Best Locations for Buy-and-Hold Rental Properties

[Aaron Paterson]

I own two townhouse rentals (Colorado and Wyoming) and am thinking about my next property.  I have a number of questions:

1. What are considered some of the best locations long-term for such properties?  Criteria would include good tenants, property manager, cash flow, and appreciation.  With respect to these criteria, I've had a good experience with the Colorado property (East Commerce City near Reunion) and a bad experience in Wyoming (Rock Springs).  Should I invest in northern Colorado again?
2. Is the best approach a conventional 30-year fixed mortgage with 20% down?  If yes, my price range is around $200-400K based on availability of down payment.
3. When should I consider a 1031 exchange of the existing Colorado townhouse (3/2.5)?  (Note: The Wyoming property is far upside down, which is why I don't consider selling it now.)  I'm reluctant to let this one go since it's been such a steady cash flow, but am also open minded to better opportunities (perhaps single family or duplex/fourplex).
4. Is the 2% rule possible?  My existing Colorado townhouse would yield a rent:home value ratio of ~0.7%, far off the 2% mark, yet it's still been a successful rental.

While I own two rental properties, I'm still a real estate novice and look forward to learning more from all of you!  Thanks in advance for your advice...

Aaron

[Jeff Dulla]

@Aaron Paterson

If you are going for buy and hold, here are some quick thoughts on your questions:

1. I don't have much to add on the broad sense of locations. I prefer to hone in on locations I know for sure. Unless you really have someone trusted to work with in each location, I don't know how you can truly know a vast array of areas unless it is your full time job. If you like Colorado and have had success, stick to investing there.

2. If you are going to hold the property long term, I am not sure how you can beat a conventional 30 Year Mortgage. If the property works on that platform, I would shoot for that all day. A lot of people talk about different programs on here but it is usually because they cannot get past an obstacle to conventional lending (don't have enough down payment, property is in disrepair, do not have income to qualify, etc). If you have all those bases covered, conventional all the way as it will protect you in the long haul against fluctuations in the market. 

3. If the townhome is working and you have other capital to work with, why do the 1031 exchange? I wouldn't unless you have an agent you really trust in Colorado and you can trade up for a multi-unit. I would think most people in BP that have a portfolio would tell you they have more than a few just solid/OK rental properties in the mix. Not every one is going to be a complete home run. But solid/consistent has a value. 

4. I don't think you can ever use a blanket rule like that. Every market differs. In the city of Chicago, for instance, there is no way most rental properties meet that 2% rule. Especially for multi-units, I am  sure it is more like 1% would be more typical to come by. The more solid and established the location and values, I would think the lower the typical percentage would be. Once you start getting into some more transitional areas, your ideal 2% may be attainable. 

Hopefully this helps. PM me if you have any detailed financing questions you need help with. Good luck!