If you're thinking about investing in rental properties as a real estate investor, it's important to choose markets that will give you the best return on your investment. While rental properties exist in almost any market throughout the country, not every market is ideal for building wealth through investing in real estate rentals.
So, what makes a good market to target housing for renters? Before you get ready to create your lease agreement, here are a few factors to consider when evaluating a potential market for rental real estate!
How to Find Success Through Rental Real Estate
What does it take to make money with rental properties? Many successful real estate investors choose this strategy, and it's a common way for new investors to get into real estate as a way to build long-term wealth.
To find success as a rental property owner, you need an investment property (or multiple properties) that generates more rental income than the expenses required to maintain the residential rental property. That means investors need the right combination of the ideal rental rate, good tenants, affordable properties, and managed expenses to generate ongoing revenue.
In addition to those critical aspects of investing in rental properties, investors need the property to be in a market with high demand for rental homes. So, how can property investors find out if a potential location has what it takes for success with rental properties? First, you need to look for a few traits during your market research.
Job Market Growth
A strong job market is critical for rental properties, as it indicates that there will be a steady stream of potential tenants looking for places to live. If a city or town is experiencing job growth, that's a good sign that the demand for rental units will be high.
To learn about the job landscape, research the recent job trends in any potential markets you're thinking about investing in. Consider the overall health of the job market as well as which industries are growing or contracting. You can find this information from the Bureau of Labor Statistics and other government sources and local news outlets, the chambers of commerce, and local property managers.
Cities and towns with thriving tourism industries are also often good markets for rental properties--especially if you prefer short-term rentals (like an Airbnb). That's because there will always be a demand for short-term rentals to house travelers.
However, even if you're not interested in being a landlord for vacationers, a location with a lot of tourism can still be a good market for long-term rentals. People who work in the tourism industry often need places to live, and they may not want to buy a home if they only plan to stay in the area for a few years.
To evaluate whether a potential market has a thriving tourism industry, look at recent news articles and research the number of visitors to the area. You can also ask local property managers about their experiences with short-term rentals in the area.
Good Price-to-Rent Ratio
The price-to-rent ratio is a key metric for evaluating markets for rental properties. This ratio compares home prices to annual rents in an area to help you determine whether it's cheaper to buy or rent in a particular market.
To calculate the price-to-rent ratio, divide the median home value by the median annual rent amount in a given market.
High Demand for Rentals
Of course, a real estate investor must also make sure there's actually a demand for rental units in any potential market. Otherwise, it will be difficult to find tenants for your property.
There are a few ways to determine whether there's high demand for rentals in a given market. First, you can look at the vacancy rate for rentals. Another way to gauge demand is to talk to local property managers and ask about their experiences with finding tenants. If they say it's difficult to keep units rented, that's a sign that there may not be as much demand as you'd like.
Good Property Taxes
Finally, you'll also want to make sure that the residential property taxes in any potential market are reasonable. Otherwise, your rental income may not be high enough to make the investment worth your while.
To learn about property taxes in a market, contact the local assessor's office. They should be able to provide you with information about tax rates for different types of properties.
Once you target a desirable market, look closer into specific neighborhoods to find ideal locations for short or long-term rental properties. Then, create a strong document for your residential lease agreement, connect with a property manager, find tenants, and start collecting rental income!
Find the Rental Properties You Need With Privy
Privy helps real estate investors reduce the amount of time and work required to find the market research they need to make smart investing decisions. When you're ready to invest in rental properties, let our software deliver properties and investor insights to your inbox! We'll target properties that fit your criteria in the markets where you can find the best success as a rental property owner.
Reach out soon to learn more about how Privy can help you find the rental properties you need for success!
When you're ready to create a standard lease agreement for a rental property, use the insights in our free resource, "The Ultimate Guide to Lease Agreements."