You heard it before. T, the first three rules of real estate are Location, Location, Location, and this is no different when buying a rental property. If you’re in the market to buy rental property real estate, you need to know your market. Below are a series of steps you can take to fundamentally understand your real estate market and determine the best areas in which to buy and hold properties.

Establish where the rental markets are

Here’s a systematic way to find out which rental markets in your area will have the highest potential returns.

  1. Ask a real estate agent to compile a list of properties that have sold in your area. You’ll want to find sales data on “bread and butter” rental properties: properties with 3 bedrooms, 1 bath, 800 sf – 1200 sf with basement and garage.
  2. Take the list of properties and sort them by sale price.
  3. Once you have sorted the properties by price, divide them into 3 groups: the bottom third by price, the middle third by price, and the top third by price.
  4. Next, grab a map and start mapping out the three groups of properties. For each group, use a different colored marker on the map.

Once you have the map populated, you should start to see trends on the map. Properties priced in the bottom third will likely have the potential to generate the highest return. These are the areas you will want to investigate further. If you’ve lived in the area, you probably have a general idea about these areas, but you should put that aside for now because to really get to know the market, you need to complete the following steps.

Drive the target market

Once you’ve established a few areas, you’ll want to get in your car and drive around the neighborhoods. When you do this, you should take note of the things listed below. Keep in mind that you have to look for trends in the area. You may see a house that is particularly good or bad, but you’re really trying to see the neighborhood as a whole, so look for trends.

What is the state of the houses in the area?

Do you see solid houses, with good roofs and freshly painted trim, or do you see dilapidated old houses with broken windows?

Are the properties maintained?

An easy way to tell this is by looking at the state of the landscape. Do you see mowed grass with flowers planted all over it, or do you see tall grass and overgrown weeds? The condition of the landscape can provide a great deal of information about the people who live in that neighborhood.

How is the neighbourhood?

Look at the streets, are they clean or is there rubbish lying around? Look for the sidewalks. If you drive outside of school hours, do the children play in the streets? Or, on the contrary, the neighborhood gives you chills. You’re really looking to answer the question “Do my tenants want to live here?”

Talk to people in the neighborhood

It’s really a good idea to talk to people in the neighborhood. If you see someone walking down the street, stop and let them know you’re looking to buy real estate in the area and ask them about the neighborhood. Or, you can stop at a local business like a market or gas station and talk to the man behind the counter about the area.

Once you’ve established your target markets and boosted areas, you should be able to quickly see which markets you want to invest in and which you don’t. To document this, you can easily take a map and highlight the streets where you will consider investing.

Determine the yields

The next step is to look at the potential returns it will generate. This is a very simple thing to do, and you can follow these steps.

  1. Talk to a local property management company about rental rates for a 3-bedroom, 1-bathroom home with a garage and basement in the area you’ve selected. The property management company should be able to give you a very good idea of ​​rental rates and also give you more feedback on the area in general. You should also check with them about their fees for managing the property.
  2. Look up some property taxes to establish what you can expect to pay in property taxes in the area you’ve selected.
  3. Talk to an insurance agent about the cost of insurance for a property in your target market.
  4. Calculate your net income. To do this, simply take your expected rental income for the year and subtract taxes, insurance, and property management fees.
  5. Calculate your return. To do this, simply divide the net income you calculated in step 4 by the price you’ll pay for the property.

With this information, you should be able to see what types of returns you can generate for your target area. An interesting exercise to perform is to also calculate your return in areas where houses sell for a higher price. What you’ll find is that the neighborhoods may be a bit nicer, but your profits will dwindle quickly.