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This post will start off by assuming that you are not making the beginner mistake of buying rental property in your home town and, therefore, that you are attempting to identify the best real estate markets….
So, how do you know if you are doing that correctly?
As with all investing, it is not an exact science, but here are some of the most important questions to consider when trying to find investment properties in optimal “investor advantaged” markets…
If one industry or sector of the economy were to take a hit, would that substantially affect the entire market?
(Often expressed as a Gross Rent Multiplier or "GRM"). How inexpensively can you buy property, and how much rent will it command? Additionally, how high are the property taxes and other fixed expenses that will affect your cash flow margin?
Can the majority of the population currently afford to buy the homes? How much more appreciation can take place before the majority of the population cannot afford to buy the homes? (Remember, you want upside potential as well as an exit strategy--the ability to sell the property to an end-user who can afford to buy it from you at the retail price).
Now, even if you come out with positive answers to all of the above questions, there is something else that is important to remember (and most real estate gurus and property promoters won’t tell you this):
What is the real vacancy rate of comparable properties in the precise area where your property is located?
What does the vacancy rate trend for comparable properties look like over the past 12 months, and where does it appear to be headed?
What is the (conservatively estimated) fair market rent of comparable properties in the precise area where your property is located?
What does the rental rate trend for comparable properties look like over the past 12 months, and where does it appear to be headed?
If not, your property could lose value (and both rental and re-sale desirability) based on community decline
So, when you are identifying the best real estate markets for buying rental property, be sure you take into account both macro-market and micro-market factors. If you ask yourself these 12 questions above, and find answers to them before purchasing each property, you will be ahead of 90% of individuals buying investment properties today.
We are not legal, tax, or financial professionals. The content on this page is for informational purposes only and should not be construed as individualized advice. It is your duty to consult with your own tax, legal and financial professionals about your individual situation, applicable laws, and the suitability of any investment property for you personally. All real estate investing involves risks, which buyer assumes, and no specific returns can ever be guaranteed by anyone.
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