Real estate is all about location. Location is perhaps the greatest determining factor in the affordability, availability and demand for housing. A more desirable location will almost always result in higher prices when compared to similar homes in less desirable locations.
Location is the primary factor that will determine whether a property is a good real estate investment or not. Just because a property is expensive or is in a high-priced area doesn’t mean it will be a profitable investment, though. Conversely, lower-priced properties in more moderately-priced regions aren’t necessarily a sure-fire money maker, either. In fact, real estate is so location specific that one neighborhood of a city could be prime for investment opportunity while another is a place you should stay away from.
Picking the wrong location is likely to be more detrimental to the outcome of your investment than the level of investment you’re making.
So, what is the ideal location for a real estate investment?
The general answer is the location should be desirable to the particular person you’re trying to attract while returning a profit to you at the same time.
Are you looking for a good place to attract seasonal rentals? Search for locations that are close to seasonal-specific features, such as ski resorts, lakes or beaches.
Are you looking to attract year-round rental tenants? Search for locations where it’s generally more affordable for people to rent than buy homes.
Before you dive headfirst into the market, you need to decide what type of real estate investor you want to be, and proceed with that end goal in mind.
No matter what type of tenant you’re looking to attract, though, there are some general tips you can follow when you’re trying to find the best places to buy a real estate investment property.
A More Detailed Look at Why Location Matters
The key to real estate investment is finding properties in a location that can generate positive cash flow, build equity and appreciate over time. To do this, you need to perform thorough market research on which locations would be best for this. The end goal is to invest for profit, but that won’t necessarily come from the most expensive area.
Here’s an example:
- A $150,000 house in City A rents for $1,400 per month.
- A $750,000 house in City B rents for $3,000 per month.
Even though the one house in City B would return a greater monthly rent, the return would be greater if you invested $750,000 in multiple properties in City A than one property in City B, as:
- Five $150,000 houses in City A would yield $7,000 per month in total rent.
- The one $750,000 house in City B would yield $3,000 per month in total rent.
That’s a whopping $4,000 per month difference in income, with the same $750,000 total investment.
Now that it’s much clearer on why location matters, let’s take a look at the three major steps to finding the right property in the right location.
Step 1: Pick the Right Market
The first step is finding the right general market for real estate investment. This is the key to finding profitable opportunities. Before you even start to look at specific properties, you need to find a market that is prime for profit.
To that end, you should look for a market that is strong in these four areas:
1.) Market Growth
2.) Job Market
3.) Home Values
4.) Rental Rates
Ideally, you will find a market that is prime for future growth. You can narrow your search by researching whether an area is projected to increase or decrease in population in the future. You want to find a market where people are moving into rather than one in which people are moving out.
An increase in people will ultimately drive a continued demand for rental housing. Not only will this ensure you have a large crop of potential tenants, but your rental income will increase while the value of your home appreciates. An increase in population often leads to an increase in investment in the region as well, in the form of infrastructure, education and jobs – which all contribute to increased value for your investment.
People move into areas that have employment opportunities. The more opportunities, and the more diverse the opportunities, the better.
One way to figure out which markets have a strong job market is to look at past and current unemployment rates. This will show you whether an area has had steady job growth and stability, or whether a region had a spike and then a bunch of lulls.
Job stability and job growth are great indicators of future demand for rental housing.
Even if your goal is to purchase a property to rent, it’s important that your investment increases in value over time. Make sure the price you’d have to pay for a property is worth the price. Factor in the costs of not just acquiring the property but also costs for renovation, insurance, maintenance and property taxes.
The final preliminary assessment you must make is whether a region produces rental rates that would result in a solid investment, with positive cash flow. A market may prove strong in the first three areas, but if it doesn’t support good rental rates, then it will be hard to reach your desired return.
You can use online tools to estimate the rental value of any residential property a given location, both for the current and future market. Then, you can use that value to determine whether the income you can expect to generate will result in a profitable investment.
