What Kind of Neighborhood Has the Best Investment Properties?

Real estate investing is a very lucrative industry. If you want to find the best investment properties, you need to know where to look. The profitability of your investment heavily relies on two words: investment location. The neighborhood you invest in could make all the difference in your property’s performance. So, learn how to find the best neighborhoods to invest in real estate right now.

Key Factors of a Profitable Neighborhood

Okay, so we know that location is important when searching for the best investment properties. But how do you determine which neighborhood is the best place to invest in real estate? Well, when trying to evaluate and analyze a neighborhood for real estate investing, there are a couple of factors to consider:

#1. Median Home Value

You want to look for below market value properties in high-value neighborhoods to make the most profitable investments. A good real estate market is one that’s experienced a pattern of gradual price appreciation in the past. Steer away from neighborhoods with multiple previous spikes and corrections.

#2. Median Income

A high median income typically gives more leeway for a higher rental rate. During your neighborhood analysis, search for areas with a household income higher than the local median. This doesn’t necessarily mean the best investment property is found in more expensive areas. It simply means that areas with employment opportunities and well-payed jobs will typically have high housing demand.

Related: How to Do a Neighborhood Analysis in Real Estate

#3. Percent Employed

High employment rates are key because this reflects a strong economy. A strong neighborhood is one with a 70 percent and above employment; 50 percent is considered low.

#4. Percent of Owner-Occupied Homes

This is important because you can gauge the rate of rental property demand. Generally, the best investment properties are found in areas where people prefer to rent rather than own. So a neighborhood with a low percent of owner-occupied homes is better.

#5. Average School Rating

An area with good schools is an area people want to live in. This factor is especially important for investors considering how to find investment property to use as long-term rentals. Some people move to a specific neighborhood just because it’s in a good school district.

#6. Crime Rate

No one wants to be in a neighborhood filled with crime. It’s important to research crime rates if you’re investing in a neighborhood you’re unfamiliar with.

Related: Should I Buy a Rental Property in a Bad Neighborhood If It’s Really Cheap?

To start looking for and analyzing the best investment properties in your city and neighborhood of choice, click here.

Now that you know what general characteristics to look for in a neighborhood, it’s time to dive into the numbers. Every investor wants to have positive cash flow properties in their portfolio. That’s because investing for cash flow puts you on the fast-track for immediate rental income. If you want to ensure a high return on investment, there are three main metrics to evaluate in order to find a neighborhood with the best investment properties:

#7. Cap Rate

Short for capitalization rate, the cap rate measures the rate of return on a property. The cap rate formula is the net operating income divided by the property’s current value. Investors typically use it to compare two similar properties or to evaluate the return and risk of a prospective investment property. A neighborhood with a high average cap rate is the first place to look when searching for high cap rate properties for sale, naturally.

#8. Cash on Cash Return

This metric is similar to cap rate, but it factors in the investment property’s financing method. Its formula considers the debt on the property (your mortgage). For this reason, investors usually give the cash on cash return a heavier weight in the analysis. The basic calculation is the net operating income divided by total cash investment (only what you paid, excluding any loans). You can find the best investment properties in neighborhoods with a high average cash on cash return.

Related: What Is a Good Return on Investment for Rental Properties?

#9. Occupancy Rates

This a metric rental property investors should always look at as well. A neighborhood with low vacancy rates is an attractive one. Whether it be for long-term rentals or short-term rentals, high occupancy is key if you truly want the best investment properties.

For traditional long term rental properties, a neighborhood with a high price-to-rent ratio means residents prefer renting. This translates to a wider renter pool and likely a higher occupancy rate. You also want to remember the key factors mentioned above; don’t invest in a neighborhood no one wants to live in. Short-term rentals are the best investment properties in neighborhoods within cities that see a lot of tourists during the year.

These three metrics are key in any real estate investment analysis, but they’re also important when analyzing a neighborhood. Knowing how the area performs, in general, will let you know whether or not it’s the right place with the best investment properties. Using the local market’s averages for these metrics will point you in the right direction. But where can you find this kind of information?

How to Find the Best Neighborhoods with the Best Investment Properties

If you really want to find the best investment properties in the right type of neighborhood, use Mashvisor’s tools. Because each investor has different goals and follows their own strategy, it’s important to personalize the search for property based on your criteria.

So, for a visual take on neighborhood shopping, consider our heatmap analysis tool. Narrow down the search results by defining your top priority (rental income, property price, occupancy rate, or cash on cash return). The map will highlight neighborhoods that rank high for the criteria in green and red for those that rank low. It’s one of the best ways to find profitable neighborhoods in your city of choice.

use a heatmap to find neighborhoods with the best investment properties
Mashvisor’s Heatmap Analysis Tool

Our neighborhood analysis displays everything you need to know about that area for a profitable real estate investment. Our investment property calculator provides key neighborhood stats and insights.

Mashvisor's neighborhood analysis will help you find places with the best investment properties
Mashvisor’s Neighborhood Analysis

If you’re interested in learning more about how to use neighborhood analytics with Mashvisor, click here.

Related: Expert’s Guide on Finding Income Properties Using a Heatmap

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