Updated May 26, 2020
Every real estate investor looking to buy a property knows that location is one of the most important factors to consider before settling buying a home personally. However, location is just as important when looking at investing through rental properties. Here are just a few ways in which the right (or wrong) neighborhood can make or break an otherwise fantastic investment opportunity.
How to invest in the right neighborhoods
Keeping your goals in mind as an investor and the time and intensity that varies between rentals in the different classes, you want to choose neighborhoods wisely both for better profit and ease of management. Grades classify the four rental neighborhoods, just like in school.
Overview of Class A down to a class D properties.
• Class A is often more expensive and has less of a renter pool due to higher rents.
• Class B is the right spot for investors to be in; while you may have maintenance, the properties are often reasonably priced and have good rental rates.
• Class C can be good to rent, but you will have more maintenance, and you will be managing a low-income tenant.
• Class D is recommended for seasoned fix and flip investors due to its higher crime, lower-income, and deteriorated housing. It is good for helping make neighborhoods safer and more functional to live in but hard to manage rentals.
What the classes mean for investors
1. Class A properties are usually newer, built within the past ten years, or have gone through a full renovation. These houses are the most attractive for owner-occupants, so you see fewer renters in this class. While they are the idea for long term investors because they need less maintenance and have fewer issues, these properties have higher-end amenities like stainless steel, granite, and hardwood floors.
The main problem is these properties are more expensive to buy, giving you less of a margin between rent and operational costs. This type of investment is well-suited for a seasoned investor and not necessarily just starting or having limited reserve funds.
2. Class B properties are the rental sweet spot. You find well maintained and built houses in class B neighborhoods. They are a little older spaning 10 to 30 years. Often, they are in good condition and in neighborhoods where people enjoy living there. You can charge more in rent than in a lower class property as there is a demand for these neighborhoods.
It is also important to note that tenants in these properties are usually lower-income, they can afford rent, but do not have the funds or savings to purchase the home themselves. This is a bonus as an investor because you'll appeal to a larger pool of potential tenants.
Another upside of class B property is due to their age; you can purchase them at a lower price. The downside of class B properties is they will require more maintenance than Class A due to their age. But they can be improved to increase the ability to charge more for rent.
3. Class C properties bring with them a few more issues than Class B. These buildings are more than 30 years old and may have visible signs of neglect and deterioration. These properties need constant repair or overall renovation before renting.
This also brings up another issue with class C properties as they are often located in less desirable neighborhoods with higher crime and low rental rates. Most of these properties are investor-owned and can be fixed up and maintained to be quality rentals with reasonable rates.
Proper tenant screening is essential in this neighborhood, and staying consistent with current rental rates is very important. These properties do require intense management and may be best suited for an experienced investor.
4. Class D properties are older buildings than even class C and are often in need of more maintenance and repairs. These properties are in areas where crime and drug abuse are high and will present challenges when trying to find reliable tenants.
These properties do cost less upfront than other classes but will cost more in time and maintenance to manage. Class D neighborhoods are underserved with safe and functional property. Houses in these neighborhoods can be excellent opportunities for fix and flip investors.
Which neighborhood is the right investment for you?
More Affordable Neighborhoods
You might have gotten lucky and found an incredibly nice house in a class A neighborhood, for a reasonable cost, or maybe you've just finished your flip of a property that you managed to get for cheap in a higher-cost neighborhood. However, now you're likely to be faced with a new issue due to your neighborhood. Renters might still look more readily towards affordable properties rather than paying for a higher-end community.
After all, about 34% of Americans rented their home in 2019, and rent can be expensive when you've got other household costs. The right property could end up being a bust if your rent estimate is too far above the average neighborhood rent.
While owning a home in these neighborhoods can have a better appreciation than in a lower grade neighborhood, it may be better to fix and flip property than hold it at a rental.
Too Expensive To Afford
On the other hand, you could try your luck in a more expensive class B neighborhood for the sake of charging future renters more. Rent statistics for these neighborhoods might indicate you stand to make more money through increased rental payments.
However, there's a catch - you'll need to find a way to afford your initial property purchase in a more expensive neighborhood. Because of this more costly investment, you stand to lose more if you fail to rent it out in a reasonable time frame.
Choosing A Neighborhood
Try using a neighborhood search tool before you settle on a property to invest in to avoid both of these issues. Neighborhood search tools, when combined with property reports, rent estimators, and more, can help you select a neighborhood with all the qualities you're looking for in your future investment. As long as you have a general idea of what you're looking for and where you'll be able to find the right property for you using these resources.
Pricing your rental can be a struggle, especially if you've chosen the wrong class of neighborhood. Luckily, neighborhood search tools can help you choose well. For more information on the location and its impact on rental properties, visit rentometer.com to determine your rental rates.
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