8 Ways to Identify the Best Places to Buy Rental Property
How do you regard a market steady and high growth rate in rentals for the next ten (10) years? If you are looking for markets with the highest rental growth in the previous years, then you are not on the right track.
A solid performance in the past does not mean it will also perform well in the future. You require paying close attention to the essentials that are driving rental growth. Sometimes, the essentials are there, but the growth in terms of rent has not manifested yet. Those are “hidden treasures” that you want to invest in.
Investing in a real estate industry is based solely on concrete historical track is like purchasing a growth stock in blindsight. The investment has been doing well but it can be reversed in a period when the demand goes at a decreasing rate. Like how individuals sell their stocks when they feel that such a company is becoming overvalues, residents can obtain priced out of a market when the city becomes high-priced.
We have listed eight (8) fundamentals to explore that will aid you in spotting the most efficient real estate markets:
- Growth in Population. Communities possessing 1.5 percent minimum year-over-year (YoY) growth for the last twenty (20) years and a population of more than 100,000 people. It is imperative to look at population growth at the onset since it is efficient for trimming down the list. Rank the cities covering about 100,000 individuals from highest to lowest YoY growth in the last ten (10) years. Try to look for ten (10) markets that you are interested in. A market where you know a lot of people living there should be on top of your list.
- Income Growth of Households. You have to look for an income of a household growing at about one (1) percent minimum YoY for the last twenty (20) years. You have to be reminded that without substantial income growth of a household, there will not be great growth in the rental. If a city possesses a strong rental income growth but a weak growth in household income, then it only signifies that its settlers are getting priced out of the market. The effect is that population growth will begin to slow down.
- Crime rate. You have to pay close attention to a crime index that has been consistently declining over the last ten (10) years. A falling crime index is an efficient sign that the community is improving steadily. Companies also make an analysis in terms of the crime index in making sure that their office locations are enticing to workers, especially those with families./
- The ratio of household income to rent. You have to look for the minimum present median household income to median rent ratio at 1:4 or more. This is an efficient basis for measuring affordability in the location. You have to be sure in using median and not average because high household incomes can surely affect the average.
- Employment growth. You have to look for at least 2% minimum employment growth for the last twenty (20) years. It is a known fact that employment growth is a key indicator of the condition of the economy. An increasing population is not sustainable without excellent employment growth. But, you have to identify what companies or sectors are propagating, whether the growth will continue or stop.
- Employment Miscellany. You have to compare the present employment ratio to the national employment ratio. You have to look for cities with excellent diversity about employment. You have to look for cities with excellent diversity about employment. It simply means that the local ratio of the city should be within a few percent of the National average across all industries. You should eye for employment diversity to lessen the risks relative to specific industries falling.
In an industrial community where there is a thick job availability, say in manufacturing, but the national manufacturing job ratio is not that high. This simply means that manufacturing is an important industry. But statistics showcase that the amount of employees has been declining. However, one should not worry if the local employment ratio is a bit higher in terms of the professional services industry or education since the same possesses an excellent long-term outlook and is stable in a way.
- Median House Value. You have to look for at least 2.5% YoY growth in the median house value over the last twenty (20) years. This is an effective indicator of the entire wealth in the city. To add, if the median house value has been consistently appreciating for twenty (20) years. This simply means that it is not cheap to purchase a house, forcing renters to be renters for a long while.
- Landlord-friendly communities. Although this will not be a deal-breaker, you have to stay away from States that have hard rent control and guidelines on eviction of tenants. If you have selected a market that is not landlord-friendly, then you have to make sure you record this in your projections and underwritings. Get in touch with a seasoned property manager to know the trades deeper and how fast you can renovate your units so that they can add value and eventually increase rents.
Conclusion. Everyone does their market research in the approach that they know is right for them.
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