It is no secret that successful real estate investors capitalize on a top location to yield strong returns on their investments.
The optimal rental strategy reaps high rental income, high occupancy, and a long-term real estate appreciation. In real estate investing, there is no such thing as a ‘lucky investment’, successful real estate investors study the housing market, crunch the numbers, and analyze and assess on a macro level (i.e., the local housing market) as well as on a micro level (property level) before they close the deal on a rental property. There is no magic formula, but there are resources readily available to investors to guide them in making smart investment decisions when it comes to real estate investing. In this post, we give you the best real estate investing tips for choosing a top location to yield high returns.
7 Real Estate Investing Tips for Choosing the Right Location
1. Comparative Market Analysis
If you are a beginner real estate investor, the first thing you need to do is familiarize yourself with comparative market analysis. A comparative market analysis is performed by comparing similar properties recently sold, preferably within a 6-month period. The analysis compares the investment properties based on many factors, including but not limited to location, property features, and vacancy rates. In other words, you must learn how to analyze an investment and calculate your return on investment before you decide to go ahead with buying a rental property. In this day and age, the internet has made it much easier to calculate the ROI without the need of manual work. There is a good number of websites, like Mashvisor, which allow real estate investors to assess numerous potential investment properties and calculate their ROI in an instant. Whether via real estate comps, cap rate, cash on cash return, or price to rent ratioMashvisor’s investment property calculator, you will have access to all the necessary tools and metrics to recognize a worthy real estate investment in a much shorter time frame.
2. Price to Rent Ratio
To elaborate on the previous point, one of the best real estate investing tips to find a good location is to calculate the price to rent ratio. Simply put, the price to rent ratio, or the P/R ratio, allows you to determine whether a housing market is favorable for renting or buying real estate. The P/R ratio is inversely proportional to rent: the higher the ratio or the price of the home, the lower the rental income or the accumulated earnings of the investment property.
Price to rent ratio (P/R) = Average list price/(Average rent * 12)
*Average list price and average rental income can be found on Mashvisor.com.
Price to Rent Ratio Benchmark:
- Ratio between 1-15 means it is better to buy.
- Ratio between 16-20 means it is better to rent.
- Ratio of 21 or more means it is better to rent.
To give you a better perspective, in 2017, Seattle and Los Angeles scored a P/R ratio of 35.1 and 38.0, respectively. This puts both cities at a high P/R ratio, which means homes are too expensive to buy and show low ROI on rental property income as a result.
3. Positive Economic Factors
It is a no brainer that one of the best real estate investing tips we can give you is to look at your investments on a macro level. Our advice to you is to look at the bigger picture before you hone down on a neighborhood and a property. What this means is to keep up with the economic trends and conditions and understand how they may affect your investment profit potential down the line. You cannot assess the worthiness of a real estate investment without factoring in key economic indicators, i.e., Gross Domestic Product (GDP), unemployment rate, income and wages, interest rates, and consumer price index (CPI).
4. Safety and Crime Rates
Another real estate investing tip is to pay attention to the crime rate and safety of the neighborhood you want to invest in. Tenants want to live in a safe area, especially if you buy and hold a single family home and look to rent it out to a family. Families look fora rental property in safe neighborhoods with a kid friendly environment.
5. Nearby Amenities and Facilities
To make sure you choose best locations to buy a rental property, make sure it has nearby amenities and facilities to enhance the attractiveness of your property to prospective tenants. Without nearby school districts, parks, and public transportation, real estate investors will find it extra challenging to rent out their rental property.
Real estate investing tips to find the perfect neighborhood:
- Do not discount parks, green, and open space
- Commercial districts with local shops and restaurants
- Coffee shops and pubs
- Surrounded by nature
Having nearby amenities and facilities is among the best real estate investing tips to capitalize on the right location for your rental property.
6. Mashvisor’s Heatmap Tool
One of the best real estate investing tips we can give you is to use Mashvisor’s heatmap tool. A heatmap is a graphical representation of the best areas for real estate investing across the .S. This tool allows investors to find the best areas for investing based on key metrics, such as cap rats, cash on cash returs, occupancy rate, and rental income for both traditional real estate and short term rentals, like Airbnb. If you have a location in mind, Mashvisor’s heatmap tool can also give investors reassurance of the location’s real estate profit potential.
7. Property Taxes and Local Laws
Before you decide to buy an investment property, pay attention to the local laws regarding your investment property to mitigate your expenses and property cost.
Take into account the following:
- Property taxes: Are they high or low relative to rents?
- Rental laws and licenses: Local regulation of rentals is especially important to your bottom line.
- Rent control: Some cities regulate how much you can rent a unit for and how much you can raise rent over time.
- Eviction laws: State governments in the US typically regulate landlord-tenant laws.
These are our best real estate investing tips for choosing a top location for your rental property. Let us know what your real estate investing tips are for capitalizing on the right location for your business.
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