Are you looking to invest in properties? This guide will show you how to choose the best places to invest in real estate.
Real estate investing has been around for thousands of years. While new things have emerged and changed the industry (like investment tools and AI for finding properties for sale), the importance of location and its effect on the potential returns from a real estate investment still applies to this day. Choose the right location and your property investment will give you easy and high financial rewards. Choose the wrong location, however, and you could lose even if you pay a very low price.
In a previous blog, we listed the top 10 cities in the US housing market for owning an investment property in 2019. But what makes these cities better than others? What did property investors find to determine that these housing markets are profitable for investing in real estate? In this blog post, we answer these questions and show you the important characteristics that the best locations have in common.
1) Job Growth and Employment Trends
Rental properties are only profitable if you’re investing in areas where people want to live. That’s because your goal as a real estate investor is to find tenants for your property to generate rental income. Naturally, people are attracted to places that offer good jobs where they could make good money. Thus, the first features of the best places to invest in real estate are regarding the job market and employment trends.
Let’s say you own an investment property in a town where there’s only one major factory. If the factory relocates, your investment will suffer because rents will go down, vacancies will go up, and you won’t be able to sell for top dollar. Therefore, it makes sense that the best locations have strong job markets and economic stability.
A few things to look for are:
- The number of jobs: is it increasing or decreasing?
- The median salary: increasing or decreasing?
- Types of jobs: professionals, high-tech, high-paid technicians, or low-paid laborers?
- Diversified jobs: are there only 1-2 major industries or a variety of industries and job sources?
Of course, no location is perfect. But, you want to invest in a housing market with a low unemployment rate, rising median salary, a mix of worker types, and a diversified source of jobs. These factors make real estate investors much more comfortable since the economy is protected from an isolated event which could disrupt their investments.
If you’ve read our blog on the best places to invest in real estate in 2019, you’d notice that these cities all have stable economies and strong job market growth. Dallas, for example, has a 5.3% annual job growth rate compared to the national average of 2.6%. This is only one of the many reasons it ranked #1 in the PwC’s Emerging Trends in Real Estate® report.
2) Stable Increase in Population
The next characteristic is closely related to the jobs and economics of a location and that is the population growth. As mentioned, people want to live where they can find jobs and make money. Thus, property investors will notice population growth in cities that offer better jobs as people tend to move there. Furthermore, other things that attract people to a location include the weather, the price of housing, natural attractions, and local politics.
Population growth and net migration are important to the real estate market as they drive economic activity and growth. Moreover, housing markets with an increasing population are the best places to invest in real estate simply because this will increase the demand for housing. So, if you’re a rental property owner in an area where demand is high but supply is limited, you’ll enjoy higher rents and higher property values. This is one of the ways to make money in real estate.
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3) Limited Supply of Properties
Continuing with the laws of supply and demand in the real estate industry- we already stated that the best places to invest in real estate have a high demand for your rental property with a low supply. Why? Because this allows you to have a higher price, rent, and value. To find whether your housing market falls into this description, a real estate market analysis will help. However, while a location may have high demand and low supply when you first buy an investment property, there could be an expansion in the future.
Therefore, your job as a real estate investor is to find out how many competing units can be built in your area. The best locations for real estate investing are ones where there’s little possibility for an increasing supply of your type of investment property. The harder it is to build new supply, the more valuable your existing property investment will become. Typically, such locations have:
- Natural borders (lakes, rivers, oceans, and mountains)
- Man-made borders (protected parks, land, and universities) that prevent expansion
- Strict land development laws and rules that make construction more difficult or expensive
- Limited amounts of specific types of zoning (like commercial or multi-unit properties) which makes these property types more valuable over time
4) Low Price-to-Rent Ratio
The price-to-rent ratio is a simple way of evaluating the potential profitability of a location. Essentially, it calculates the ratio of house prices to annual rental rates, which allows you to decide whether buying or renting a property gives better financial rewards. It ranges between
- 1 – 15 (low) meaning it’s better to buy
- 16 – 20 (relatively high) meaning it’s better to rent
- 21 or more (high) meaning it’s much better to rent
To calculate the price-to-rent ratio, simply take the median price and divide it by the median yearly rent. For example, if the housing market has a median property price of $200,000 and a median yearly rent of $15,000, the price-to-rent ratio is 13.33. Real estate experts believe that the best places to invest in real estate are those with low price-to-rent ratios – the higher the ratio, the worse the market is for rental properties.
