How to Identify Areas for a Rental House

If you are a real estate investor or are thinking about becoming a land lord there are several steps you should take in identifying areas for a rental house.

Go Where the Renters Are

It's always best to start your search for rental housing in areas that have high a concentration of renters. You do not want to place a rental house in an area that is comprised of mostly owners.  These inhabitants usually have stable incomes and own their homes, therefore they have no need to rent. You can determine the ratio of renters to homeowners by visiting your economic development bureau or researching your area on US Census Department's website. The Census data will tell you how many people live in your city and the percentage of renters. For instance, if your city has a population of 20,000 people made up of 60% renters and 40% owners, that means 12,000 rent and 8,000 own their homes. This would be a generally favorable place to look for rental housing.

Know the Market Lease Rates

To identify the best area for your rental house you also want to identify areas where rental rates are high. The lease rate of your rental home will have to be high enough to cover any mortgage payment you may have plus expected property taxes and any other fees you may incur as landlord. For example, if your mortgage payment is $1,000 per month, property taxes are $200 per month, and utilities cost $100 per month you will need to find an area that will support a monthly lease rate of at least $1,300 per month. If the market lease rate if $1,500 a month you could expect to make a profit. If market rates were only $900 per month you could expect to lose $400 per month.

You can find local market lease rates by speaking with property managers in the areas you are researching. You can also look on websites like craigslist and the local mls to find average rent rates for your type of property.

Vacancy Rates

The vacancy rate is an important statistic for rental units. The vacancy rate is expressed as a percentage and tells you how many of the rental units in an area are vacant at any given time. For instance, a 10% vacancy rate means that at any given time, 10% of the rental units in an area are vacant or in transition. Vacant units mean there is no rental income for that unit. Stay away from areas with high vacancy rates as you will spend most of your time trying to fill the units and less of your time actually collecting rent checks.

Find the Employment Hubs

There are more available public services in metro areas and they also tend to offer more employment opportunities. Areas that have growing job markets are employment hubs.  These are areas that have flourishing economies, which will attract more renters. Generally speaking, metropolitan areas have lower vacancy rates than rural areas. Areas that are in high demand are areas with low supply, thus the lower vacancy rate.



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