Evaluating Neighborhoods and Markets for Rental Property

[Beth Haselhorst]

Hi. I am a new investor and I'm trying to develop a checklist for evaluating neighborhoods in the St. Louis market for rental property. I’m looking for something that will focus my efforts so I don’t get bogged down by ALL the properties and ALL the possible measures.

I’m talking to people too, but when sitting at my computer and a property comes up, or my realtor sends me properties, I’d like a quick way to determine if it’s a good market.

Based on a BiggerPockets podcast where the guest gave great tangible suggestions on where he goes to evaluate the market, I’ve found www.bestplaces.net:

On that site, I type in the zip code, and look for these four things:

1. Population is increasing
2. Median home price is over $100,000 (so it makes sense to rent vs. buy)
3. Positive Job Growth
4. Home appreciation is going up. (sometimes I forego this one because MOST areas seem to show a decrease, which I found surprising, but I KNOW there are good areas here).

But I have realtors suggesting areas for good rental property cash flow that don’t meet ANY of those requirements.

My financial goals with rental property is long-term and would like to implement the BRRRR strategy.

Any suggestions on what to look for? Otherwise, I find myself looking at EVERY area and putting numbers for EVERY property into the BiggerPockets calculator and probably wasting a LOT of time.

Thanks for any help!

[Max Householder]

Hi Beth, I think when evaluating neighborhoods in St. Louis it's best to get out on the ground and drive through them or ride a bike around if you're into bicycling or get out and walk them. Stats like population growth and median income are helpful on a macro scale, like the STL Metro region, but it's hard to find statistics for areas smaller than a zip code and especially in a city like St. Louis that's block-to-block in many areas, those stats can be misleading.

I heard a recent podcast that noted one of their criteria is for the area to have a median income that can cover the rent. Typically about 1/3 of income spent on housing is considered reasonable, so if you're looking at buying houses that rent for $1,000/month then the median income of the area should be $36,000 at an absolute minimum. Then you know your rent should be affordable to more than half the population. If you go with 30% or 25% of income, then you'll be affordable to an even larger segment. Always check the crime reports. Avoid violent crime like murder, assault, home invasions etc. There are many great areas of the city where people still get their car or garden shed broken into, so take petty crime with a grain of salt.

I would focus on getting out and about in these neighborhoods at least by car. What are the existing homes like? Are they run down, recently remodeled, are many for sale, are none for sale? What kind of cars do people drive? At 6:00 on a weeknight are there a lot of plumbing, electrician, contractor type trucks parked around indicating people have good jobs? What kind of businesses are around? Are they new or have they been there a long time? Are they highly rated? You can have areas with great businesses largely supported by people from outside the area, so the median income numbers might show low numbers, but you know people with higher incomes like the area and like hanging out there, so if you provide a nice place to rent, you'll get the best of that group.

Look for dumpsters indicating remodeling/investment projects going on and especially new construction. Larger investors will have already done extensive research on an area before putting in six figures or millions of dollars to invest, so just follow them and save yourself the number-crunching. If Wal-Mart or Chik-Fil-A is putting in a brand new building, there's someone at the corporate HQ for did a lot of diligence on where to build.

Hope that helps you think of some outside the box ideas to evaluate an area.