What Are Your Real Estate Buying Criteria When Looking to Purchase a Rental?

[Allen Zhu]

Hey everyone,

I’m currently looking into buying a rental property and would love to hear what criteria you all use when evaluating potential properties, whether they’re in-state or out-of-state.

A few things I’m curious about:

1. Location Factors: What key elements do you look for in a neighborhood or area? How do you evaluate an area you’re not familiar with, especially if it’s out-of-state?

2. Market Conditions: How do you figure out if the local real estate market is good for buying rental properties, whether it's a buyer’s or seller’s market?

3. Property Features: What specific features do you prioritize (number of units, square footage, amenities, etc.)? Do these differ if it’s an in-state or out-of-state property?

4. Cash Flow & ROI: How do you calculate potential ROI and rental income? What's your ideal monthly cash flow, and does that impact your decision on location?

5. Risk Management: For out-of-state properties, how do you manage risks like property management, maintenance, and tenant turnover?

6. Financing & Loans: Do you approach financing any differently for in-state versus out-of-state properties?

Would love to hear your thoughts and experiences, especially any lessons you've learned along the way. Thanks!

[Eric Fernwood]

Hello @Allen Zhu,

You asked excellent questions, and I agree with Kevin that they call for long answers. I will do my best to be helpful and keep my post reasonable in length.

Selecting a good investment city and property is straightforward. I will explain the process below. Reach out if you have questions.

Let me first share my key assumptions:

• Tenants, not properties, pay rent. A reliable tenant is invaluable—they stay many years, pay the rent on schedule, and care for the property.
• Renters are diverse. Each tenant segment has specific housing requirements and will not rent properties that don't meet those requirements.
• Real estate investing is about long-term financial freedom. Your rental income must outpace inflation, last your lifetime, replace your current income, and continue even when the economy dips.

If we agree on that, here’s how I approach location and property selection:

Location is King

Where you invest dictates your long-term income potential. Look for cities with:

• Strong, consistent population growth: More people needing housing drive up rental demand.
• Rapid property appreciation of existing properties: This lets you acquire more properties with less cash.
• Job growth: Your tenants need jobs to pay rent. Focus on cities that attract new companies. When companies choose a location, they consider:
  • Metro population over 1 million: A large, skilled workforce and robust infrastructure. Wikipedia's Metropolitan Statistical Area page
  • Low Crime Rates: High crime deters businesses and residents. Do not invest in any city on this list.
  • Low Operating Costs: Companies seek locations that allow them to remain competitive, avoiding areas with high taxes and regulations. Property taxes are a good indicator of overall operating costs. LendingTree
  • Low Risk of Natural Disasters: Companies are wary of areas prone to natural disasters. The best indicator of natural disaster risk is homeowners insurance costs. Do not invest in cities with high insurance rates.

Property Selection: Target Your Tenant

Instead of buying a property and hoping for reliable tenants, flip the script: identify a tenant segment with a high concentration of reliable people. Talk to local property managers to determine the right segment (reach out if you want specific questions to ask). Once you've identified your target segment, observe what and where they're renting. Then, buy similar properties. The key is meeting the housing requirements of the people you want as tenants, not guessing. Depending on the city and the tenant group, this approach is adaptable—it could be condos, single-family homes, or townhouses. And the principle applies universally to in-state or out-of-state investments.

I hope this helps.