How to Determine Rental Demand Before Buying an Investment Property

Buying income property is one of the best ways to generate steady monthly income and secure your financial future. However, choosing the wrong investment property can lead to financial loss. Before you buy, you should ensure that the investment property will generate a good return on investment. While there are several factors that need to be taken into account when looking for profitable rental properties for sale, your best bet is to first find a location with strong rental demand.

Rental demand is the competitive need for rental properties in a particular real estate market. In other words, it is the number of people that are looking for rentals in an area. It is a key indicator of the income potential in a rental market. If you buy a rental property in a housing market with high rental demand, it means that your rental will have less risk of vacancy and will be able to demand higher rents. This translates into higher monthly rental income and steady cash flow. Moreover, since you’ll have more prospective tenants to screen, it will be easier to find quality tenants.

If you want to find the best places to buy rental property, it’s important that you learn how to determine rental demand. This requires a thorough rental market analysis. Read on to find out how to go about it.

How to Determine Rental Demand

To determine rental demand, you need to look at the different factors that influence demand levels. Let’s go over some of the key drivers of rental demand that you need to keep an eye on:

1. Number of Listings

The first thing you should look for when analyzing rental demand in a real estate market is the number of listings. This is one of the most straightforward indicators of rental demand.

If a housing market is oversaturated with rental properties, it means that there is a high level of competition for tenants. In such areas, there will be a high vacancy rate and landlords will be forced to lower their rents to attract tenants. The best rental markets are those with fewer listings. In such markets, there is typically a high rental demand.

2. Demographics

Another key factor to consider when looking for rental markets with high long-term rental demand is the demographics. This comprises of population data such as age, gender, migration patterns, disposable income, and population growth.

The demographic profile of a real estate market can help you understand not only the general rental demand but also the specific types of properties with the most demand.

For instance, a housing market with a high number of millennials would have a high demand for rental property because they are generally more interested in renting than homeownership. They also tend to prefer apartments to single-family rentals.

3. Price to Rent Ratio

Price to rent ratio is also a key factor to consider when gauging the rental demand in an area. This metric shows which option, homeownership or renting, is more affordable in a specific area.

A high price to rent ratio means that the cost of buying a home in the area is higher than that of renting. In such an area, the renter population will be more than the population of homeowners. A high rental property share means that there will be a higher rental demand.

Related: What Is a Good Price to Rent Ratio for Real Estate Investments?

4. Job Market 

Areas with high job growth will attract young people who are searching for employment opportunities. When they relocate to these areas in search of jobs, they will also require a roof over their heads. As a result, there will be a surge in the demand for rental housing. As the renter population increases, there will also be an increase in the rental growth rate.

Related: Why the Best Cities for Tech Jobs Can Be the Top Cities to Invest in Real Estate

5. Tourism

If you are looking to invest in Airbnb, you should look for an area with a high short-term rental demand. One key indicator of high short-term rental demand is a thriving tourism industry. These are areas with tourist attractions like parks, beaches, mountains, museums, etc. If you buy an Airbnb rental in such a market, you are likely to enjoy a high Airbnb occupancy rate.

Related: 4 Steps of Airbnb Market Research

6. Future Development

When looking for where to buy rental property, you should also consider the future rental demand. A growing market with major development projects planned will be more attractive to potential tenants. Such development projects may include infrastructure improvement, new hospitals, new schools, etc.

If the current rental demand is not strong enough, it’s likely to improve in the future in such areas. If it is good now, it’s likely to get even better.

Using Mashvisor to Find Real Estate Markets with Strong Rental Demand

With several factors to consider, finding markets with strong rental demand can be time-consuming. Fortunately, there’s an easier and more accurate way to do it.

If you want to find areas with the highest rental demand in the US housing market, we highly recommend that you use Mashvisor’s real estate heatmap. This tool uses up-to-date algorithms and predictive analytics to help you find strong rental markets from the comfort of your home in a matter of minutes. All the legwork has been done for you.

With the heatmap analysis tool, you can perform a neighborhood analysis on your city of choice using filters like Airbnb occupancy rate, listing price, rental income, and cash on cash return. The heatmap will display the performance of the different neighborhoods for each filter you set using a range of colors.

A neighborhood with a good rental demand will enjoy high rental income and cash on cash return. For those interested in buying Airbnb property, look for neighborhoods with a high Airbnb occupancy rate.

Once you have found a neighborhood with good rental demand, you can use Mashvisor’s rental property calculator to find the occupancy rate of individual properties, rental income, rental comps, and more.

The Bottom Line

When looking for where to buy a rental property, rental demand is a key factor to take into consideration. This is because it will influence your occupancy rate, rental income, and ultimately your return on investment. Be sure to do your research on the 6 factors listed here and don’t forget to use Mashvisor’s real estate investment tools to help you along the way.