Investing in real estate has continued to be a great long-term investment.

Those who choose to invest in real estate will enjoy long-term value appreciation and equity creation as well as extra income and cash flow each month. When you are evaluating a potential real estate investment, there are many important factors to consider.

One of the most important factors you will need to consider is the neighborhood and location.

There are various factors that need to be considered when you are evaluating a neighborhood or real estate investment location.

Some features you should look for in a neighborhood can include:

• good schools
• access to public transportation
• walkability to shops and restaurants
• low crime rates

All of these features should create rental demand, which should be evidenced through local occupancy and rental rates.

As you are evaluating a new rental property location, there are various tips you can follow to select an ideal property.

Narrow Your Search Sorting by Class of Properties

Once you are ready to start looking for a new rental property, selecting the best market and neighborhood is very important.

However, you will also want to make sure you are choosing the right type and class of property for your investment.

For a residential investment property owner and investor, you will have various types of assets to consider.

These can include purchasing:

• single family homes
• multi-unit properties
• single condos or townhomes located within a larger community

It is important to evaluate the benefits, disadvantages, and costs of each option.

Generally, real estate is broken down into different classes, which are Class A, B, C, and D.

There are differences between each class that should be considered:

• Class A Properties – A Class A property is generally characterized as a luxurious property located in a high-end neighborhood that would command both high sales prices and high rental rates. These can include new construction properties or older units that have gone through significant renovations.
• Class B Properties – A Class B assets are typically more affordable than Class A and are in nicer neighborhoods, but do not necessarily have all of the same luxury upgrades. You will typically find these in safe and wealthier communities.
• Class C Properties – A Class C homes are typically made of quality materials and located in a decent neighborhood. While they may be in good condition and livable, they will probably not have any luxury upgrades or modern stylish finishes.
• Class D Properties – A Class D asset is usually considered one that will need a considerable amount of work to be done. This can include both deferred maintenance or more significant structural improvements. While they can be more difficult to rent, they will offer more potential for those that are able to complete the necessary repairs.

Review Recent Sales Comps

Selecting the right location for your real estate is always very important.

However, you will want to ensure you are making a sound investment based on the market value of the asset.

Before investing in any area, it is important to check recent sales comps. These will give you a clear picture of what any home in the area should sell for.

As you are evaluating a potential purchase, you should compare the price-per-square-foot, the number of bedrooms and bathrooms, luxury upgrades, and other features to other homes that have sold.

This information can help you identify good deals and even find a way to further negotiate an even better deal.

Find Average Rental Rates

Beyond getting a good deal on the purchase of a property, you need to ensure the rental market is strong enough to provide you with a good investment return.

Beyond paying a mortgage, you will also have:

• real estate taxes
• insurance
• maintenance
• utilities
• and other costs

Ideally, you should be able to earn a rental income which is well in excess of those costs. To do this, you will need to do the right diligence in the market to ensure you are making a sound investment.

An important part of this process is to find the average rental rates in your local area. There are various online resources you can use to quickly find the average asking rent in your area.

This can typically be broken based on the type of asset you own, number of bedrooms, and other features. This will give you a good idea as to whether you can receive the rent you need to meet your investment criteria.

It is also important to check local demographic information to ensure there is a good pool of potential tenants.

Some items you should consider will include the:

• population in the area
• median income
• employment rates
• percentage of renters versus property owners
• average age of the residents

Find Rental Comps

While it is important you invest in a market which will provide good rental and occupancy rates, you also will want to look at actual individual comps to see how your target investment aligns.

There are various free real estate listing websites which will show any open rental units available for lease. It is always a good idea to review all of these comps in the immediate area to see how they compare in terms of asking rent, specific location, unit size, asset class, and other features.

You can always just call local property management companies and have them tell you rental rates as well.

Based on this information, you will get a better sense as to whether your asking rent is reasonable.

Learn About the Area

As discussed, the location of a property is very important and can have a dramatic impact on the overall return of your investment.

Due to this, it is very important that you learn as much about the area as you can.

While sales comps, rental rates, and occupancy percentages are very important, there is always more that you can do to learn more about the area.

This can include meeting new people, speaking with local residents, networking with other investors, and even talking with the local government about potential changes in the area.

Network

While you may go into real estate investing on your own, it is always a business which will require good professional relationships.

As you will want to have support in marketing, leasing, and improving your property, as well as finding new assets in the future, it is important that you try and meet new people that live and work in the area. Having good professional relationships with local real estate agents and brokers, mortgage brokers, contractors, and city employees will be helpful.

