Believe it or not, real estate investing is addictive. As soon as you buy your first investment property and start renting it out, you ask yourself if the time has come for buying a second rental property. And so on and so forth until you find yourself with a portfolio of multiple rental properties.
However, before you start searching for an investment property for sale – whether it’s your first, second, or third one – you have to decide on the best place to invest in real estate at the moment. As any real estate expert will tell you, location is the most important factor for the success of a property investment. After all, the location determines the property price, the rental demand, the rental income, the occupancy rate, and last but not least the return on investment (whether you look at cap rate, cash on cash return, or rate of return as a real estate investor).
If you already own a positive cash flow property and are considering growing your investment properties portfolio, you might be tempted by the idea of buying a second rental property in the same neighborhood. This investment strategies has both pros and cons, so let’s take a look at them:
The Advantages of Owning Multiple Properties in the Same Location
First, we will look at why it might be a profitable investment decision to buy a second investment property in a place where you are already investing.
1. Top Place for Rental Properties
The only reason why a real estate investor would consider buying a second rental property in the same city and neighborhood is if his/her first property is getting a good return on investment. If you already own an investment property in a top location, it makes sense to search for another property there as well. Investing in real estate in the best place will bring you high return in terms of both cap rate and cash on cash return. Thus, the most important benefit of owning multiple properties in the same top market is the positive cash flow you’ll be getting.
2. Knowledge of the Area
If an investor has been owning and managing a rental in a certain location, he/she is familiar with the local housing market, the traditional and short-term rental laws and regulations, the local taxes and insurance fees, the rental demand, the rental rates, the tenant pool, the cost of property management, etc. This means that the investor can buy a second investment property in the same neighborhood and start renting it out much faster and more efficiently than if going in a totally new and unfamiliar market. Moreover, his/her knowledge of the local real estate market will help him/her make the most profitable investment decision by buying the right property and choosing the optimal rental strategy. You will also find the answer to the question of “How much should I charge for rent?” much more easily with your previous knowledge of the market.
3. Familiarity with Tenants
If you already invest in real estate in a certain place, you know the tenants. This means you are not only able to go about buying a second rental property which perfectly suits the local rental needs and requirements, but you also know what to expect from your future tenants and can prepare for it in advance. Certain areas have higher rates of tenants not paying rent; others have frequent evictions; still others suffer from high crime rates. You as a landlord can overcome all these challenges as long as you are aware of them and start working on them before you even buy a property.
Another advantage of buying a second rental property in the same neighborhood is that your current tenants might be able to bring you future tenants. If your renters are happy with you as a landlord, they will recommend your rental properties to their family, relatives, friends, colleagues, and other acquaintances who would like to live in the same area. For example, if your tenant has had a trouble-free experience in your rental, she is very likely to tell her sister moving to town to come live close to her in your new investment property. This will largely facilitate the process of how to find tenants, especially good ones, which is one of the most important factors for the success of a rental property business.
4. Easier Real Estate Analysis
Conducting comparative market analysis (CMA) is one of the first steps towards buying a profitable investment property, once you’ve chosen the market. In order to find a good investment property for sale at fair market value or even below market value, you have to see what similar properties – real estate comps – have been selling for in the past couple of months. Naturally, this process becomes easier and faster if you are familiar with the local market.
If you’ve been visiting the neighborhood when maintaining and repairing your first rental property, you are aware of all the properties that have been recently sold and bought. You know their characteristics and how similar they are to the property you are planning to buy.
Looking for an even more efficient way to conduct real estate market analysis? Try out Mashvisor’s rental property calculator.
5. More Efficient Property Management
Managing multiple properties in the same area is very time- and cost-efficient, regardless of whether they are located in your own city or out-of-state. You become familiar with all the local handymen if you decide to manage your property on your own, or with the professional property management companies if you prefer passive investments in real estate. If you engage in long-distance real estate investing, you will save from transportation costs if all your properties are located close to each other.
The Disadvantages of Buying Multiple Rental Properties in the Same Market
Unfortunately, all the pros above don’t mean that buying a second rental property in the same neighborhood is always a perfect investment choice. There could be some serious cons as well.
1. Negative Changes in the Housing Market
Although real estate investments are very low-risk because of the relative stability of the housing market, especially when compared to the stock market, the real estate market is not static. Maybe a few years ago, when you bought your first investment property, this was the top location for investing in real estate, but things might have taken a downturn since then. A buyer’s market can turn into a seller’s market over the course of a couple of years. Thus, a real estate investor should never ever go about buying a second rental property in the same location blindly, before conducting careful real estate market analysis, including neighborhood analysis, and investment property analysis. Don’t assume that because the market was profitable 5 years ago, it still is.
Real estate investing is very much learning by doing. However, this doesn’t mean that just because you’ve been in a certain housing market for a few years, you are an expert and cannot make an investment mistake there. No matter how long you’ve been present in a neighborhood, always approach your next real estate deal with care and caution. An overconfident real estate investor is rarely a successful investor. You should always base your investment decisions on data, analytics, and facts rather than on your gut feelings.
3. No Good Real Estate Deals
Even if all indicators and analysis show that the location of your first rental property is ideal for buying a second one, maybe there are just no good deals in the local market at the moment. Don’t rush to buy just any property for the bare reason that you already own a rental in that area. If there are no good deals, you should either look for another top market to invest in real estate or wait for a property at fair market value to become available for sale.
In case you decide that the location of your first investment property is not where you want to be buying a second rental property any time soon, you might be interested in the 10 Best Places to Invest in Real Estate in 2019.
How to Go About Buying a Second Rental Property in the Same Neighborhood
Now that you know the major pros and cons of buying a second rental property in the same area, we would also like to offer you a list of the things you need to do if you decide to try this real estate investment strategy to grow your portfolio and expand your business.
- Perform real estate market analysis and investment property analysis: This is the only way to make sure that you are dealing with a profitable housing market and buying an investment property with expected high return.
- Use an investment property calculator: Even if you are a real estate expert, analysis takes a lot of time and energy, which you could be spending on other aspects of growing your rental business instead. So, make use of 21st-century technology tools and get a rental property calculator, like Mashvisor’s. It will provide you with readily available data and analytics for available properties for sale in your real estate market.
- Base your investment decision on numbers and not on emotions: Regardless of how much you like your first rental property, buying the second one needs to be an entirely rational business decision.
Real estate experts say that you should buy a new investment property every 2-3 years if you want to succeed in the business and grow your investment portfolio at a good rate. If you already own a profitable property, it is only logical to start thinking about buying a second rental property in the same neighborhood. While this can be an excellent real estate investment strategy, it has to be executed carefully and be based on neighborhood market analysis and solid numbers. If your analysis shows that your market is still a top choice for property investments, start searching for the best investment properties for sale there today!