According to a US Census Bureau report in 2018, there are over 20 million rental properties with 48.2 million individual units in the USA. The majority of owners of these rental properties are individual investors as opposed to corporations. Many of these real estate investors own one to four properties. Real estate investors purchase rental properties for rising house valuations and passive income in monthly rent checks.
That being said, the United States is a very large and diverse country. There are plenty of various changes in growth and trends in population migration that can affect the profitability of a rental property. Despite real estate being a generally solid investment, some regions have higher returns than others. This is why we’ve compiled a brief list of factors to consider when purchasing a rental property.
The local economy
The local economy and availability of places of employment is a key factor in real estate investment. People tend to move to regions that have a lot of job opportunities and regions where jobs are disappearing usually decline in both price and population.
If a major employer moves into a region, the local population tends to grow and housing prices tend to climb. When the opposite happens, such as manufacturers in the rust belt closing, the area tends to stagnate.
A clever real estate investor should look into the local economy of a city or area. Areas where a large company is expecting to expand to or build a campus in, maybe a good investment.
Real estate investors should look into the local population of an area or region before purchasing a property. Population changes are usually a trend of sorts and areas that are growing or decreasing usually do so for a few years unless a change takes place. This change in many cases is linked to the local economy and occasionally to the local climate or amenities.
Locations with good weather and a pleasant environment tend to grow. This may be why areas that lack harsh winters such as Florida and parts of Arizona have been thriving as an example.
Rent Price Increases
Real estate investors receive monthly returns in the form of monthly rent checks. As such, an investor should seek locations where rent prices are increasing. While rent is currently on the rise across the United States as a whole, some areas have seen a larger increase than others. While there is no guarantee that a location that increased sharply in average rent will continue to do so, it is usually a trend.
Rent.com tends to release reports periodically regarding average rent increases by city, and state.
Home Value Growth
Another thing that is of key importance in order to ensure Rental Property Profitability, is the growth of their property’s value. It is a major factor in the return on investment for real estate investors. In recent years we’ve seen a major increase in the valuation of homes across the United States. As with average rent, home valuations in some areas have greatly outpaced others.
To look up the average growth of home values in a city, Zillow research provides tools for home buyers. This includes a home value index which provides information on pricing on an average property in a municipality as far as 10 years back. With it, you can see a visual representation of home value growth and make a more educated decision.
Percentage of Renters
One interesting aspect when analyzing an area as a real estate investor is looking at the percentage of renters versus owners. The national average is 65% of Americans own the home they reside in. A real estate investor should probably avoid regions that deviate too far from the national average. This is because a healthy rental market is needed for the investor to maximize profits. The website world population review can provide this statistical information for pretty much every city or region in the US.
Number of Listings & Vacancies
The world of economics is driven mostly by the simple principle of supply and demand. Areas, where there are many listings and vacancies, have a high supply and could be an issue for investors. High supply could impact profitability and limit a real estate investor’s ability to increase the rent as they need to remain competitive in the market.
Ideally, a real estate investor should prefer areas that do not have long vacancies. While it is hard to find statistics, one can briefly check out listings on real estate websites to understand vacancies and listings.
Quality of Neighborhood
Sometimes there can be a large disparity in housing prices in the same city. Prices in New York City, for example, can vary for an identical property just a few blocks away. A good local neighborhood is usually comprised of a few different factors. This includes the quality of local schools in the area, crime statistics, and local amenities.
In a good neighborhood, school quality should be high, crime should be low and there should be plenty of things for locals to do in their free time. Neighborhoods that are considered good usually have better growth rates and bring better returns.
People tend to be drawn to areas and locations that have activities and things to do. In cities, many local amenities are located in close proximity to each other. This may be part of the reason Millenials and other age groups tend to prefer urban living. These amenities can be restaurants, cafes, shops, parks, and things such as movie theaters to name a few. Typically areas with plenty of amenities tend to grow faster than areas where they are scarce.
Taxes play a part in every investment’s ROI. There are taxes when selling stocks, buying gold and of course property taxes. Unlike other forms of taxes, property tax can vary wildly depending on the location of the property.
Nationwide, the effective property tax rate is 1.1% of an average home’s value. In addition to that, local authorities such as states, counties, and municipalities usually have additional taxes. According to USA Today, New Jersey tends to have the highest property taxes in the US, and Hawaii the lowest.
Return on Investment
At the end of the day, the thing that every investor really cares about regardless of asset type is the return on investment or ROI. There are two main methods of calculating ROI being:
- ROI = net return on investment / cost of investment x 100%
- ROI = final value of investment – initial value of investment / cost of investment x 100%
The main problem with calculating ROI is that it can be difficult to factor in time as a variable. Regardless, a clever real estate investor should create a model that will try to predict real estate returns in five years. A home appraisal or Realtor can assist with projected prices as well as rent estimates. Keep in mind that an investor with a plan usually tends to be more profitable than one without a plan.
Rental Property Profitability
One should try to factor in all of the moving parts listed above before making a big financial decision of buying a property. By considering all of the above, you may be able to increase the profitability of your rental property.