These professionals can offer guidance and support and even help you find future opportunities before they are available to the larger market.

Talk to Local Homeowners

When you are looking for real information about a new neighborhood, sometimes nothing is better than speaking with the local homeowners.

While some people may be hesitant to speak with you, others can be open books that will provide you with a lot of great information about the area.

They can give you a sense of what it is like to live in the area in terms of noise, disturbances, friendliness of neighbors, and other information you will not be able to find doing standard research.

Consult City and County Economic Departments

Another way you can get some good information about a neighborhood is by speaking with the local government.

When you are looking at properties and evaluating neighborhoods, you should also be concerned about the growth and direction of the area and going right to the city and county economic departments is a good idea.

The city and county economic departments can offer a lot of real-time data about housing prices, real estate and population trend statistics, and other important data.

Further, they can provide you with insight into plans for infrastructure, zoning changes, and other approved data that could have an impact on the neighborhood in the future.

Areas that are getting a lot of positive development and investment should be poised for improvement and could improve your return on investment.

These groups can also give you insight as to whether there are any restrictions, or proposed changes, that could affect your ability to lease the investment property.

Look for Good Schools

As you are looking to purchase a new rental property, finding a home that is located in a good school zone should always be a priority.

Anyone that has school-age kids will want to live in an area where they can send them to a quality public school. Due to this, having a home located in a good school zone will always have a certain level of demand.

There are various online tools that you can use to validate the quality of the schools.

While you will probably be able to find an overall school rating, you can get further data and detail by evaluating:

• the school’s test scores
• parent satisfaction ratings
• funding and budget
• teacher to student ratios

All of these will give you a sense of a school’s reputation today and the direction it is heading.

Use Neighborhoodscout.com as a Tool

When you are going to invest in real estate, it is also a good idea to invest in the tools you need to properly evaluate your investment options. One great online resource that you can use is neighborhoodscout.com.

This online resource is very convenient and easy to use. Once you have access, you are able to type in an address of any home in the country. You can then immediately get great information that you can use in your evaluation process.

This will include median sales prices and rental rates, crime rates, demographic information, school ratings, and other data that is important and will have an impact on the potential success of your investment.

Defining Your Investment Goals

When you invest your money in residential rental properties, you really should have some goals in mind first.

Those goals could include:

• steady and reliable cash flow
• property appreciation
• debt pay down (by the tenants)
• tax benefits

Or maybe all of the above.

Either way, you should have your goals laid out prior to actually investing in your first residential property.

Ideally, you ought to have both short-term and long-term goals planned out (in writing) somewhere. The plans should include how you will use your various investment property types to achieve your goals.

Once these tasks are complete, you will be ready to invest in your first residential property.

Let’s go over the different types of properties so you can see how they might fit into your plan.

List of Residential Property Types

• Single family homes in four separate classes
• Easy entry single family homes
• Multi-family home duplex
• Multi-family home triplex
• Multi-family home quadplex
• Townhomes
• Condominiums
• Apartment buildings
• Foreclosures
• Distressed homes
• Manufactured/mobile homes

List of Single Family Homes (SFH)

What do the various classes of single-family homes mean?

Let me define them here, then explain which ones are good to invest in.

• Class A – luxury house, made with high quality materials for more than 90% of the house as well as internal fixtures. These are located in high end neighborhoods where the affluent live.
• Class B – nice house, partly customized and featuring nice upgrades. These houses are not as costly as a luxury one, but do cost more than a standard house. The neighborhoods are usually safe and middle/upper class.
• Class C – your standard single family house, this is a stock house built with the quality materials. They typically exist in a community where at least most of the houses look roughly the same and have some crime, but usually non violent.
• Class D – a single family home in bad shape. These homes are usually located in lower income areas with high and violent crime.

Money can be made in all classes at different times in the market, but your bread and butter should be B & C class homes.

The beauty of B & C class is that the investor can usually make improvements to the house and add to its value immediately. Now we have additional equity, our property value is going up because it’s in a good location, and we can still capitalize on cash flow because we bought it at a “deal”.

If you as an investor focus on these types of homes and buy consistently, you will grow your wealth and cash flow over time.

Multi-Family Homes

• Duplex – this is a structure that has two units in the same building. Each has its own entrance and can house a small family. The two units share a common wall, yet the floor plans can vary.
• Triplex – this is a residential structure that features three separate but connected units. These residential properties share one or more common walls. The triplex is designed to house multiple families.
• Quadplex – a quadplex, aka fourplex is a building containing four dwellings and used for commercial purposes. These are meant for small families and sometimes couples or individuals that want more space.

