Real Estate Investor Corner: Understanding What Makes A Good Rental Market For Your Buy-and-Hold

All real estate is, essentially, speculation. This is especially true when it comes to buying a property for a long-term investment in what is known as a buy-and-hold strategy. Whether you are holding just to sell later, or fixing the property to use as rental, you are looking further ahead than just a fix-and-flip. You have to anticipate the market a few years down the road. Luckily, even though everything is speculation, being educated and informed makes speculation more than just a guess-and-hope strategy.

When looking at a rental market, there are a lot of underlying factors that make an area grow. Even in cities with established rental markets, there are areas and neighborhoods that are primed for growth, where a rehab professional with a hard money loan can get in for cheap, fix up a place, and have it ready to rent when the market shifts. Knowing these underlying economic factors is the best way to anticipate the future.

Evaluating The Rental Market Down The Road

Major cities are vast and unimaginably complex. It doesn’t really do much good to say “the city is doing well” or “the city is doing poorly,” because even if one of those extremes is more generally the case, there are still enough exceptions to make the actual lived-in experience of the city vary wildly. Rich cities have very poor quarters, and vice-versa.

This complexity means that when evaluating areas to purchase property for a buy-and-hold, with an eye on the rental market, you can’t just say “Los Angeles is doing well, so any property should be ok.”  You need to understand what makes certain areas promising for rentals, and that means understanding the underlying economic fundamentals at force behind what makes them promising. There are a few to know:

  • The right kind of job market. There is no such thing as the wrong kind of job, as any work is valuable, but when you are hoping to rent a place and turn a profit, you’ll want tenants with well-paying, stable jobs. Perhaps the most important sector in this economy is the tech sector, which attracts young people who have money, don’t yet have families, and are transient and not looking to buy. Obviously, there are exceptions to this, but speaking broadly it is an accurate demographically representation. Cities with tech sectors tend to be very good rental markets, and the areas near where these jobs are located are especially valuable. Older areas with buildings that can be rehabbed as incubators or for single start-ups are a great place to start looking, as people will want to rent homes around these workspaces.
  • Access to transportation. Public transportation is becoming increasingly important again, as the car-centric mode of commuting feels wasteful, stressful, and time-consuming to many people. Cities are investing in trains, light rail, and even cable cars. This is extremely important to the younger generations, who are making up an increasingly high percentage of the workforce, particularly in the tech sector. So areas with the “right” jobs that also have access to public transit, or areas that are connected by public transportation to the jobs, are ideal.
  • Proximity to hubs. Of course, the best of all worlds are areas that have jobs, residential space, and public transportation (because not everyone can live or work there). Neighborhoods that are really beginning to boom are “hub-oriented”: areas that are full of mixed-use multi-family residences, where people can live, work, or play. San Diego, especially, is using aggressive urban planning to make more-or-less self-contained hubs, striving to become a “city of villages.” Urban planning isn’t a secret, though: look to city council records and other sources to find out where the next wave will be, and how to get in on it.
  • New restaurants and stores. Sometimes, jobs and urban planning aren’t what make an area boom. For some reason, restaurants and stores either know when an area is going to grow, or make it grow. Keep your ear to the ground. If you hear about a cheap area that is suddenly the hot spot to eat or dance, look into it. That is often the start of a transforming neighborhood, and at a time when property can be had cheaply.

Future articles will go deeper into some of these concepts, especially about how you can learn what cities are planning.

There are a lot of ways to make money in real estate, all of which involve hard work and a lot of planning. Doing the right research is almost as important as knowing how to put in a new master bathroom. Doing the former right helps make the work worth it, by making sure your beautiful rental unit is in a place where it can flourish. A hard money buy-and-hold loan from Socotra can help make your research into something concrete

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