Newbie's 5-Minute Guide to Selecting the Right Location

[Jack Vaughn]

As a "newbie" about 6 months into my educational journey, one of the things I wish I had was a series of 5-minute guides to give me a high level overview of the different aspects of real estate investing so that everything doesn't seem so scary and overwhelming! I have found that when I teach others about what I am learning (currently reading The Book on Rental Property Investing by Brandon Turner, much of this comes from his book), I retain the information better myself so this is helping me as much as I hope it helps you! I hope that my 5-minute guides will help other newcomers like myself, jump straight in! These guides are not meant to be all encompassing or detailed, only provide basics in simple terms to help beginners understand. If I am incorrect in something, please correct me! I would love to hear all feedback and deeper insights!

Newbie's 5-Minute Guide to Selecting the Right Location

Neighborhood Ratings

There is no rigid scale for rating neighborhoods but you'll usually hear an A-C, A-D, or A-F classification. Based on which classification scale someone is using, a C on their scale might be a D on your scale so be aware of that when talking to investors or reading posts here in the BP forums. We'll use an A-D scale, as this is what Brandon Turner uses in his book, The Book on Rental Property Investing. Here's a breakdown:

A - newest buildings, hottest restaurants, best schools, wealthiest people, highest-cost real estate

B - slightly older buildings, decent restaurants, decent schools, middle class/blue collar people, updated but not as shiny real estate

C - 30+ year old buildings, lower income housing, check cashing businesses, pay check to pay check people

D - War zone, wouldn't want to try here alone, high crime and usually lots of drug use/sales

Crime

Crime is a big deterrent of attracting good tenants and high home values. You can't 100% understand the crime levels and stereotypes of areas unless you have "boots on the ground" in the area as it can change block by block. To get a good feel for the crime rate in an area, check out the follow free websites:

Drug Use

Drug use in an area can be hard to determine but as a rule of thumb, drug use follows areas of high crime.

Schools

Good schools are key for attracting long term, quality tenants and low vacancy! Ratings of local schools can be found at . These rating are on a 1-10 scale and are based off of test scores, academic growth, college readiness and other available data.

Unemployment Rate

High number of jobs usually equals a strong rental market. Don't worry too much about the national unemployment rate, instead focus on the local unemployment rate. Head over to to find out the unemployment rate of your zip code.

Population Growth

Nothing better than being able to raise the rent each year! This is possible in areas with high population growth. Another great value-adder is appreciation, which is driven by the demand for an area. To gain insight on the growth rate of your area, check out www.us.com/rank.

Housing Starts and Building Permits

To understand whether an area is being overbuilt or underbuilt or right on track, compare population growth with the amount of houses being built. This will give you a good indication if a market is oversaturated or an opportunity to hit the ground running! Check out for construction data.

Transportation

People usually don't want to live in areas that are hard to get to and from. For this reason pick an area that is in close proximity or is easily assessable to where people might want to work, shop and have fun. For an idea, pay attention to where the newest starbucks, shopping center or movie theatre is being located. These companies spend millions on market research.

Price-to-Rent Ratio

People really like to analyze price-to-rent ratios for an area. Although this ratio fails to take into account many important characteristics such as lower-income areas of a zip code, number of bed/bath rooms and conditions of the properties, it is great to getting a high-level understanding of an area, as it is only an average and not specific.

Price-to-Rent Ratio = Median Monthly Rental Price / Median Sales Price

To calculate this ratio, you can find the needed data at .

Vacancy Rates

This term is the percentage of the year that a property will sit vacant. This is important as it this a major cost of a property! Vacancy rates can best be determined by asking a local agent or property manager. Make sure you include this in your analysis!

Property Tax and Insurance Rates

Be conscious of the property tax of an area and any required insurance such as flood insurance. These are important numbers to consider in your analysis and can add quite a bit to your monthly expenses.