Multi-family homes are good residential investment properties because they allow you to scale the number of doors in your portfolio quickly.

The investor could also choose to “house hack” the multi-family unit. This is where they would live in one unit, and rent out the remaining ones. This allows for better financing options, with less money down.

Instead of one steady income coming in, this investor has between two and four steady incomes. It is also easier for them to hire a property manager to oversee the homes.

Townhomes

Townhomes are single-family homes which typically have two floors and share a wall with another home. It is possible for a townhome to have more than two floors. Traditionally, they do not have only one floor.

There can be two joined yet separate townhomes or an entire row of them. Depending on the location of the townhome, it may have a small yard, porch, or balcony as part of the property.

As is true with the multi-family house, an investor of townhomes can build his or her portfolio faster and have multiple sources of steady income from them.

It is important to know what fees, restrictions and covenants the HOA’s have in place before taking the plunge into renting townhomes.

Condominiums

These are basically individual apartments an investor can buy.

Their structure is similar to those of apartments, yet instead of renting them, the owner can buy them. That said, it is feasible for an investor to purchase a condo, then rent it out.

Again depending on where the condominiums are located, the buildings can either resemble garden apartments with two or three floors, or a multi-story apartment building. They can feature only one or a few bedrooms and bathrooms.

There are normally numerous condos in one complex and are perfect for a small family, a couple, or an individual. This is another deal where the owner of the complex is more likely to be able to hire a property manager to take care of things.

Like with Townhomes, it is imperative that you know what the HOA fees and restrictions are before buying a condominium.

Apartment Buildings

Whether they are garden apartments or tower buildings, apartments are a great investment. These are perfect for people who do not seek the permanence of owning a home. They are content to rent for however long of a duration they are comfortable with.

Sometimes rental apartment buildings turn into condominiums. It all depends on the preference of the investor. With a rental apartment the maintenance and any repairs are provided by the superintendent and his or her staff.

With a condominium, the owner has to take care of those things themselves. Depending on the size of the apartment complex, the investor can get all the income they desire from one or two properties if that is what they want.

Most investors “syndicate” apartment deals because they cost so much to get into. Syndication is a fancy word for saying that investors raise money from other investors to have enough money to buy the apartment complex.

Foreclosures

These are properties where the owner could not keep up with the mortgage payments and now the bank wants to take back that house or other property type.

Sometimes, out of spite, the owner will destroy the property before the bank takes possession of it. Then repairs must be made in order for that property to again be profitable. This is an attractive opportunity for an investor.

Very often the property which is in foreclosure will be put up for sale as is to the general public. An investor has the option of buying it as it is and fixing it up themselves.

Then, this property may become valuable again.

The new owner can opt to sell it or turn it into a rental home. Many investors like to snap up properties in foreclosure because the price is typically quite low and very affordable.

Distressed Property

This term is often assumed to be a foreclosure, but it does not have to be. Oftentimes, a distressed home may have been inherited by an estate when a family member died, or it’s owned by an out of state landlord who hasn’t kept it up. Or sometimes by just a lazy homeowner who has let their home go to shambles.

Or it could be someone who is in actual financial distress and needs to get rid of the home quickly.

Like a foreclosure, these homes are frequently available at a significant discount from its actual worth. This is great news for an investor.

It is rare that a distressed sale gives the seller the full value of that home. Any property type can fall under this category.

Manufactured Houses

These are homes that are also known as mobile homes, and are prefabricated and often come in two or more sections. The models pretty much all look the same and the house itself can be moved from one location to another.

Oftentimes, an investor will buy a mobile home “park” where they buy multiple mobile homes at one time for investment purposes.

An advantage of a manufactured house is the price to own it is significantly lower than a stationery home. They can sit either in a mobile home park or on a large parcel of land. That is typically up to the owner.

Another advantage is that they have traditionally produced great cash flow.

A downfall of mobile homes is that they are depreciating assets, whereas real homes are appreciating assets. Think of a mobile home park like a car- they go down in value over time.

There is also more maintenance that is required to keep them in good condition since they aren’t built as sturdy as a standard home.

A bonus nugget: You always want to own the land the mobile home sits on in a mobile home park. If not, you’ll end up paying a land lease to someone else, and they can raise that at any time.

Decide Between Short Term Rentals, Long Term Rentals, and House Hacking

First, let’s define what each of these are. Each of these represents your ideal renter, even if you are one of them.