Step 2: Pick the Right Neighborhood
Once you’ve selected the right market, it’s time to narrow your search to the right neighborhood. Selecting the wrong property in the right market can be as disastrous as selecting the wrong market altogether.
To that end, you should look for a neighborhood that has solid:
- Income Levels
- School District(s)
Income levels of a particular neighborhood matter a lot, but potentially not in the ways you might think. Neighborhoods with higher median income usually have homes with higher price tags. This may prevent you from meeting the 1 percent rule, which says you want to choose a property where the rent you’ll receive is close to 1 percent of the purchase price of the home.
Lower-income areas usually have much lower price points. This makes for a lower total investment, but the danger is these areas usually also have high tenant turnover and maintenance costs.
Moderate-income neighborhoods have lower purchase price points and may still return solid rental rates. This makes for an ideal situation – where your investment level is moderate but your returns are high.
Families are always looking to move to an area where the public school district is strong, to provide the best education for their children as possible. It’s not a surprise, then, that neighborhoods with the more desirable school districts are the ones that yield higher rental rates.
Beyond school districts, families desire amenities. Neighborhoods that are flush with places to shop, libraries, parks and playgrounds, restaurants, medical facilities and grocery stores are consistently more desirable than areas that don’t offer these things.
You’re looking for two things in terms of transportation:
- How long is the average commute to work?
- What is the accessibility to public transportation?
People don’t often voluntarily move into a neighborhood that is either too far from their place of work and/or extends their commute because of heavy traffic. Access to public transportation also greatly contributes to the desirability of a neighborhood.
Step 3: Pick the Right Property
Once you’ve chosen the best market and the best neighborhood in that market for investment, it’s time for the final step – choosing the right property.
The goal is to find the best property within your budget that will give you the best return when compared to the projected rent you’ll receive.
To that end, you’ll need to analyze:
- The Appraisal
- The Inspection
- The Acquisition Costs
- The Ongoing Costs
A third-party appraiser will give you the best sense of whether the home you are thinking of buying is a good value compared to other similar properties in the neighborhood. Just because a property fits within your budget doesn’t mean you’re getting a good deal. The appraiser will evaluate the property and make a comparison to other recently-sold homes or homes on the market in an apples-to-apples way. The report the appraiser produces will give you a good idea of the fair market value of the home, which you can then compare to the list price.
An independent inspection by a professional inspector will give you a glimpse under the hood, if you will. The inspection will tell you if there are any potential major issues with items such as the foundation, electrical, plumbing, roof, windows, HVAC and even pests. These are all expensive things to fix if there are problems, which you’ll have to take into account when you’re considering the potential amount of your investment.
The Acquisition Cost
If you’re planning to finance the purchase price of the home through a mortgage, you should do the math on how much upfront money it’ll cost you to acquire the property and get it prepared to be listed for rent. This would include:
- The down payment: at least 20 percent of the purchase price
- Closing costs: roughly 1.5 percent of the purchase price
- Acquisition costs: roughly 3.5 percent of the purchase price
- Rehab costs: which can vary depending on the state of the home
This final number will help determine how long it will take to recoup your overall investment.
The Ongoing Costs
Your ongoing costs will include:
- Monthly mortgage payments (if you financed your home)
- Property taxes
- Management fees (which can potentially also include Home Owners Association dues)
- Leasing fees
This final number will help determine whether your property will result in positive cash flow, when compared to the monthly rental income it generates.
Invest in Real Estate the Smart Way with HomeUnion®
Now that you know where the best places to buy are and how to pick the ideal location for your real estate investment, it’s time to hit the ground running. Partnering with HomeUnion® will make your real estate journey simpler and your path to success easier.
HomeUnion®’s large network of homes allows you to invest in the best markets throughout the country, and not be relegated to investing only in your immediate location. And the research and data-driven tools they provide are what help HomeUnion®’s members be more successful with their investments.
Visit us online for more information, or call us at (866) 250-5610.