Rental Markets: What Makes a Good One?

A recent CNBC report discussed the rental real estate market and the new profile of the hottest market in real estate. According to the report, the fallout from distressed properties continues, with over 5 million loans falling into foreclosure or with properties already on the market in 2012. For investors following Jason Hartman's advice to diversify holdings in different markets, that means houses to purchase and renters to find in areas all across the country. But every rental market is unique, with its own profile that arises from a context that’s shaped by location, a neighborhood’s profile, and the kind of renter pool that yields the right tenants for the property.

Any property exists in relation to the larger context of the neighborhood, the city, and the state where it’s located, and its viability as an income producing property depends on factors on all those levels. These factors determine issues including the pool of potential tenants, the maximum rent to charge, and even limitations on property maintenance and upgrades. So a good market will depend on the interplay among all those variables.

Generally speaking, though, desirable markets feature a diverse employment profile, with numerous companies and institutions providing jobs that keep tenants able to pay rents. If an area must depend on only one employer, when that employer leaves or goes out of business, the employees depart too, leaving behind vacant houses and empty schools. Employers and institutions that attract renters, as opposed to buyers, is also a plus – places such as colleges, businesses hiring younger professionals, and large technology f

irms.

Those renters – the long-term employed individuals who can’t, or don’t choose to buy homes – are likely to be able to consistently pay rent and keep the property reasonably well maintained. Renters of single family homes tend to be families, perhaps former homeowners themselves, and are looking for a long-term rental in areas with community ties to schools and other services. To attract those kinds of renters, choose properties near a school or other institutions offering services a family might need.

Another factor to consider is the overall economic profile of the city and even the state where the property is located. Ongoing development in key areas such as commerce and housing, suggest a belief in future growth. Likewise if the state where the property is located is suffering a downturn due to natural or economic factors, the likelihood of finding a relatively large pool pf desirable tenants shrinks.

On the city and state levels, the laws and practices that govern use of land, the impact of planned improvements and allowable changes to the property can be a tip off to problems with the property in the future. The strictness of business zoning and limitations on alterations to the structures can severely limit options for upgrading or even maintaining the property.

Subject to the vagaries of local life, markets outside your general area can be worth investigating. With an eye toward the future and a clear look at present circumstances, each investor can decide if a particular market area is

right for them. As Jason Hartman says, all real estate really is local. (Top image: Flickr/elleb)

The American Monetary Association Team


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