Why? There are mainly two reasons for this: 1) markets with a low price-to-rent ratio have lower property prices. And 2) investment properties in these markets reap high rental income. Let’s compare between two cities to clarify. Based on data from Mashvisor’s Investment Property Calculator:
Camden, New Jersey has a
- Median Property Price: $101,550
- Monthly Rental Income: $1,241 ($1,241 * 12 = 14,892 Yearly Rental Income)
- Price-to-Rent Ratio: 6.7
- Cash on Cash Return: 5%
San Francisco, on the other hand, has a
- Median Property Price: $1,621,143
- Monthly Rental Income: $4,280 ($4,280 * 12 = 51,360 Yearly Rental Income)
- Price-to-Rent Ratio: 31.5
- Cash on Cash Return: 1%
As you can see, a high price-to-rent ratio does not always mean a high return on investment. As a result, cities with higher rates may not always be the best places to invest in real estate. To learn more about Mashvisor and how we’ll help you make faster and smarter real estate investment decisions, click here.
5) Small-Scale Characteristics
What we’ve mentioned above are characteristics of the top places to buy investment properties on a large scale. However, real estate investors need to keep in mind that there are other characteristics that affect how profitable small-scale locations are for real estate investments. These include:
- Real Estate Appreciation: the rate at which the rental property appreciates in value. It’s best to buy rental property in a location with high appreciation rates as an investor can then sell it for a higher price at a future point in time.
- Occupancy Rate: how much of the development has been absorbed by the housing market through renting. In simple words, it’s the number of units occupied divided by the total number of units available in the area. Of course, the best places to invest in real estate have higher occupancy as it leads to a higher return on investment.
- Safety and Crime Rate: Always avoid areas with high crime rates no matter what the numbers say on paper. People want a safe place to live – your tenants and future buyers are no different. Moreover, crime can cost you money as a real estate investor in terms of stolen property, vandalizing, and more. Thus, always invest in cities with low crime rates.
- Rental laws and licenses: In some cities, real estate investors have to obtain a rental license, pay a yearly fee, and meet an inspector at each property annually. Also, while rental laws can require basic things (like installing smoke detectors), they can go much further. For example, in some cities, rental property investors must give their tenant the first right to purchase before selling.
- Rent controls: Some bigger cities regulate how much a real estate investor can rent out a unit for and/or how much you can raise rent over a certain time period. This is obviously a concern for your overall return on investment.
- Eviction laws: Some states in the US are landlord-friendly while others are tenant-friendly. If you’re buying investment properties in a tenant-friendly state (like New York and California), be prepared for additional costs and time if you need to evict a bad tenant.
Last Words on the Best Places to Invest in Real Estate
Before buying an investment property, real estate investors must see, assess, and analyze if the property they’re eyeing meets their requirements. But before even selecting a property, investors should first study the location. It’ll take a thorough real estate market analysis to find the best places to invest in real estate – knowing what characteristics to look for makes it easier.
Keep in mind that one investor’s ideal location for real estate investing may look very different than the best location for you. However, any location needs to generally have a balanced mix of the above features, not just one or two. Keep those in mind and you’ll find the best location for your property investment! To start searching for the best rental properties in your city and neighborhood of choice, start out your 14-day free trial with Mashvisor now!
What characteristics are most important for your choice of an ideal location to buy a rental property?