So what makes a good rental market? How do you know for sure if the place you’re wanting to invest is going to be good or not?
Here are a variety of things to measure the health of a rental market:
- Population Growth
- Job Growth
- Industry Variety
- Landlord Law Favorability
- Tenant Quality
- Property Value
- Appreciation Potential
This is pretty straightforward – are there more people coming to your area than there are leaving? Generally this means there will be a demand for property – rental or purchasing. Of course, this can be a double edged sword! If people are moving in town, the price of real estate may go up making it harder to buy a decent priced rental property. On the other hand, it should drive the rental prices as well…
This ties closely with the population growth – if there are more jobs in the area, it brings more people, which drives demand for property. If jobs are dwindling, it may be harder to keep your rentals full.
If there’s just one industry in town (think about the car industry in Detroit), and if that industry takes a big hit, will there still be enough jobs and people to keep your rentals full? But if there’s cars, aerospace, medical, education, and other big industries, then even if one of them takes a hit, the market should still be ok.
Landlord Law Favorability
Pretty straightforward – do the laws in that area favor the landlord or the tenant? If you need to evict, can it be done within a month or will it be 6 months and a huge headache to get a bad tenant out? Definitely look into the laws or ask around if they favor the tenant or landlord.
This is sort of hard to put an exact number on or determine what makes a “good quality” tenant. It sort of fits with Job Growth and Landlord Law Favorability too. This a question that a local Real Estate Investor Association could help determine. Are there a lot of problems with tenants? Do they pay on time? Take care of the property? Etc.
You might be able to find a house for $30k, but is the rent going to be worthwhile? Is a $30k house really worth getting? Obviously there’s a lot more detailed numbers you should work out such as Cap Rate or you could start with the 2% rule (monthly rent / price of the house >= 2%), but really run the numbers and make sure it’s worth it. Are you paying $30k for an A class property or a D property? Can you get good rent to purchase price value? A $100k house renting for $600 a month probably isn’t going to work out so well.
This may be the lowest consideration in finding a good property. But it’s still something to consider nonetheless. If the housing market is crashing or going down, you probably don’t want to invest there. But if there’s indication of growth an appreciation, I’d have no problem with a property, assuming the rest of the factors line up. I never like to buy houses for normal appreciation (fix and flips are a completely different story), but I may tend to avoid an area if the house value is expected to go down.
Depending on your strategy, you may value one of these factors more than the other. Awesome! Your area may be really strong in one area, but relatively poor in another. Just depends on your risk tolerance.
But the whole idea is to know what factors to look for. These will at least guide you on areas to look at.