Real estate investor, Founder/CEO of TurboTenant: rental marketing, tenant screening, rental applications, rent payments, and more.
Rental trends are always in flux, and recently, the housing market has been almost too hot to touch, making it challenging to determine where to invest. The Covid-19 pandemic has only added to the complexity of finding the perfect location to invest in, with larger cities seeing trends like out-migration. For example, New York City saw 56% of residents move away and only 24% move into the city during 2021.
So, how do you decide on the best place to invest? As a long-time landlord, I’ve invested in a variety of properties all over the country, all with one thing in mind: my property investment goals. With concrete goals, you will be prepared to make a well-informed decision on the best place to invest.
Below, I’ll guide you through the pros and cons of areas you can invest in, plus additional factors to consider when buying a rental.
Types Of Areas To Invest In
After finalizing your property investment goals, it’s important to dissect the positives and negatives of buying in certain locations. Consider factors such as natural city growth, the renter pool in college towns versus senior communities and the effects a high-tourism area has on a rental property’s success, along with additional pros and cons.
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Urban Vs. Suburban
Urban and suburban areas couldn’t be more different, but is one necessarily better than the other in terms of property investment?
The pros of investing in an urban area include a constant influx of renters, shorter vacancies, attractive amenities and attractions, potential tax breaks for historic properties and a low depreciation rate. The cons of investing in an urban location include the fact that it’s an expensive market to enter, parking can be difficult, there are often higher crime rates and urban locations are not always family-friendly.
When it comes to suburban areas, the pros include low tenant turnover, a more affordable market, family-friendly locations, less wear and tear and, generally, a lower crime rate. As for the cons, investing in a suburban home can mean a smaller population of renters, longer vacancy times and less variety in properties.
College Towns Vs. Senior Communities
College towns and senior communities are both rental markets that feature a niche group of renters. While operating within Fair Housing Laws, understanding the type of tenant you would like to rent to is another major consideration.
There are several pros of investing in a college town, including a constant influx of renters, stable rent prices and property appreciation, easy rental advertising to your target market and, often, parents serve as co-signers, ensuring a consistent cash flow. But investing in a college town also means high tenant turnover during the off-season, more wear and tear and a high-maintenance investment (e.g., noise complaints, roommate disputes, etc.).
As for senior communities, the pros include maintenance covered by an HOA, easy rental advertising to your target market, a quiet community, less wear and tear, low tenant turnover and desirable locations. The cons of investing in senior communities include high monthly HOA fees, a smaller renter pool and limited investment opportunities.
Vacation Destinations Vs. Non-Vacation Destinations
One of the main goals of property investment is achieving the best possible return on your investment. For some, this might mean opting for a short-term rental over a long term. Whether or not you intend to have a short-term or long-term rental, you should consider the pros and cons of investing in properties within high- and low-tourism areas.
The pros of buying property in high-tourism areas include a constant influx of renters (both long-term and short-term), attractive amenities and attractions and the ability to easily move between a long-term and short-term rental agreement. However, investing in vacation areas likely means a smaller population of long-term renters. It’s also an expensive market to enter, with high tenant turnover based on seasonality and a high likelihood of wear and tear.
Non-vacation destinations tend to include more affordable properties, experience less wear and tear and have a higher population of long-term renters. On the other hand, there is less flexibility moving between short- and long-term rental agreements and not as many desirable local attractions.
Other Important Factors To Consider
While it’s important to consider actual location types, there are several additional factors to examine when determining where to invest. These factors include:
• Price-To-Rent Ratio: A high price-to-rent ratio can be an important indicator of a lucrative real estate investment market. The price-to-rent ratio is calculated by dividing the average cost of a home in a specific area by the average cost of annual rent in that same area. A score above 16 indicates that it’s more affordable to rent than to buy. However, it’s important to understand that extremely high ratios (25+) may mean properties are overvalued or even part of a larger asset bubble.
• Housing Market Growth: A market showing signs of growth should catch your eye as an investor. Be sure to do your research to avoid housing bubbles that may eventually burst, causing you to lose money in the long run.
• Climate: Tired of shoveling snow? You’re not alone. Consider looking for areas with sunshine and palm trees or cold climate properties with an HOA that handles snow removal for your tenant.
• Neighborhood: Depending on your investment goals, looking for specific neighborhoods might help you accomplish them. For instance, owning property near a good school district will attract more families. Alternately, if an area is a hot spot for crime, tenants won’t want to live there or renew their lease.
While rental trends are always shifting, your property investment goals should remain relatively constant. The combination of your goals with a sound understanding of the positives and negatives of investing in certain locations, plus additional vital factors, will help produce a high ROI wherever you buy. Thankfully, there are many online property management tools that make it possible to manage a rental from anywhere, opening the door to numerous property investment opportunities in a wide variety of locations.