How Do You Know If a Rental Market Is Good?

If you are planning to invest in rental property, you want to first find a good rental market. But how do you know whether or not a rental market is “good”?

A thorough rental market analysis will answer this question. Rental market analysis involves assessing different factors to determine if a specific area is the best market to buy a rental property.

How to Do a Rental Market Analysis

Here are the key steps to conducting a rental market analysis:

Evaluate the job market

Investment in rental properties for sale only makes sense if the people in the area can afford to pay the rents. This is why it is important to assess the job market first before making a move. Here are some questions you need to ask yourself:

What are the major industries in the area?
Are the number of jobs in the market increasing or decreasing?
What is the median salary?
What is the unemployment rate?

The ideal location should have a low unemployment rate, rising median salary, a stable variety of industries, and a local government keen on creating jobs. To get more job-related trends and statistics, visit the U.S. Bureau of Labor statistics site or search for the local Chamber of Commerce.

Check the population growth

Closely related to the job market is the issue of population growth. If an area has high population growth, it usually means that there will be high rental market growth. In case there is a limited supply of rental properties, tenants will be willing to pay higher rental market rates. Besides population growth, you could also consider the median age of the population. This will help you determine what kind of properties would be in demand. For more information on the population trends and forecast in your area of choice, visit the U.S. Census Bureau.

Consider the price to rent ratio

Price to rent ratio is one of the most important rental market statistics in real estate investing. It compares the median property price in an area with the median rent prices. It is a measure of how affordable it is for locals to buy a home vs rent and therefore offers insight into the potential profitability of a rental investment property.

Generally, it would be advisable to invest in rental properties in an area where the price to rent ratio is above 16. A high ratio shows that properties are too expensive compared to monthly rents, and thus more people are likely to rent than buy a home. As a result, there will be a high demand for rental property.

The following are some of the best rental markets in the US housing market based on price to rent ratio (source: Mashvisor):

Tuscaloosa, Alabama: 42
Montgomery, Alabama: 38
Boise, Idaho: 36
New York, New York: 35
Boulder, Colorado: 35
Hilton Head Island, South Carolina: 35
Santa Barbara, California: 34
Salt Lake City, Utah: 33
Bend, Oregon: 33
Dennis, Massachusetts: 32

Of course, investing in a high price to rent ratio market only makes sense if you can actually afford to invest in such a location. Otherwise, a lower price to rent ratio may be better for you.

Evaluate the neighborhood

Before investing in an income property, you must verify if the neighborhood you are considering is desirable. A good renting market will not only attract and retain tenants but will also help your property appreciate. Here are some of the factors to look out for when evaluating a neighborhood:

Crime rate – No one wants to reside in an area prone to crime. You can get information about crimes in the community by checking local newspapers or sites or contacting local law enforcement to get the latest crime statistics. Don’t forget to visit sex offender registries.
Schools – For tenants with school-age children, the issue of schools is very important. Visit the websites of local schools and check the test scores of their students. You should also check online to see what people are saying about the schools.
Nearby attractions and amenities – Tenants will want to live in an area that is close to parks, beaches, cultural venues, libraries, and hospitals.
Walkability – This is a measure of how friendly a neighborhood is to walking. Factors affecting walkability include street connectivity, presence of trees and vegetation, quality of footpaths, air quality, and traffic conditions. The higher the walkability score of an area, the better.
Public transportation – Proximity to public transit like subways, trains, buses, and trolleys is a crucial factor in housing. You can use tools like Google Transit to identify subway stations or bus stops in an area.
Local laws and infrastructure – Are the property taxes high or low? Does the local government provide services like water/sewer access, code/planning enforcement, street-side leaf pick-up, and trash pick-up? What licenses do you have to obtain as an investor?

Once you have that information, you’ll need neighborhood data specific to rental properties. This data should answer questions like “How much cash on cash return do investors generate in the area?” You can easily access this kind of data on any local rental market in the US through Mashvisor. On the Neighborhood Analysis Page, you’ll get data like the average cash on cash return and cap rate for traditional and Airbnb property. Check it out:

Get the neighborhood data you need from Mashvisor to determine if a rental market is a good location or not.

Find rental comps

After evaluating the neighborhood and confirming that it is ideal for real estate investment, the next thing you need to do is find some comparable properties (rental comps). This will give you an idea of how much local landlords are earning every month and what kind of occupancy rate they enjoy.

So, how do you go about finding rental comps? One way is to work with a licensed real estate agent. Such agents have access to the multiple listing service (MLS) which contains a database of properties that have been sold recently in the neighborhood. Using this data, the agent will give you an accurate estimate of your property’s fair market rent. Alternatively, you can use a tool like Mashvisor. This software will allow you to look up a city or neighborhood. It will then show you all the rental properties in the area of your choice (both traditional and Airbnb). You can also visit the Neighborhood Analysis Page of a location to see a historical rental income analysis for the area. You may also use its Airbnb calculator if you plan to get into the vacation rental business.

Bottom Line

Whether you are looking for property in the Seattle rental market, NYC rental market, or Miami rental market, rental market analysis is a must. If you understand rental market trends, you will make wise investment decisions and enjoy a good return on investment.

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