Choosing The Right Neighborhood
Here we are on part three of analyzing rental properties, hopefully this is helpful for you if you’re planning on expanding your portfolio or just getting started in the landlord business and plan on purchasing your first property.
If you missed the first two articles, I’d suggest you backtrack and read them first, you can find them at these links, Analyzing Rental Properties Part 1, Analyzing Rental Properties Part 2.
So what is the right neighborhood? To be fair there is no specific right neighborhood and it can vary from state to state, province to province and city to city, but there are clues to what areas tend to work better.
Following the Clues
When purchasing a rental property there are a couple key considerations you need to think about. First and foremost is cash flow.
Cash flow requires two things, healthy rents and being fully rented as much as possible. If you generate $500 cash flow a month that’s great, but if you’re vacant four months every year you end up losing money. If you only generate $100 cash flow a month, but are vacant even one month a year you could also be going in reverse.
Ideally you want properties in high cash flow areas or properties that have the opportunity to provide multiple streams of income. This can be basement suites or multiple units.
Alternatively you can look at single family homes if the monthly payments are very low and rents are great, but this can be a challenge and leaves you open for extended vacancy periods with no income coming in.
The second area to consider is a good rental population. This is where so many potential investors fall down.
You can have the best rental property in the world waiting to be rented out, but if there are no tenants, it just sits there vacant with you feeding it. This is where the economics we talked about in the first article come into play.
In healthy areas where economies are growing workers tend to migrate to the area and they tend to be renters when they arrive. Often the healthiest areas in these places are districts with good access to industrial and warehouse areas.
The reason for this is they provide the largest supply of potential renters and renters like to be close to their work. Many people moving to new cities or towns who rent are typically blue collar workers or laborers and these are your prime candidates for many landlords.
They tend to stay tenants for longer periods of time and they are plentiful which gives you more applicants to choose from when you are vacant and leads to less vacancies.
The final considerations are transportation and amenities. You want good transportation services nearby so it is convenient and you want shopping also to be handy for items like groceries.
An example of this is our furnished rental properties that cater to working men. They all have multiple buses that stop within a couple blocks that will take them to the industrial areas or other main work areas (downtown core, secondary industrial areas).
They are also located close to main transportation corridors if they have their own vehicles that can get to the North, South East or West of the city quickly. And we have nearby grocery stores, pharmacies and even restaurants that are all within a short walking distance. These features create a benefit of saved time and convenience and tend to help us keep tenants for longer periods.
Good cash flow, a large pool of potential tenants to fill your property and proximity to transportation and amenities are all keys to successful rental properties. They aren’t the only keys, and these alone won’t guarantee success, but they will make the process easier.
So, if you haven’t purchased your first rental property yet, start including these in your parameters when searching. If you already have a rental property, how many of these three attributes do you already have in place?
Not having all three isn’t a guarantee of failure, there are always successful rule breakers out there, but the more you have the easier it can be.
Not having great cash flow can be compensated with you occasionally funding the property, perhaps the cash flow is compensated by great appreciation.
Not having a large supply of local tenants can be worked around by setting up relationships with relocation companies that provide rentals for large local companies.
Not having amenities can be compensated by…. hmmmm, well hold it that one may be more of a problem, but it can depend on the area and what people are used to, but you get the idea.
So, for those you with rental properties already, take a look around and see if you have these requirements and then let me know if you have them by accident or by plan by leaving me a comment below!
I look forward to hearing from you and I would also like to know from those planning on becoming landlords int he near future, did it help? Were these last three articles useful and applicable to you? your feedback will help ensure future articles and series can help everyone the most possible, so thanks for your input.