8 Characteristics of the Best Rental Markets

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When learning about buying rental property, real estate investors are always told to invest in the best rental markets. But what exactly classifies as the “best rental markets”? More or less, there are eight characteristics an investment location would need to have to be considered among the best. These characteristics are:

  1. Positive Cash Flow
  2. High Real Estate Appreciation
  3. Strong Economy
  4. Nearby Amenities
  5. Tourism
  6. Airbnb Regulations
  7. Low Crime Rate
  8. High Demand for Rental Properties

Related: 10 Best Places to Invest in Real Estate in 2019

Positive Cash Flow

The primary purpose of all real estate rentals is to generate rental income. This, however, does not necessarily translate to profitability. Profitability is when the difference between rental income and rental expenses is positive. In other words, rental income profitability is having positive cash flow. While the generation of positive cash flow and return on investment is largely due to the characteristics of the rental property itself, a property’s investment location also plays a role. Rental investment markets need to support the generation of positive cash flow. They can do so through some of the following characteristics like high demand for rental properties, for example.

High Real Estate Appreciation

Positive cash flow is not the only form of profitability the best rental markets have. The best rental property markets also make investment properties profitable in terms of property value. This increase in property value over time is called real estate appreciation. According to Zillow, US investment properties appreciated by 5.2% over the past year, with an expected 2.2% in the present year. A common theme in the best rental markets in the US is high appreciation. These rates can range widely, but overall, the benefit of appreciation is relative to the investment location. With increased home values, real estate investors can sell their real estate rentals at higher prices.

Economic Success

Different rental strategies have different features that need to be considered when looking for the best rental markets. Traditional investment properties, for instance, strongly benefit from being in a location with a strong economy. There are many ways in which a thriving economy propels some of the best rental markets for investors. When a location undergoes developments, such as construction or the opening of new businesses, new residents, and thus potential tenants, move into the area. Investors can always learn of a real estate market’s economy by visiting the US Bureau of Labor Statistics website. A successful economy also contributes to increases in appreciation, especially if the income property is near traditional rental amenities.

Proximity to Traditional Rental Amenities

Speaking of traditional rental amenities, what exactly are they? These are anything that enhances the allure, demand, and profitability of real estate investment properties. Examples include schools, colleges and universities, grocery stores, restaurants, parks, and many other conveniences and necessities. The best places to buy rental property are also near a variety of amenities.

Based on an investment property’s location, real estate investors can adjust their rental property and strategy to a specific niche. If a property is in a college town, for instance, a real estate investor can use an investment property as a college student rental.

Related: 8 Reasons to Invest in College Town Properties

Tourism

best rental markets have these characteristics

If you’re interested in the best rental markets for Airbnb properties, then there are many characteristics of the best vacation rental markets that you need to keep in mind. The most significant of these features is the area’s tourism. Every city’s tourism is unique and offers much to specific tourists. Young families would be interested in amusement parks, college students on Spring break want to visit beaches, and sports fans will definitely come to watch championship events. As an Airbnb host, you should find out what makes your area’s tourism successful and tailor your rental property to that aspect.

Airbnb Regulations

We’ve mentioned tourism, but the best rental markets for Airbnb require an even more important characteristic. This feature, of course, is legality. Even if an area is rich in tourist opportunities, renting out Airbnb rentals would be detrimental if short-term rentals are outlawed in the area. Airbnb regulations vary from city to city, but there are common laws that real estate investors must abide by. These typically include hotel occupancy or transient taxes, permits, and zoning requirements. As an investor, you should also be aware of any present and developing short-term rental legislation. Here are Airbnb regulations in popular cities in the US, according to Airbnb itself.

Low Crime Rate

Another quality of the best markets to buy rental property follows an old saying: “safety first.” Regardless of investment strategy, real estate investors need to make sure that their investment location of choice is safe. Just as an investor wouldn’t want to buy a rental property in a crime-ridden area, a traditional tenant or Airbnb guest wouldn’t want to live or visit such a location either.

High Demand for Rental Properties

There’s no doubt in any investor’s mind: The best place to invest in real estate must garner high demand. All seven of the previously mentioned characteristics add to the demand of the best rental markets. However, there are other factors that must be taken into account. Occupancy rates of the market, for instance, will significantly impact the demand for a property. The optimal rental strategy of the market will also play a role in tenants’ demand for rental property. A general guideline, however, is that anything that benefits a tenant and a real estate investor will be found in the best rental markets.

How to Find the Best Rental Markets

Throughout this blog, we’ve helped you identify the best rental markets. But you might be thinking of another issue, which is how to find the best rental markets. Here’s the short answer: By using a heatmap analysis tool. With this tool, investors can conduct a real estate market analysis. This will analyze the investor’s market of choice and it will also determine where to buy an investment property in the area based on real estate metrics like the cap rate, cash on cash return, rental income, and more. Wondering where you can get your hands on such a tool? Look no further! With Mashvisor’s Heatmap Analysis Tool, you can analyze all the best rental markets across the US! To get started, click here to begin your 14-day FREE trial with Mashvisor!

