How to Pick the Best Location to Buy a Rental Property
Some places cash flow better than others
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For research, I looked up a bunch of articles on how to pick rental markets. A lot were heavy on data and using excel spreadsheets. I don’t think you need to get that crazy.
There’s not one “best” location to buy real estate. You can find investors making buku dollars in any real estate market. Some locations will be much better in terms of cash flow. Cash flow is my main focus.
Buying property around where you live would be easiest. It’s hard for someone to sell you a rental outside of a homeless encampment when you know the area. I live in Phoenix. Cash flow is generally trash, so I buy property out of state. It’s tough to cash flow well in places lots of people want to live. Rents are low compared to house prices.
The easiest way to find cash flowing rental markets would be to know a real estate investor and buy where they buy. No need to reinvent the wheel. I bought my first duplex in the same neighborhood my uncle bought in. If you don’t know any real estate investors, you can find good rental markets by process of elimination.
One way I look at rental markets is by Googling the top 50 metro areas in the US by population. These are places people want to live, so there will be rental demand. Like I said before, cash flow will be a lot harder to find in places everyone wants to live. A lot of gold can be found in small metros or tertiary markets outside of these major metro areas. Or in neighborhoods outside of the hottest spots in the city. Step #1 is to figure out which of these areas cash flow. It’s easy to figure out which areas won’t cash flow pretty quick. If they don’t cash flow, no need to look into them any further. Go to realtor.com and type in the city or state and your criteria. Realtor.com has an estimated mortgage payment when you click on the property. You can check rental rates by looking on the realtor.com rental page, Craigslist, or ask a realtor. If every property you pull up rents for $2k per month, and the estimated mortgage payment is $3k, it’s probably best to avoid the area. Or adjust your criteria.
Once you find an area that cash flows, you can do a deeper dive to see if it’s a good area to invest in.
Factors to look at when evaluating location:
Tertiary markets:
Tertiary markets are markets outside of the major metro areas. I don't want to buy anything too far into the boondocks, but tertiary markets offer a lot of opportunity. Most of my properties are in Wichita, but it is a somewhat competitive market, so sometimes hard to find value. The most recent duplex I bought was in Haysville. Haysville is a small suburb outside of Wichita. That duplex cash flows more than my Wichita properties. By going out of the major metro area, I was able to find better returns.
Population growth:
I focus on investing for cash flow rather than appreciation, but it’s ideal to have both. Growing cities are going to have more rental demand, and will appreciate more. I don’t think it’s necessarily a big deal if the population is growing slowly or not at all, assuming it’s a normal sized city. I wouldn’t want to invest in a town of 10k people with a rapidly declining population. You won’t get much rental income if the city ceases to exist.
Crime:
Neighborhoods can differ drastically within cities. The cash flow might look amazing on paper, but I don’t want to buy anything in a super dangerous area. Drug dealers don’t usually make good tenants.
Industry/economy:
A lot of investors stay away from areas that only have one major employer or industry. If something happens to the employer/industry, it will have a huge negative effect on the city. Ghost towns are cool, but they don’t have renters.
Elite School Districts:
I used to think I should only buy property in good school districts. I don’t think that anymore. The schools next to my properties are junk. People still rent those houses. Buying in a good school district is ideal, but you are going to be paying a premium. I follow this guy on Twitter, Sean O’Dowd, who has an interesting strategy on buying in elite school districts: https://seanodowd.co/why-i-buy-single-family-homes-in-elite-school-districts/. He gets tenants to sign a 3 yr lease because the properties are in such high demand. It seems to work well for him, but not the strategy I use.
The Most Important Aspect of Finding Good Rental Markets:
I think the most important aspect of finding a good rental market is your team. Namely the realtor and property management company. I go into finding a good realtor and property manager here. So far, all my rentals are in Wichita. Are there better rental markets than Wichita? Probably. I usually work crazy hours, and don’t have a lot of time. When I’m looking at property, my realtor and property manager can tell me pretty quick which areas to stay away from. I can’t jump on a plane every time I want to look at houses. It makes it much easier to find cash flowing rentals.
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