Investing in real estate is potentially very lucrative. With even a single rental property, you can generate enough revenue to cover all your expenses and more, ultimately resulting in positive monthly cash flow. At the same time, your properties have the potential to appreciate in value, multiplying your net worth as you collect that monthly income. And as your portfolio grows, these effects will build on themselves, becoming more and more valuable.
However, there's certainly no guarantee of success. Some rental properties are better than others and will fare better in the years to come. So how do you know where to search for the best rental properties as a real estate investor?
What Is a “Good” Rental Property?
First, we need to answer the question of what is a “good” rental property? In other words, what makes one rental property better than another?
Some real estate investors have specific goals in mind; for example, they may want a property that they'll eventually inhabit in their retirement. But if we're thinking generally, most real estate investors would prefer a rental property that's as consistently profitable as possible.
Almost any property could potentially be very profitable under the right circumstances, as long as it has some intrinsic value to tenants. If you pay the right price, market the property in the right way, and know when to exit, any property could hypothetically be worth investing in. Under this definition, there are “good” rental properties everywhere, or at least from coast to coast in the United States.
Of course, perfect situations are very rare. Instead, when searching for valuable rental properties to add to your portfolio, you'll probably have to consider many different variables simultaneously.
Location Dynamics to Consider
Generally, you'll want to look for properties in locations with sufficient demand and potential to grow. You'll also want to look for neighborhoods that are within your price range and favorable in terms of local market dynamics.
These are some of the most important location dynamics to consider:
· Employment. People can't rent from you unless they have money, and they can't have money unless they work. Accordingly, you should prioritize rental properties in areas with strong employment.
· Safety. Your tenants also want to be safe. Areas with low crime rates are preferable to ones with high crime rates.
· Education. Pay attention to schools and education ratings in the area as well. Good schools are a major attractor for parents and families.
· Transportation. People are much more likely to rent in areas with easy access to transportation. Access to major highways, public transit systems, and sidewalks are all beneficial.
· General aesthetics. Some neighborhoods are simply more beautiful than others. An area with lush vegetation and gorgeous architecture could be a superior investment.
· Cleanliness. The cleanliness of an area shows how much local people care about it – and forms a powerful first impression for prospective tenants. Ideally, you'll choose an area that's relatively clean.
· Friendliness. Similarly, most real estate investors prefer investing in areas that are somewhat friendly. Neighbors don't need to be best friends with each other, but they should be able to get along.
· Tenant demand. Tenant demand is also important, and is often a byproduct of the other factors on this list. How many people are searching for rental properties in this area? How is that number likely to change in the future? How many rental properties are available, and how much are they charging for rent?
· Culture. Culturally relevant locations tend to be associated with rising property values. Be on the lookout for interesting arts districts that seem to be on the rise.
· Competition. Finally, think about how much competition you have. There are a lot of amazing neighborhoods in this country, offering a brilliant combination of good education, plenty of employment, relative safety, and even friendliness – but if there are too many real estate investors competing for properties in the area, prices are going to be driven artificially high.
Other Factors
Of course, you'll also need to consider:
· Price. Any piece of real estate can be a good investment for the right price. However, getting a good price isn't always possible. Sometimes, it's better to go for a better deal in a worse neighborhood than a worse deal in a better neighborhood – but unfortunately, there's no universal recommendation here, as there are too many variables to consider.
· Accessibility. You'll also need to think about your own accessibility. You're going to be responsible for managing this property, so it might pay to choose a property relatively close to you. Of course, you could always hire a property management firm to manage a property on your behalf if it's not easily accessible to you.
· Fit in your portfolio. Most investors realize the importance of diversifying a portfolio. Essentially, this means investing in different types of assets to balance out risk and secure more consistent profits. As your real estate portfolio grows, you'll need to think about this, investing in properties that offer something unique to your overall portfolio.
Real estate investing isn't for everyone. But if you're willing to do your research, plan carefully, and consider dozens of little variables in every one of your real estate transactions, you can eventually develop a much stronger real estate portfolio – and work toward achieving even your most ambitious financial goals.
