How To Buy A Rental Property | Part 2: Pick Your Real Estate Market


what’s up guys it’s James Allen the
out-of-state investor and today we’re gonna continue with our mini-series and
get into part two of how to buy a rental property where I’m gonna talk about how
to pick your real estate market in just 9 steps now I kind of did a video on
this topic already called buying rental property out of state this is where I
focused on researching how to choose a metro area to invest in the link is in
the description below and I highly recommend watching that video first
before watching this one now I mentioned this before but there are three
different levels of research for choosing a real estate market and in
this video I’m going to be focusing on level 2 and level 3 research which is
what I used to narrow down my specific target area to buy real estate now if
you’re really planning on narrowing down your market then I’m going to need you
just smash that like button and go ahead and push the subscribe button below to
get notified of new real estate videos just like this one all right enough of
that now let’s get into it number one establish your goals when deciding on
where you’re gonna invest you’re gonna have to make a decision about which kind
of neighborhood you want to invest in are you looking for appreciation cash
flow or a little bit of both typically good neighborhoods have better chance of
appreciation but have lower cash flow whereas the lower quality neighborhoods
have better cash flow but less chance of appreciation the way investors break
down neighborhoods is by using a letter grading system it’s nothing official or
anything that’s documented in any sort of way it’s just simply a way of
describing an area an a neighborhood is an area with all the latest and greatest
this would include things like the best restaurants best schools most expensive
real estate wealthiest individuals you get the idea for a rental property these
kind of areas typically have the best quality tenant but at the same time they
have the worst return on investment as far as passive income is concerned and
this is mainly because the prices of these properties are just too high to
see good cash flow and in many cases they end up being cash flow negative
A “B” neighborhood may not be the best of the best but it will still have good
schools good restaurants coffee shops and newer buildings as a rental property
B Class areas will cater to your middle-class blue-collar worker type
these are reliable tenants that will for the most part not be a headache and
bring a decent return on investment as far as cash flow is concerned a C
neighborhood is more of a lower-income area with older buildings in these areas
it’s not uncommon to find nearby pawn shops payday advance shops or other
similar businesses as a rental property these tenants will be less than reliable
and are seen as riskier than B Class tenants but it can work out just fine in
a lot of cases it just really depends on who you get your return on investment
will also be higher than your beat class properties when all goes according to
plan finally a D neighborhood is the lowest income area and will many times
be what we call a war zone in these areas you can count on seeing lots of
boarded up windows graffiti and it’s generally an area you wouldn’t feel
comfortable driving or walking through even in the middle of the day for me I
like to focus on B areas down to C plus areas and this is for a couple of
reasons one they provide solid cash flow to they’re not as risky as those D or c-
areas might be which for being an out-of-state investor is really
important to me and three I feel like the odds of getting appreciation on my
properties are increased since there is a level of desire and demand to live in
these areas either way this should help give you an idea of your options when
you’re establishing your goals and deciding on what level of risk and
reward you want in your rental property number two crime rates crime rates are
statistics that you can find online they give you an idea of how low or high the
crime is in a certain area this can be really useful information to help
mitigate risk on your rental property but keep in mind that these stats are
not a hundred percent reliable for all your due diligence I like to start with
Best Places net to find crime ratings on different cities or zip codes that I’m
considering and then once I’ve narrowed down my zip
codes of interest I’m gonna get more specific with my research and go to
realtor.com or neighborhood scout comm where I could see crime maps showing me
exactly where the more dangerous and more safer areas are almost block by
block here’s an example for you right now I’m on realtor.com where I’m looking
at a property in Atlanta now as you can see it shows me which neighborhoods are
higher or lower in crime this is really helpful to avoid bad areas in a mostly
good zip code and the last thing I’d recommend doing is calling up your local
police department and just ask their opinion on an area that you’re
considering they may or may not answer your question depending on the person
but it is worth trying so that you can gain as much information as possible number three schools schools are always
one of the biggest driving forces behind rising real estate prices so it’s safe
to say that if you are looking for an area that has an opportunity for
appreciation good schools will be one of those things to consider now I like to
use Greatschools.org for this because they have ratings for the majority of
schools in the nation you can just type in a city or zip code and get an idea of
schools in the area and you can even type in the property address you’re
looking at to see which schools have been specifically assigned to that
property I like to see that there are schools in the general area that have a
rating of at least five out of ten but it doesn’t have to be for that house
specifically because as I mentioned before schools drive up real-estate
prices so if you’re looking at areas with ten out of ten schools there’s
probably a good chance you’re looking at the most expensive real estate that
won’t cash flow number four gentrification one of the best ways to
capture appreciation on rental properties is targeting areas where
there is gentrification taking place or what we also call a path of progress
this is basically an area where homes are getting renovated maybe new
construction being built basically an up-and-coming area to get an idea of
where this is taking place I recommend talking with local real
estate brokers or investors but one of the best ways to get an idea is by
driving all the streets in your target neighborhood
when driving the streets you’re gonna start to see if there are areas seeing
