How to Identify the Most Profitable Neighborhoods to Invest In

Want to learn more about how to choose which neighborhoods to invest in? There are factors to consider that you might not expect.

When it comes to buying a property, you’ve probably heard the emphasis on “location, location, location” already. But you need to look beyond the surface. Many factors go into the quality of a neighborhood, from local laws to the corner shops to the building itself. Keep reading to learn what factors can work against the value of your prospective rental property, and how to choose which neighborhoods to invest in.

Regulatory Factors

The first area you want to look at are the local laws and regulations where you intend to invest. More specifically, look at the property taxes in your area and how favorable landlord-tenant laws will be to you.

Property taxes vary widely, but they exist everywhere you want to invest. There are some areas that have very low property taxes that will have you paying out a relatively small sum every year. Also take a look at applicable exemptions and tax credits in your area, especially if you plan to upgrade the property after buying. Note that an area with a high property tax isn’t necessarily bad if it’s otherwise a pleasant neighborhood. Be wary of high property taxes in less than ideal areas.

How to Choose Which Neighborhoods to Invest In

Certain features of the neighborhood will make or break an investment property’s profitability.

Price-to-Rent Ratio

The price-to-rent ratio is an indicator of whether an area is cheaper to rent or buy. To calculate it, take the average monthly rent in a neighborhood and multiply it by 12. Divide that figure into the average home price.

You want to look at neighborhoods with a price-to-rent ratio between 16 and 20. This will allow you to make a good return on the property with a decent rent while also making renting approachable for potential tenants.

School Districts

If you don’t have school-aged children, you may overlook this factor. But your prospective tenants may have or plan to have children, and this factor will be important to them. Look at the surrounding schools in your area and their associated ratings.

Vacancy Rates

Vacancies have the potential to kill your bottom line. Every vacant unit is a missed rent payment that month. For better investments, look at how long rental properties stay on the market. Longer market times indicate that the owner had a hard time finding tenants, and you probably will too.

Natural Disasters

Any area can experience bad weather, but some areas are more prone to it than others. The coastline faces hurricane risks, while the Midwest braces for tornadoes. Some neighborhoods will be relatively safe from major disasters, while others update building codes accordingly.

When looking at a property, look into what natural disasters you can expect and how well the building can stand up to them. Otherwise, you face high insurance premiums that will eat into your bottom line.

As an example, owners in Florida can get a windstorm mitigation inspection to see how well the property can stand up to hurricanes. It isn’t a required inspection for insurance purposes, but it can bring substantial savings if the building has desired features.

Other Amenities

Keep an eye out for other favorable qualities in your prospective neighborhood. Access to public transportation is key, as well as being close to parks, libraries, beaches, restaurants, shops, gyms, and so on. If these things are within walking distance, it speaks well of your property. Otherwise your tenant pool will be limited, as those without reliable transportation will have trouble getting anywhere from their home.

Economic Factors

A strong local economy is key to whether your investment will be successful. But the economy’s strength depends on three important factors.

Population Growth

Look at the population trends for the neighborhood. If the population is growing, it speaks to economic growth for the area and a favorable tenant pool for you. Unemployment rates are another factor to consider, as this will affect your pool of paying tenants.

Commercial Real Estate Growth

People tend to move to where jobs are, so choose an area where jobs are opening up. Alongside unemployment rates, you should also look at how much business is expanding in the area. New commercial construction and “help wanted” signs can point to positive economic development in an area.

Diversified Economy

Be wary of neighborhoods that revolve around one form of business. For example, a city that relies heavily on tourism may have more profitability in renting out apartments for Airbnb than any long-term lease. And you may struggle to fill vacancies in a time of low tourism. Similarly, college towns will see high vacancy rates in the summer as students go back home. An ideal neighborhood has a diversified economy that relies on more than one sector to keep the money flowing.

Using ProspectNow for Your Market Analysis

ProspectNow has a comprehensive property search database with millions of residential and commercial properties all over the country. If you struggle with knowing how to choose the best neighborhoods to invest in, this platform is the best place to start. You can find all the data you need on a property and the surrounding areas, giving you key insights to decide whether or not to invest in the area.

ProspectNow also has a “likely seller” algorithm to help you spot properties that are likely to sell in the next 12 months but haven’t yet hit the market. This is a great opportunity to find new properties in fast-growing areas before other sellers swoop in.

Once you find your ideal property, ProspectNow makes it easy to reach the sellers and start the process. Owner contact information is easy to find, even if the owner is an LLC. You can call, email, or send postcards using included templates that make your communications look clean and professional.

Are you ready to understand how to choose which neighborhoods to invest in? ProspectNow has helped investors, brokers, and many others do just that since 2008. Sign up for your three-day tree trial and find out how much more you could be making with the ProspectNow platform.