The first step to locating a target area is to evaluate the key indicators of an area. These key indicators will have a positive or negative effect on the supply and demand of housing. Evaluating them will identify the areas with the strongest rental markets. Key indicators include:
- Building permits – Permits help to forecast growth based on what’s coming (i.e., single family homes, multi-family homes, retail).
- Employment – Strong employment increases the demand for affordable housing, which can positively impact occupancy rates, increase rents steadily over time, and increase property value.
- Average household size – Understanding the average household size allows you to determine the appropriate type of property or unit mix to invest in.
- Demographics – The demographics (i.e., age, race, gender) of a given area will determine who will rent from you. The growth of the population in the area is also important to consider.
- Psychographics – This means knowing who the typical renter is and anticipating his or her needs in advance. Examples include, covered parking, appliances, and transportation.
- Mortgage interest rates – These help to evaluate and determine market cycles.
- If rates are at an all- time low, more people will be qualifying for mortgages and are therefore less likely to be in the rental market.
- When the money supply is tight and lenders are cautious and interest rates are high, that’s when you’re in the best position as a rental property owner.
- When rates are low but lending standards are tight for the middle to moderate income demographic, this demographic will typically be forced to rent.
- Rental market rates – Looking at the rental rate history in an area helps you determine where rents are currently and where they will be in the future.
- Occupancy rates – This is the percentage of currently rented units. This helps you forecast how many vacant units to average in your numbers so your financial calculations are based on accurate vacancy estimates.
Note: Additional factors can also be important to middle- income families. Remember, you have to think like your prospective tenants, and their needs may be different from your needs.
- Close to transportation, highways, etc.
- Close to public transportation (bus lines, subways, etc.)
- Close to retail and shopping
- Close to large employment centers