1. Short Term Rental
2. Long Term Rental
3. House Hacker

Short Term Rental

A short term rental is when you, as the owner of the property, allow very short term renters to use your house. This could be as little as a single night, although this is a bit annoying, and usually no longer than a month.

These residences are ideal for people looking at a vacation rental, where they might only be staying for a week, or just a weekend getaway for a birthday, corporate retreat, or family gathering.

Long Term Rental

A long term rental is when you are only allowing renters to stay for longer durations, like a month, a year, or even longer. This type of property is usually rented by someone who plans to live there as a seasonal or full-time resident.

While some may be for just a month or quarter, most of the terms signed in this category are for an annual lease—mostly families who are not able or not interested in buying, or someone who just doesn’t want to commit to purchasing their own home.

House Hacking

House hacking is probably one of the more interesting types of properties because you, the owner, are also a resident—you just so happen to be renting out another portion of the property at the same time.

House hacking is most common using a duplex, triplex, or quadplex type of property where more than one residence can be utilized within the same property. A duplex means you occupy one space, and you have a tenant in the other. A triplex means you’d occupy one, and have two tenants. And so on.

While some find this a great way to keep a sharp eye on the property as they live in and build equity at the same time, or even have a place to live essentially rent-free, others are not so keen to be in such close proximity to their renters.

Decision Matrix for ROI vs. Safety vs. Difficulty vs. Entry Price

You can use a decision matrix to lay out and evaluate your goals for getting the best return on your investment.

Below, you’ll find a decision matrix to help you find the type of residential properties you wish to concentrate on and how you plan to use them to meet your short- and long-term goals.

Type	Difficulty	Risk	Reward
SFH-A	Hard	Low	$$$
SFH-B	Medium	Low	$$$
SFH-C	Easy	Low	$$$
SFH-D	Expert	High	$$
Duplex	Easy	Low	$$$
Triplex	Easy	Low	$$$
Quadplex	Easy	Low	$$$
Townhome	Easy	Moderate	$$$
Condo	Medium	Moderate	$$$
Apartments	Expert	Moderate	$$$$
Foreclosures	Hard	Moderate	$$$$
Distressed	Hard	Moderate	$$$$
Manufactured	Expert	High	$$$

You can also get an idea of how safe an investment this will be.

If you can see from your decision matrix where a particular property type will be a difficult investment with a high entry price, you may wish to steer clear of it.

Instead, concentrate on residential property types which may be simpler and only slightly less profitable for you.

Start, Then Optimize

In the end, the stops to finding the ideal type of property is simple:

1. Write down your goals.
2. Learn about the property types.
3. Identify your ideal property types based on your goals.
4. Start.

Just remember—as you build your portfolio, you may find your goals change, or you may learn new things about each property type you really like (or really hate).

Start, adapt, and build your dreams by building your portfolio today.

Ready to get in the real estate investing game? One of the best and most profitable ways to get started is to buy residential rental properties. 

Step one is finding the right property.

In this simple guide, I’ll break down the process of buying a residential rental property and cover everything from choosing the right type of property to contacting homeowners and calculating return on investment.

Types of Rental Properties

Before learning how to buy a rental property, you need to understand the different types of properties you can choose from. 

Essentially, there are three types of residential rental property options:

• Short-term rental: Short-term rentals (think Airbnbs) are rented out for days or weeks at a time, usually for less than 90 days.
• Long-term rental: Long-term rentals, on the other hand, are more permanent and usually come with a lease that runs for six months or longer, bu can sometimes go month to month
• House hacking: With house hacking, you buy a single or multi-family property, live there, and rent out a portion of the home or the additional units to earn income.

Each of these strategies has its share of advantages and disadvantages. For example, you might have a higher immediate earning potential with a short-term rental than a long-term one, but you’ll also have to deal with more maintenance fees and constantly market the property.

Steps to Buying a Rental Property

Once you’ve decided on the type of property you want to buy, it’s time to hit the market. Here are a few steps to help you land a home that’ll pay off.

Look In the Right Places

Choosing a neighborhood that will attract renters and keep them there is key to profitable real estate investing.

Here are a few factors you should keep in mind as you start your search.

Neighborhood

Buying a house in a neighborhood with a high vacancy rate, high crime, or few homes to begin with won’t get you very far. Instead, focus on neighborhoods that are established or up and coming. Go with neighborhoods that aren’t the best in town, but aren’t the worst either, to get started.

Look out for new developments and construction, too. They can indicate future growth in the area.

Property Class

You should also consider the property class. Property classes are defined by a home’s age, location, and overall state. Class A properties, for example, are new or fully renovated homes that are in great shape in prime residential locations. 

