The most important thing in real estate is location, location, location. Today we discuss the key factors to finding the perfect rental property neighborhood.

Zach Evanish from Roofstock joins us to discuss what factors to consider when choosing a rental property neighborhood.

Near or Far?

The majority of rental property owners buy within a 30-minute drive of their own home. There are advantages to that; you know the area well, you can visit the property, if you don’t want to hire a property manager, you’re close enough to handle things yourself.

There are also risks and disadvantages. If you live in an expensive area, you may not be able to afford as many properties as you would like to own. You are also more vulnerable to economic and weather events. If there is a big downturn in the local economy or a natural disaster, your investments are vulnerable because you have all of your eggs in one basket.

Okay, Far

Great, you’re convinced that far is a good idea when it comes to a rental property neighborhood. But where can you find insight into non-local markets? Roofstock has developed a neighborhood metric that rates neighborhoods based on five factors:

Median Home Value: In regard to list price, half the homes are listed above this price and half below it.

Median Income: Median income is the amount that divides income distribution into two equal groups, half with incomes above that amount and half below.

Percent Employed: This is the rate of employment in an area. A number above 70% is considered high, under 50%, low.

Percent of Owner Occupied Homes: This is the number of people in the area who own rather than rent.

Average School Rating: Whether or not an area has good schools is one of the most important factors when considering rental property.

Cash Flow or Appreciation?

When determining an area to invest in, you must consider your goals. Are you more interested in cash flow or appreciation? Cash flow means you’re making money on the property right away; the rent is higher than your expenses, including the mortgage. Appreciation means the house will gain a lot of value over a period.

If you’re looking for cash flow, a less expensive house in less expensive markets like the Midwest is what you should look for. The price to rent ratio will be better for cheaper homes in less affluent areas.

If you want appreciation, your investment will be more long term. You won’t make money right away, but the property will generally be newer, easier to manage because it won’t need a lot of repairs and the tenets tend to stay longer. The prices in these areas often don’t match rents, so you have to count on appreciation to make money on these types of properties.

Zach recommends areas like Miami and Orlando for appreciation investments.

No Vacancy

Another factor to consider is a vacancy, how long do properties in an area typically sit empty between tenets? You should put aside 5-7% of the monthly rent aside for vacancy times. That comes out to about one month of no rental income every two years.

Local property managers can get you these numbers. Requiring 60-90 days notice from your tenets and charging a fine if they don’t provide it can help protect you from a long vacancy.

Where the Cool Kids Are

There are certain areas that are hip and attracting young, educated people and the industries that employ them. How do you know what those areas are? Net move in and net move out data can give you an indication. People are moving out of rust belt areas in search of better jobs and moving out of markets where they’re being priced out...