Is This A Good Rental Investment? Part I: Assessing The Location

Even A Great Deal on a House can Fail You in the Wrong Neighborhood.

If you just follow the regular news it seems almost everywhere you look today real estate values are going up. Jump on the internet and you’ll find plenty of supposed deals on rental properties. Well, all is not as it seems so you should perform your own due diligence.

The single most important factor to research is the neighborhood to determine the type of tenant, if any, it will be desirable to.

Profile Your Best Tenant
The first step is to ask yourself what kind of tenant you’d like best, and what neighborhood that tenant would prefer to live in. Are you excited about renting to a family, knowing that it likely means two incomes and thus potentially more rent? Or would you rather have a hard-working bachelor who won’t be home often enough to throw excessive amounts of parties? Once you’ve put some thought into the tenants you want, you can compare it to what you find.

Case the Joint
With your tenant in mind, drive through the neighborhood within a few blocks of your potential new rental home. Look for public services: parks, libraries, police stations, fire departments, and anything else free and easy to access. Look at the neighbors: are their houses maintained, grass cut, and cars washed? You’re not likely to attract a tenant that will improve the quality of the neighborhood, so you can estimate the quality of tenant that will apply based on the appearance of the area around the rental.

Get The Relevant Specifics
Based on the tenant you want to rent to, look for details about the neighborhood that will appeal to them. For example, if you’re after a bachelor yuppy, you probably want to time how long it takes to get into the local highway — commute time is important to that kind of person. If you’re looking for a family, check on the quality of the local schools by asking around or looking them up online. If you intend to rent to an elderly couple, you’ll want to check on the distance to the nearest grocery store.

Clues To Keep An Eye On
There are some things that you can use to gauge the near future performance of an area that will affect your ability to get a quality tenant:

• Lots of ‘For Sale’ signs in the area usually means property values are probably going down. It’s basic supply & demand – too much supply drives down prices.
• Lots of ‘For Rent’ signs in the area often implies an oversupply of rental properties and not enough tenants. So, you’ll have to be competitive — either offering a low rent or a high-quality building — to get a solid tenant.
• If business buildings nearby are sitting empty or are for sale/lease, it can also be an indicator of a neighborhood on the decline.
• On the opposite side, a neighborhood that is full and has new construction or obvious remodeling going can indicate that the place is on it’s way up, which can be an excellent place to invest.

Talk To the “Natives”
One of the best ways to get a clue about the neighborhood is to simply ask people. You don’t need to make up a fancy story or anything; just knock on their door and tell them you’re thinking about buying that house across the street and you’d like to know what they think of the neighborhood. Most people are surprisingly willing to talk about the place they live.

Remember — you can always improve a building. It’s much harder to improve the environment around the building. Buy in the right neighborhood, and a lot of flaws can be forgiven. Try to rent in the wrong one, and the prettiest house in the world won’t keep a tenant happy for long.