How Picking Rental Markets Based on Climate Can Make You More Money
A central piece of any successful real estate strategy is picking the right market. You know the drill — you want good schools, safe neighborhoods, with lots of potential buyers or renters. Most real estate investors will use many of the following qualifications to determine if a property is worth buying:
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- Sales price
- Projected rehab costs
- School info
- Neighborhood demographics
- Neighborhood crime rates
- Projected appraisal value
Here is one more you should consider: Climate
This isn’t obvious but if you are committed to investing then you should consider climate seriously. Here’s why:
All things being equal, it is always going to be smarter to pick an investment in a climate that has significant temperature swings. Think Cincinnati, cold in the winter, hot in the summer — huge temperature changes over the course of the year. It could be 100 in the summer and minus 10 in the winter. That’s a difference of 110 degrees over the course of the year. Compare that to San Diego (where I live) where it’s 80 in summer, 50 in winter, so not much of a swing at all.
The three benefits of investing in a market with huge temperature swings are:
- Flipping – You can sell for more money.
- Buy and Hold – You can charge more in rent.
- You will sell/rent your property faster than your competition.
For example, consider 2 different investments, one in Cincy, one in Wilmington, NC. Both have comparable sales prices, rehab costs, neighborhoods, projected rents, projected sales prices, etc. The major difference between them is that the neighborhood where the Cincy property is located will have utility bills (gas, water, electric) that average $350/month while the Wilmington property neighborhood will average $100/month*. Market rent for both properties is $1000.
(* These are approx. estimates)
- Total expense for Cincy property for a tenant is $1350 (rent + utilities)
- Total expense for Wilmington property for a tenant is $1100 (rent + utilities)
So, after we green up both properties (see previous posts to see how we do this) we cut the utility bills by 50%:
- Cincy property monthly utilities are now $175 while other neighborhood homes are still $350.
- Wilmington property monthly utility are now $50 while other neighborhood homes are still $100.
As the investor, considering both properties, you can:
- Increase rents in the Cincy home by $125/month and still save your tenant $50/month. That equates to an increased profit for you of $1500/year, $7500 in 5 years.
- Increase rents in the Wilmington home by $25/month and save your tenant $25/month. That equates to an increased profit for you of $300/year, $1500 in 5 years.
All things being equal, this is a no-brainer. The Cincy property will win every time because the savings and profits are so high. Some of the other added benefits are that you have happier tenants who’ll probably stay longer since their utility bills are lower. In addition, harsher climates (like Cincy) tend to have more rebate programs available, so your rehab costs could actually go down.
So, if you are truly ‘market agnostic’ and willing to invest in any market you should definitely consider the climate of the property you’re investing in. It’s a strategy that’s new but steeped in sound investing principles. You get higher rents/sales prices because you offer a compelling advantage to any future tenant/end buyer. It’s a win for you, a win for the end buyer and a win for the polar bears. Not too bad…
Photo: Jenny Downing