Home Price Growth Analyzed

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U.S. home prices rose by 0.1% in May month over month, according to the Federal Housing Finance Agency (FHFA) latest seasonally adjusted monthly House Price Index (HPI). Year over year, home prices rose 5% in May,  according to data calculated using home sales price information from mortgages sold to, or guaranteed by, Fannie Mae and Freddie Mac. 

For the nine census divisions, seasonally adjusted monthly house price changes from April 2019 to May 2019 ranged from -1.0% in the East South Central division to +0.5% in the South Atlantic division. The 12-month changes were all positive, ranging from +3.6% in the West South Central division to +6.7% in the Mountain division.

According to Redfin, home-sale prices increased year-over-year by 3.4% in June to an average of $321,000, which is the third-consecutive month of growth. The report states that the growth rate of home prices was similar to May’s rate, but down 5.5% year-over-year increases in June 2018. 

Redfin reveals that just six of the 85 largest metros tracked by Redfin saw annual declines in sale prices. San Jose, California, was the biggest market to see decreases, with home prices falling 4.9% from 2018.

Other areas that saw decreases were Oxnard, California (-4.8%), Oakland, California (-2%), Seattle, Washington (-0.5%), Lake County, Illinois (0.1%), and Los Angeles, California (-0.1%).

“As national home price growth stabilizes, we’re continuing to see supply and demand dynamics play out differently in affordable inland markets than in expensive coastal markets,” said Redfin Chief Economist Daryl Fairweather. “In places like Philadelphia (Pennsylvania) and Cleveland (Ohio), where home prices are growing by double digits and buyers are rate-and price-sensitive, falling mortgage interest rates make buying a home this summer increasingly attractive. But without a commensurate increase in the number of homes for sale, some of the most affordable markets are driving nationwide home prices up. Meanwhile, expensive markets like the Bay Area and Seattle are still feeling a chill with falling prices and many more homes for sale than there were a year ago. Unlike their inland counterparts, buyers in these once-hot West Coast markets are less likely to feel the urgency to buy while rates are low and before prices rise more.”

NFIP Has Paid Over $1B in Florida Since Irma

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FEMA’s National Flood Insurance Program (NFIP) has paid more than $1 billion towards 21,949 flood insurance claims by policyholders whose properties were flooded during the historic storm since Hurricane Irma in Florida, Wink News reports.

Florida has more NFIP policies in force than any other state, and officials are urging Florida homeowners, renters and business owners to contact their insurance agent and insure their properties from flooding.

“One of the most important steps you can take to prepare for hurricane season is to buy flood insurance,” said Federal Coordinating Officer Gary Stanley, the FEMA official in charge of Florida’s Hurricane Irma recovery efforts. “Homeowner’s insurance does not cover losses from flooding, so don’t wait, purchase flood insurance today. A policy typically takes 30 days to go into effect, so when the next storm is on its way, it could be too late.”

According to a recent survey by insuranceQuotes.com, many homeowners are in the dark when it comes to what is and isn’t covered in their homeowners insurance policy. Flood and mold damage are among the most common misconceptions when it comes to homeowner’s insurance. The survey revealed that 35% of Americans incorrectly believe that a standard homeowner’s insurance policy covers flood damage, and 34% incorrectly believe that a standard homeowner’s insurance policy covers mold damage. 

These homeowners may be unaware that flood insurance is a premium provided through the NFIP, rather than an included feature in their homeowner’s insurance. In general, a homeowner flood insurance policy covers up to $250,000 in structural damage and up to $100,000 in content loss. However, some homeowners may not be aware of what a “flood” actually means.

“Many consumers, when discussing or describing a loss, think that the words ‘flood’ and ‘water damage’ are interchangeable and mean the same thing,” says Mark Carrasquillo, an agent with the New York City-based brokerage E.G. Bowman Company on insuranceQuotes.com. “This is entirely wrong. In the insurance world the terms are very different.”

Senior Housing is Becoming More Appealing to Investors

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A new survey of housing investors claims they’re looking to ramp up their investments in the senior housing sector over the next 12 months.

The CBRE U.S. Seniors Housing & Care Investor Survey, results of which were published by Real Estate Weekly, found that 62% of real estate investor surveyed plan to buy more elderly living properties in order to boost the size of their portfolios.

“Senior housing demand should remain at relatively healthy levels through 2019, given expected steady economic growth and lower mortgage rates,” said Jeannette Rice, Americas head of multifamily research at CBRE. “Demographic trends are positive for the asset class, with the baby boomers nearing the traditional age for senior housing and nearly 9,000 turning 70 every day this year.”

