no desire to commit to homeownership. The median price for homes in San Antonio is little under $230,000, but up-and-coming neighborhoods for longer-term investment often have lower prices. Get familiar with the city to find a good area with below-average home values in an upward trend to make the most of your investment.
Indianapolis is a big city that’s experiencing a steady population and economic growth, with both new jobs and an increase in average income throughout the city. The unemployment numbers have stayed low for the past few years and are continuing to trend down. Although it might be known for big events like the Indy 500 and NCAA basketball tournaments, the local economy has a healthy diversification. There are plenty of jobs in education, health care, and finance, keeping much of the population employed.
It’s a buyer’s market in Indianapolis, so negotiating can easily turn to your favor. Additionally, the city has one of the highest occupancy rates in the country, with a large pool of prospective tenants. Since so many people in Indianapolis prefer to rent (almost half of the population), homeowners can set rates that keep their profit margins higher without losing out on renters.
As the city continues to grow, so will house prices across the board. Over the last year, home values increased by almost 15%, and in specific neighborhoods, these numbers were higher. Familiarize yourself with the local market to find the most promising communities to buy in and you’ll see a steady check from tenants as well as increasing value on your residential rental property investment.
Utilizing Property Management
You’ve done your research and narrowed down the areas to where you might maximize your rental income, but there’s one problem. It’s too far from where you live and it doesn’t seem like a feasible option to invest somewhere where it’ll be difficult for you to be present. That’s where partnering with a property management company may be of help to you.
Property management encompasses all the day-to-day operations that are needed to maintain residential rental properties. This takes care of anything from communicating with tenants and repair vendors to meet all the requests and needs of your tenants to taking care of lease contracts and rent collection. With a property management company, it truly becomes a source of passive income, as it takes away all of the logistical and service required components of maintaining and managing rental properties yourself.
While you may be concerned that the monthly fee will eat into your profits, the income potential from a top market may outweigh your losses in the long run. You’ll have to decide what your desires are in investing in residential rental properties, how these desires fit your short-term and long-term goals and decide where to purchase your property and how to manage it from there.
The Bottom Line
There is no one perfect place to invest in real estate, as each has its benefits and risks. That being said, you can take careful stock of an area’s growth, vacancy rate, and local demographics to predict market growth potential. If new businesses are coming to an area with lower property prices and rent is trending upward, you may have found yourself a great starting point to your real estate portfolio. But if there are many properties already sitting empty, you might consider finding somewhere else to buy.