gentrification and also which areas have rehabs in process at that moment number
five number of renters and vacancy rates the number of renters and vacancy rates
are good ways of getting an idea if an area is going to make for a successful
rental property Citydata.com is my go-to website to see what percentage of a zip
code are renters I want a decent sized pool of more than 30% of the population
in a particular zip code so that if I go vacant I know there’s a good amount of
people looking for a place to rent in that area the lower the percentage the
harder it might be to rent out whenever it goes vacant to get an idea of rental
vacancy rates there are some stats that you can find online but for the most
part they aren’t gonna be completely reliable information the best way to get
an idea of rental vacancy rates in an area is to talk with your property
manager any good property manager should know this number off the top of their
heads and they’ll be able to guide you if a house you’re targeting is in a
worse area compared to others as far as vacancy is concerned the national
average vacancy rate is about 6.8% at the moment so you can use that as a
measuring stick to gauge if you feel like an area has a high or a low vacancy
rate number six median income median income is a great way to get an idea of
tenant quality and it can also be found on Citydata.com if the median household
income in an area is about $20,000 a year then you know you’re most likely
going to be dealing with low quality tenants with that said there is no
specific amount of income that I recommend targeting since every state
has different levels of income but as you research a lot of zip codes in your
area you’ll start to get a feel for what would be a low quality income level now
I don’t want to paint this topic with broad brushstrokes because I know that
even in a low-income area you can have good tenants as well I would just say
going off the odds the higher the median income level the more likely you’ll have
better ten quality what’s also cool is that on
Citydata.com you can actually break it down on a map to be more specific than
just a zip code like I’m doing right now you can see that I can go area by area
and it will adjust on the meter below to tell me what the median household income
for that small area is this is really helpful when you’re looking to start
making offers on properties and can help you dramatically mitigate risk number
seven nearby restaurants and retail it’s great if you can buy a property that’s
near great restaurants coffee shops or shopping malls things of that nature but
this may not fall in line with your goals and the type of properties that
you’re going for and that’s okay I don’t put the same amount of importance on
these things as I do compared to most of the other tips that I give but it’s
nevertheless a nice bonus if you can find a property nearby these kind of
areas that still cashflow and bring in a good return number eight population
growth when narrowing down on your investment area I want to understand not
only how the metro population growth looks but also get more specific and
understand how the county or city population growth looks as well
population growth is one of the biggest drivers in real estate and rent prices
so definitely get familiar with this information if you want to increase your
chances of appreciation now the website that I like to use for this information
is www.census.gov this will give you the most up-to-date information on
population and will help you as you continue to narrow down your target area
number nine property taxes the last thing I want to look at when I’m
narrowing down a market is property taxes every county has a different
percentage they take for property taxes and if one takes a big percentage it can
really eat into your cash flow for example I’m looking at a property here
in Dallas Texas where the county tax rate is on average two point one eight
percent of the assessed property value this property is three hundred and
sixty-five thousand dollars and the property taxes on this
property will come out to about 693 dollars a month now let’s take a look at
another property but this time we’ll go to Madison Alabama where the county tax
rate is on average zero point 43 percent of the assessed property value the
property I’m looking at in this area also has a price tag of three hundred
and sixty-five thousand dollars however the monthly property taxes are only a
hundred and forty dollars a month so you can see that the Madison Alabama
property saves you five hundred fifty three dollars a month or six thousand
six hundred thirty six dollars a year for the same purchase price that can
seriously be the difference of cash flowing or being cash flow negative so
when you’re looking into narrowing down your area check out what the average
property tax percentage rate is last thing you’ll want to double-check is
that there may also be city property taxes as well depending on the city that
you’re targeting so check with your real estate agent on that one to make sure
you understand exactly how much you’ll have to pay for your property taxes when
owning a rental property in that area so with all that said I know that was a lot
of information to take in but guys these nine steps really will help you to
narrow down your market of choice to not only pick a great one but also help
you mitigate risk along the way most of these things can be researched in any
order but make sure whatever you do start with number one which was
establishing your goals because this is what’s gonna help you to decide exactly
which area works best for you also your property does not have to check every
box that we discuss today to be a great deal these are just different things to
consider whenever you’re narrowing down on your market as always guys thank you
for watching keep an eye out for the next videos in this series on how to buy
a rental property I’m posting a new video every Friday now if you enjoyed
watching this video go ahead and give it a thumbs up if you haven’t already done
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and I’ll see on the next one

4 comments on “How To Buy A Rental Property | Part 2: Pick Your Real Estate Market”

  1. The Out of State Investor says:

    It all starts with your goals when narrowing down your market. What are your goals this year in Real Estate?

  2. Drake Miller says:

    I want to get a duplex live in one side and rent the other

  3. Jaime Resendiz says:

    Keep Up The Great Content. I Liked It & Hope The Video (Your Message) Keeps Growing.

  4. Matthew Falkenstein says:

    Good content! I have subscribed.

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