Real estate investment is the best way to plan for a secure retirement and reach financial freedom, but only if you get the right properties. The field is full of great choices, but it’s also full of bad ones. Always commit to doing your due diligence, and start by looking for the signs of a great property.
1. A Nice Neighborhood
The neighborhood is everything. It determines your vacancy rate. It controls the type of tenants your property will attract. And while there’s no one type of neighborhood to look for, you must be aware of what the area is like and think through how it will affect your property.
As an example, if you choose a place too close to a university, the numbers might look attractive initially, but you’re going to run into issues later down the line that must be factored in. Vacancies tend to be high every summer, towns sometimes have exorbitant permit fees to discourage conversions to rental properties, and you could be looking at big rehab expenses every year.
2. Good Schools
Good schools attract the best tenants: stable families looking to rent long-term. Good schools also mean your property value is likely to continue improving, so when you’re ready to sell, you won’t have trouble finding a buyer and getting a good price.
3. Low Crime Rates
Check with the local police or do some online hunting to find the crime rate in the area around any property you’re considering. In particular, you want to focus on rates for vandalism, home invasions, and the most serious crimes like murder and rape. But don’t just look at the overall rate: you have to know what it means relative to the city. For example, at first glance, New York’s crime rate is higher than Charlotte, NC, but New York’s crime rate has been dropping steadily for the last 30 years, even as the population has grown to historic levels.
It’s also important to know how a neighborhood compares at the local level to other neighborhoods, as this will give you an idea of the type of local people who will be attracted to your area. Finally, be sure to look at the trend numbers. Even if they seem low, you might reconsider if the trend is on a steady uptick. At the same time, even if the numbers are a little higher than you’d like, if the trend is steadily down, you could be looking at a good investment in a community dedicated to cleaning up.
4. A Strong Job Market
This is one of the biggest things to look for to find the best rental property investments. It just makes sense that opportunity attracts tenants, so use the U.S. Bureau of Labor Statistics and similar sources to find out what the market is like in any given area. Again, look for how this compares to cities of similar size and especially the overall trend. If the trend is up, that’s a good sign. Other signs to look for include major companies announcing moves to the area or closing their doors.
5. Amenities People Want
No one wants to live where it takes too much effort to get anywhere. Does the neighborhood with a property you’re considering have good parks, movie theaters, restaurants, and shopping? Is there at least one good gym within easy reach? This can’t be the only thing you base your choice on, but you can’t ignore it, either. Millennials make up the largest generational numbers, and while some prefer urban environments and some want plenty of space and a more suburban life for their families, all want to be close to shopping, green spaces, and fitness opportunities.
6. Strong Community Investment
Is the local government committed to building the community? Are businesses and other investors coming in? The key here is to get in near the beginning of the trend rather than towards the end. Once everyone knows that a neighborhood is “up-and-coming,” the prices will rise, and it gets harder to find a good value investment property. Even worse, the area could eventually be over-built, and rents drop because of a market glut. You want to sell before that moment comes.
Look for the start of new construction and plans for community development rather than an area where both are already going strong. Make sure local government plans are actually at the stage where they’ve been approved by the people, and a budget is in place, but don’t wait too long. It also pays to consider the zoning for areas around your property. You don’t want to invest only to find them building something undesirable nearby a year down the line or find a huge new housing complex that competes with your property suddenly popping up on the next street.
7. Stable, Profitable Average Rents
Rental income is key for you, so know the average rent in the area. Be aware that sellers tend to overestimate these, so use other resources to get your information. Zillow is a great place to find out information like this. Take a look at the trend as well as the numbers of the moment, so you know where your property is likely to be in five years. And be sure to take the time to crunch all the numbers to be certain they make sense given your taxes, mortgage payments, and other expenses.
8. Good Property Tax Rates
Speaking of taxes, what are they like in the neighborhood you’re considering, and, even more importantly, are they expected to go up? Taxes alone can make a wonderfully profitable investment an albatross around your neck almost overnight.
Taxes are often higher in great, safe neighborhoods that attract long-term renters, and that’s fine. But there are some terrible places with high taxes, too. Talk to the county assessor to find out tax rates, but talk with local homeowners to find out if rates are expected to rise. Take a look at the area’s local fiscal health, because a city in financial distress almost always thinks a property tax hike is the way to fix it, even in cases where they’ve made it impossible for landlords to charge rents high enough to cover those taxes.
9. Insurance You Can Actually Afford
Some locals have everything going for them but are also very vulnerable to hurricanes, tornadoes, earthquakes, and flooding. Insurance is a wild card expense, and the difference between a property that turns a healthy profit and one that ruins your portfolio can be a matter of just 100 feet or so closer or farther from the ocean.
Find out average coverage rates for the city you’re looking at but then dig down to find out what’s going on at the street level. Unfortunately, a property could be too close to a sea wall, for example, and so demand sky-high insurance coverage, yet not actually be close enough to demand higher rent than average for the area.