Buying Rental Property in the Best Location

Buying rental property is like buying any real estate - all about location.

Most of the rapid rise and fall in real estate values during the last decade occurred in 4 states - Florida, California, Nevada and Arizona. Even within states, high growth areas had the greatest rise and fall in market values. And most of that rise and fall was due to speculators driving the market.

But even within a community there may be locations that are good to invest and other locations that are poor choices. Sometimes the difference is literally "on the other side of the RR tracks". So before buying rental properties you must know your local market.

When you meet local investors one of the "tips" you might receive is about a hot area to invest in. Often this is just speculators trying to drive the market because they invested in that area. Do your research and don't fall prey to this type of advice. Just like getting a hot stock tip can be misleading, so can a hot real estate tip.

One of the first pieces of knowledge you should find out is about local demographic trends. Are there areas where the population is declining? Are certain areas known for drug traffic? Investing in rental property in either of these areas is a bad idea. Some communities might have better schools which would appeal to first time home buyers. There are often racial trends as well. If your area has new immigrants, for example, find out where the first time home buyers are looking for homes. A Realtor or other investors in your local real estate investment club can help with much of this information. Local Realtor Associations can also provide information on which areas have increased real estate values.

If you take my advice to buy single family residential real estate , you should narrow your search to neighborhoods where first time home buyers might look. Don't buy the most expensive house in the neighborhood (I once purchased a foreclosed home that was the largest within a two mile radius. Although the price per square foot for the house was comparable to neighboring houses, the higher overall price kept buyers away.) Invest in a home that a moderate income family should be able to purchase.

You should also do research on local rents for single family houses. If your mortgage, taxes and insurance (PITI) is greater than the rental you will get, don't buy that property. Never count on appreciation to make your money when buying rental property. That is speculation - not real estate investment!

First time homebuyers are probably going to be making less than $100k per year. Be aware that banks won't allow buyers to use more than 30% of their income for PITI, so your payments should be less than $2500/month.

Another consideration to buying real estate is the time of the year. This graph is a 5 year average of median home values. You can see a clear cyclic pattern. Buying rental property in the winter is statistically better than buying in the summer.

In summary, you should buy rental property:

1. in a location of rising population trends
2. in an area with housing prices affordable by first time home buyers
3. a "Goldilocks" house - not too big, nor too small compared to the surrounding houses
4. at the right time of year

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