Buying a Rental Property: 5 Steps to Find the Best Place

When searching for the best place to buy a rental property, you can’t forget certain factors. After all, you could lose money if you let them slip through the cracks. There are essential processes everyone must go through before they take that jump. Let’s go through them step-by-step.  

Key Takeaway

• You can determine the best place to buy a rental property with a careful screening process. In essence, you should find the ideal location type for your needs, pinpoint a buyer’s market, avoid a booming market, look for low average home prices, and ensure the area has good growth indicators.  

Narrow Down Your Location Type 

First things first, you must narrow down which type of location you plan on buying a rental property in, to begin with. For instance, do you want to pick an urban or suburban area? Only then will you be able to figure out the best place to buy a rental property. As an experienced property management company in Northern Virginia, we focus on the following aspects: 

Urban Areas

Urban and suburban areas are polar opposites. Needless to say, they each have their own unique implications for buying a property.  

Urban areas offer a wider pool of renters, shorter vacancies, and nearby attractions that appeal to tenants. Furthermore, historic properties in these areas can offer tax breaks and low depreciation rates. 

However, urban areas come with some downsides. They are known to be costlier markets to enter. Crime rates might be higher. In addition, the parking situation can be challenging. 

Suburban Areas

By buying a property in suburban areas, investors can benefit from a more reasonably priced market. What’s more, you can enjoy low tenant turnover, low crime, and suitability for families. In these ways, suburban properties can be some of the most risk-safe real estate assets.  

Cons include a smaller pool of renters, and as such, fewer properties and more vacancies.  

College Towns

If you’re buying a rental property in a college town, you can experience a consistent stream of renters, and with it, consistent rent prices and property appreciation. To boot, since parents are often the co-signers, you get stable funding. 

On the other side of the coin, college kids can be rowdy. You can expect more noise complaints, roommate disputes, and property damage. Plus, there are fewer tenants during the summer breaks. 

Senior Communities

Buying a property in senior communities comes with various advantages. HOAs cover their maintenance. Furthermore, the tenants can be easier to deal with than college ones. They’re usually quieter, less damage-prone, and stay longer.  

As for senior communities, there are multiple pros. An HOA will handle the maintenance. Additionally, the community is quieter, stays there longer than college kids might, and is not as known to damage properties. Finally, such properties are easy to market. 

Still, there are some minuses. The rental pool is smaller, and as such, offers fewer investment opportunities. Also, HOA fees can be high. 

Determine if Your Spot is a Buyer’s Market vs. Seller’s Market 

Market cycles are key to discovering the best place to buy a rental property. In general, you should exclusively buy properties when there’s a buyer’s market. Also, you should only sell properties when there’s a seller’s market. 

As a rule of thumb, you can differentiate between a buyer’s vs. seller’s market by observing how long properties take to sell. For instance, buying a property in a buyer’s market would have a three-to-six-month turnaround, while a 6+ month market is seen as a buyer’s market. In essence, the shorter the sale time, the better for sellers. Remember, though, that each market has its own average timeframe.  

Another hint is existing homes’ average prices, coupled with their upward or downward trends. Month-to-month fluctuations may not mean much, but you should pay attention to trends lasting over three months.  

One more vital cue is finding out the area’s rental demand. You can reach out to property management companies like us to get a feel for this. 

Find Out if Your Property Location Has a Booming Market  

If home prices go up unusually quickly, that’s a booming market. With booming markets, buyers are rushing to snap up properties. This might sound good at the outset, but such markets are actually very volatile. The prices could swing the other way at any moment.  

So, you should steer clear of buying a property in these areas. After all, if prices suddenly drop after you buy your home, you will have an overinflated home.  

You can tell if higher prices signal a boom if there isn’t enough job growth to match the level of building permits. This signals that there are too many homes and not enough buyers.  

As an exception, retirement communities don’t count because jobs aren’t a driving motivation for these tenants. 

Discover if Your Target Area has Low Average Home Prices  

If your target housing market has low average home prices, this can make your investment more affordable. To see whether this is the case, confirm that your area’s average home price is a maximum of 3-4 times higher than the area’s average income. 

Affordability holds more than upfront consequences. It impacts your ability to get a stable, flourishing cash flow. If your investment property is in an unaffordable market, you will have a harder time finding buyers. In other words, your cash flow could dry up.  

Instead, avoid this trap by choosing markets with reasonable average home value-to-average income ratios. A market like this with great real estate cap rates is more likely the best place to buy a rental property. 

Look into the Three Big Indicators of Growth  

Job growth, population growth, and affordability are the three main indicators of a real estate market’s growth. Most investors follow these factors as their guide to buying a rental property. After all, these factors work in sync to shape a real estate market.  

Jobs are crucial because people often move to areas because of their jobs, or at least, job prospects. That said, if job growth happens, population growth will come with it. They go hand in hand.  

However, these two factors alone aren’t enough to cultivate a buyer’s market. Affordability is essential so you can afford and make an ROI on the property.  

Get More Support in Buying a Rental Property 

You can determine the best place to buy a rental property by doing your due diligence. In essence, you should find the ideal location for your needs, pinpoint a buyer’s market, avoid a booming market, look for low average home prices, and ensure the area has good growth indicators.  

If you want more support in buying a rental property, we can help. As property managers, our team has over a decade of experience determining a rental market’s potential.  

We know the ins and outs, the markers that serve as red flags—or green ones. What’s more, we understand what makes the properties within those markets marketable. We can support you, step-by-step, in finding and managing the perfect property. Call us today to find the secret formula for earning an ROI.