Selecting the right location for a property investment is an essential step toward benefitting from the real estate market. New buyers unaware of the importance of market evaluation before choosing an investment locale risk early failure. Further, many investors lacking prior experience erroneously assume low purchase prices alone render lucrative investments. While it’s always a good idea to hunt for fair priced homes, other factors – including renter populace and property value trends – also contribute toward leasing and resale success.
Consider these three categories and how they translate in U.S. markets before beginning an investment property search.
1. Sensible Prices
The idea of a “fair list price” is highly dependent on the city. For instance, home values in central areas of large cities almost always have inflated prices due to location convenience and subsequent high home demand. However, neighborhoods within urban areas can vary substantially in terms of popularity and price.
Regardless of budget, landlords should opt for the neighborhoods most attractive to their desired renters. Landlords who want to market to families should consider school ratings and then narrow down options by price.
One of the top-rated schools in New York City, P.S. 191 Mayflower, is located in Queens. A two-bed, one-bath co-op in that school district is listed at $209,900, and a two-bed, one bath unit in the same building is listed for rent at $1,700 per month. Assuming investors provide at least 20 percent of the down payment, or $41,980, on a 30-year fixed mortgage with a 4 percent interest rate, monthly mortgage charges calculate to $1,078 per month (including estimated insurance and taxes). After paying the mortgage, landlords receive $622 in monthly cash flow. Factoring in maintenance and miscellaneous ownership costs, landlords in this region still profit even before owning their properties outright.
2. Strong Rental Market
Renter-heavy cities give landlords an advantage, allowing them to price their units at premiums without concern for lack of demand. According to the U.S. Census Bureau, the nationwide rental vacancy rate is only 7.4 percent – the lowest it’s been since early 2005. And, according to Zillow, nationwide rent prices are up 3.3 percent year-over-year.
According to the Zillow Rent Index, or the median Rent Zestimate valuation based on current available rentals in a given city, Chicago’s median rent is currently valued at $1,703. Just four years ago, Chicago rental properties were valued much lower at $1,297. Correspondingly, rental list prices in Chicago are on the rise. The median rental list price is currently $1,730 per month. Compared to rentals in New York City, where median rent costs $2,400, Chicago has a much more affordable rental price tag, allowing more renters to enter the market and increasing lessee demand.
3. Home Value Appreciation
No one can predict future real estate health with full accuracy, but it’s important to avoid areas declining in value. Cincinnati, although a less prominent city than New York City or Chicago, gives budgeted investors the opportunity to enter the real estate game without breaking the bank. Many amateur real estate aficionados don’t have the financial portfolios necessary to operate multi-family properties in expensive markets. However, they can consider smaller cities, including Cincinnati, to get their feet wet and learn the process within a more manageable space.
The median rent price for apartments in Cincinnati is $795 – significantly lower than the two aforementioned cities. Yet list prices are approximately $124,500 and home values increased 2.8 percent in the past year – a strong projection for short-term buyers. Additionally, Cincinnati home values are expected to increase another 1.5 percent throughout the next year. Lower list prices allow buyers to budget for feasible cosmetic upgrades and increasing property values suggest greater returns on investments (ROI).
As seasoned investors know, real estate health tends to fluctuate dramatically, sometimes in fairly short periods of time. The local economy, job market, crime rates and general popularity also shift often, so it’s important to stay aware even after purchasing and leasing property. After all, selling is the largest short-term ROI, and investors looking to receive top dollar should time their listings right. Landlords also need to stay informed to come up with an attractive pricing strategy – one that can pay off the mortgage, lead to future profit and consistently attract tenants to shorten vacancy periods.
This a guest post by Jennifer Riner of Zillow
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