You’ve heard it before, the best rental properties are not in your backyard. If your goal is high ROI, where should you look for a profitable investment? In my experience there are a few qualities that make up a great rental market.
The first important characteristic to consider is vacancy rate. This is important because a vacancy has the potential to be your biggest cost. Tenant turnovers are inevitable, but you have to consider how long it will take to get a new tenant into the property. Every month without a tenant is a month you aren’t collecting rent. Your goal should be to invest in markets where properties are quickly and consistently rented. Personally, I like a vacancy rate of about 5%.
Another thing to consider when assessing a market is taxes. I like to purchase my investment properties in states where property taxes are low, just a few hundred dollars per year. Remember, every expense comes out of your bottom line, and taxes are no exception.
I also love to invest in markets that have American-based infrastructure. We’re looking for average cities, the crossroads of America! Chain restaurants, long-haul trucking, hospitals, airports, universities, and distribution centers are all businesses I like in my rental markets. Think specifically about jobs that are not going overseas. Where there is job stability, you don’t have to worry as much in a recession.
Another attribute of a great rental market is a lack of flood zones. If your investment is located in a flood zone, you’ll have an additional expense—flood insurance. And if a natural disaster does occur, your investments are gone. I don’t like that risk, and I don’t like that added expense.
Personally, I also look for affordable labor. It’s just not something I want to overpay for. It’s about developing relationships with contractors. I provide my team with consistent work, and they work for a fair wage. It’s a win-win for everyone.
You'll also want to consider the cost to acquire homes in the market. Economically, it doesn’t make sense to acquire a rental home in a place like California. I can get the same home for at least half the cost in the Midwestern markets that I like. This way, I can purchase more investments and achieve that Freedom Number!
Finally, a great rental market has a low crime rate. I want my tenants to feel safe in their homes. Remember, you can’t exclusively go off of crime data websites to get the full picture.
For more about rental markets, read my post about the five most landlord-friendly states!