There are different segments in the senior housing industry, the survey notes. For example “lifestyle” senior housing is a segment that caters to active seniors who tend to be slightly younger than the average resident, with fewer service options. The survey found that this segment has the most appeal for investors, with independent and assisted living both ranking in joint second place in the popularity stakes.

The least attractive senior living segment was Memory Care, which is form of long-term caredesigned to meet the specific needs of a person withAlzheimer’s disease, dementia or other types ofmemory problems. CBRE’s researchers said the limited appeal of memory care homes among investors could be due to overbuilding in the sector.

The survey also identified investors’ concerns about the senior housing sector, which include operating and development costs, and oversupply in construction activity.

“With new supply beginning to taper, operators will leverage rent growth to help offset rising costs and maintain a healthy bottom line,” said Zach Bowyer, senior managing director of CBRE’s Valuation & Advisory Services. “We are beginning to see innovative design trends, operating models and technologies take hold as potential industry disruptors. It’s a very exciting time to be in this space.”

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HUD and SEC Encouraging Opportunity Zone Investment

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On Tuesday, Department of Housing and Urban Development (HUD) Secretary Ben Carson released a statement applauding the Securities and Exchange Commission’s (SEC) efforts to encourage Main Street capital investment in Opportunity Zones. 

“Opportunity Zones provide a community-specific incentive for long-term investment,” said SEC Chairman Clayton.  “The SEC staff statement and guidance about Opportunity Zones demonstrate that Main Street investors can invest in their communities in a manner that is compliant with our securities laws.” Read more about the SEC’s staff statement on Opportunity Zones here.

“Opportunity Zones have the ability to enhance thousands of communities and improve millions of lives across the country,” said HUD Secretary Carson. “The steps the SEC has taken will help unlock more investments into Opportunity Zones, and more investment means better outcomes for the residents of these distressed communities.”

In 2017, President Trump signed the Tax Cuts and Jobs Act, creating Opportunity Zones to stimulate long-term investments in low-income communities. The initiative offers capital gains tax relief to those who invest in these distressed areas, and the tax incentives are anticipated to spur $100 billion in private capital investment in Opportunity Zones.

On Fox News’ “The Next Revolution with Steve Hilton” earlier this year, Carson noted that Opportunity Zones were set up to enable private investors to re-invest profits into designated areas, and investors “are going to invest that money somewhere.” He noted private investors would do what they do because they “want to be successful.”

Charles Tassell, COO for the National Real Estate Investors Association, talked opportunity zones in the March issue of DS News.

“Whether you call them Opp-Zones, OZones, or OZos, the investment flood is coming to a low-income census tract near you,” said Tassell.

“While digesting the rules, it would be a good idea to find out where those areas are near you and prepare for investments and options for investments there—before the December 31, 2026 deadline,” Tassell added. “The summary of benefits includes deferred taxes on the investment in an opportunity zone, deferred taxes on income reinvested in opportunity zones, and tax forgiveness on improvements in the value of the building at sale time in opportunity zones—if it is held for 10 years.”

A New Approach to Affordable Housing

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home pricesNew Jersey is looking to preserve affordable housing through new foreclosure law, NJ Spotlight reports. Governor Phil Murphy recently signed a law which would require mortgage holders to notify the municipality where the home is located when foreclosure proceedings on a home that is deed-restricted as affordable begin. The goal is to give municipalities option to buy homes that are deed-restricted for low- and moderate-income purchasers.

“We feel it is critical New Jersey does not lose any affordable homes,” said Nina Rainiero, a Spokeswoman for the Housing and Community Development Network of New Jersey on NJ Spotlight . “Public funds were invested into making these homes affordable and this bill ensures that public investment will not be lost because of foreclosure. Plus, it provides another family an opportunity to live in a home that’s affordable.”

According to Governor Murphy, the bill did not go as far as originally intended. Murphy had conditionally vetoed the measure, S-362, last May, stating that Federal Housing Administration (FHA) regulations expressly prohibit the use of FHA loans to purchase a property whose deed restriction will not expire with a foreclosure.

“This bill may actually hurt the very low- and moderate-income families it is intended to benefit by making it more difficult for these families to obtain a mortgage,” Murphy wrote in a statement. “This bill would effectively preclude all prospective affordable unit homeowners from accessing any FHA loan or insurance products.”

Murphy stated that the plan would “further disadvantage” prospective purchasers of affordable units because they would no longer qualify for a financial assistance program offered by the New Jersey Housing and Mortgage Finance Agency that includes a 3.5 percent down payment option and $10,000 to cover the down payment and closing costs.

According to Murphy, the current legislation puts the question of trying to maintain a low-cost unit in the hands of local officials, ensuring “that municipalities do not miss an opportunity to intervene in foreclosure proceedings and, where appropriate, preserve a home’s affordability controls,” Murphy wrote in the conditional veto.