Suburbs or cities? Where should you be buying a rental property? Just like most things in life, there is no clear-cut answer. Simply put, it all depends. Different features of cities and suburbs make them appealing to different tenants and investors. To help you understand the differences and form a preference, here are the pros and cons about buying a rental property in the city vs. in the suburbs.
Buying in the City
You can’t go wrong by buying a rental property in the city. The possibilities of renting are much greater in cities compared to suburbs. The factors that make a city what it is tend to attract many tenants. But by the same token, these factors can repel tenants from renting in a city.
- More tenants
More Americans live in cities than in suburbs. On the national level, about 63% of the U.S. population live in cities. What does mean for real estate investors? More tenants!
Not only do you have more tenants in numbers. You’ll have a more diverse range of tenants. For instance, you’ll have more college student tenants in cities than you would in a suburb. You could also decide to rent through Airbnb in a city rental, since most tourists will visit cities, and not suburbs.
- Better work locations
To add on to the last point, cities have more people living them, which creates more jobs. In turn, more jobs then create more people. More people equals more tenants.
Many adults prefer to live in cities in order to be closer to their work places. By buying a rental property in a city, the pool of tenants who work increases. This assures more guaranteed rent, which is a must for investors.
- Superior long-term investment
Homes in cities are better long-term investments compared to those in suburbs. Suburban homes appreciate at only 6.7% per year, while homes in cities appreciate at 11.3%. So in addition to positive cash flow, you will be reaping gains from appreciation. Talk about killing two birds with one stone.
As great as buying a rental property in the city can be, there are some drawbacks that you should consider.
- Higher home prices
Property prices in cities are much more expensive than suburban property prices. According to Realtor.com, in January 2016, city home prices were listed at over $430,000, while suburban properties were priced at $230,000. That’s at least a $200,000 differential! A huge difference! If your budget is low for whatever reason, you should probably reconsider buying a rental property in a city.
- Crime rates
Cities tend to have higher crime rates than suburbs. Crime rates are definitely among the top turnoffs for tenants. If you’re considering on buying a rental property in the city, make sure it’s in a good and safe location.
- People are heading to the suburbs
Although it was previously mentioned that more people are living in cities, this trend is beginning to slow down. For comparison, let’s take a look at the stats for 2001. Over 80% of the U.S. population lived in cities at that time. Fast forward to 2016, and that number has dropped to 63%.
Why are people leaving the city, and where are they heading? They’re moving into the suburbs. Reasons for moving may vary on a person by person basis, such as ditching the more polluted cities to the cleaner suburbs. However, one reason is consistent: rents in cities are just too high. These high returns tend to be a result of high property prices.
Buying in the Suburbs
If you decide on following most Americans to the suburbs, you’re in for a great investment. Rental situations, when earned, tend to be more stable in the suburbs. Still though, it is not flawless.
- Larger homes
Suburban homes are generally larger than city homes. On average, they’re larger by 300 square feet, while urban homes are more expensive by $0.18 per square foot.
Because of a suburban home’s size, you could earn about the same rent as a city property. Rentals in cities are more expensive, but a suburban home’s larger size justifies a higher rent. So as a result, suburban homes are cheaper than urban homes, but still earn about the same rent, on average. Sounds like a great investment opportunity, because it is!
- More long-term tenants, less vacancies
The most common tenants you will encounter in the suburbs are families. This is especially true in suburbs that have great schools. These tenants will be looking to stay long term in your property. Tenants tend to sign longer leases for suburban properties. And as a result, they see the property as a home, and will treat it as such. Long-term also means less vacancies, saving you a bunch of money.
- Tenants are more financially stable
If you’re looking for guaranteed rent, then buying a rental property in the suburbs is the way to go. Since most tenants come together as families, they will usually have multiple sources of income. The more financially secure the tenants are, the more secure your rent becomes.
Buying a rental property in a pristine suburb does not always work out perfectly, however.
- Not as many renters
More are moving to the suburbs, but a number of people living in the suburbs are homeowners. The tenant pool is further reduced by the fact that it is not as diverse as city pools. For example, more people seeking jobs will be looking to rent in a city, not a suburb.
- Less diversity in properties
Since most suburb renters are families, most properties are single-family homes. City rentals can come in various forms. Suburbs are more limited in this respect.
Buying a rental property in a city or suburb comes with tremendous positive but considerable negatives. If you’re looking for long-term tenants and guaranteed rent, go to the suburbs. If you’re keeping your opinions more open and just want to earn positive cash flow, go to the city. And if you want to find the most profitable cities and suburbs in the country, start your trial with Mashvisor.