On the opposite end of the spectrum, Class D properties are over 30 years old, in a state of disrepair, and usually located in areas with high crime rates, with class B and C properties falling in between the two. 

The best property class for you depends on what you’re willing to put into, and looking to get out of, your investment.

Value

Before you even think about making an offer, you need to do some homework. After scoping out the property, make some comparisons.

Start by finding a comp, which is a comparable property to the one you’re looking at in terms of its size, condition, and location. Find a comparable home that is either on the market or recently sold to evaluate the listing.

You should also look at comparable rent rates for nearby properties to see how much you can expect to earn on a home.

Learn More About the Area and House

Once you determine that the neighborhood and property check your basic boxes, dig deeper.  Ask questions that give you more insight into the area’s job market, amenities, crime rates, and schools.

There are plenty of ways to find this info beyond poking around on the internet. Try these outlets to scope out the property:

• Attend networking events
• Talk to homeowners in the area
• Build relationships with realtors and property managers
• Contact the city or county’s economic department 

I also recommend checking out Propstream, a super useful tool that provides real estate market data and helps you store homes and contacts.

Start Marketing

If you’re serious about real estate investing, you have to do more than just market properties to renters after you buy them.

To attract motivated sellers in today’s market, you need to create some targeted marketing strategies. Here are a few tried and true methods:

• Cold call: Find a home listed as “for sale by owner” or one that’s in foreclosure or vacant? Cold calling the owner could lead to a sale. There are plenty of scripts online if you’re looking for inspiration.
• Text: Text campaigns have a decently high response rate because of how quick and easy texting is for respondents.
• Mail outs: You can also use a targeted direct mail campaign to reach potential sellers. 
• Email: Similarly, an email list targeted to potential sellers in your area could be a successful method of outreach.
• Social media: Whether you’re a social media master or not, it’s a huge asset for marketing your real estate efforts. Facebook, Instagram. Twitter, LinkedIn, Youtube, and even TikTok can help you to build your reputation as a credible investor and build connections.
• Knock on doors: It might seem intimidating to some, but knocking on doors for some really direct contact with a homeowner can sometimes lead to success in real estate investing.

Regardless of which outlets you use to connect with homeowners, it’s important to come prepared. Have a game plan, be human in the way you interact, and target the right leads for the best chance at success.

Choose the Right Owners to Contact 

Now that you know how to contact owners, it’s important to understand who you should contact. Reaching out and asking someone if you can buy their off-market home is a delicate task.

My biggest piece of advice? Start with low-hanging fruit. Your best bet is to target homeowners who are likely to be willing to sell their property on short notice.

Here are the types of homeowners you could encounter:

• Vacant: These are empty homes that aren’t in regular use. Owners of vacant homes may be inclined to sell.
• Non-local: Owners who live out of town or out of state may also be more willing to sell than local homeowners. 
• Local investors: You should also reach out to other investors in your area who are constantly looking to buy and sell like you.
• Owner-occupied: Depending on the circumstances, you may also reach out to owners who live in their homes if you think they may be inclined to sell.

How to Analyze Rental Properties

To analyze a real estate property’s cost, income, and other factors, you need to use a rental property calculator.

What to Calculate

To accurately calculate your rental property’s value, here’s the information you’ll need:

• Home information: Closing cost, purchase price, renovation cost, and rent
• Financing info: Mortgage amount, interest rate, loan term, and monthly payment
• Expenses: Vacancy rate, maintenance, management fees, taxes, insurance, HOA
• Assumptions: Assumptions such as expected increasing returns and expenses

If math isn’t your strong suit, you can find free rental property calculators online to help you crunch the numbers.

Year One Summary

After a year of renting your residential investment, you’ll have even more concrete data to work with. Rather than projections based on estimates in the area, you get to calculate your property’s actual worth based on your hard-earned dollars. Here are some of the ways you can calculate profitability one year out:

• Cash flow: Think of cash flow as the money that flows in from your property in revenue, minus the money that flows out to operate it.
• Cap rate: The cap rate is your expected yearly yield on an investment, based on your property’s net income.
• Cash on cash: This is your annual cash flow, divided by your initial cash investment. Think of it as the return you are getting on all of the money you put into the deal.
• NOI: Short for net operating income, this is your gross operating income minus your operating cost.

Bottom Line

There’s a lot more to rental property investing than just buying the first house you see and filling it with tenants.

If you do some homework up front, you can land on just the right property and increase your profitability. 

Fortunately, there isn’t a complex equation to follow to find a winner. You just need to know what you’re looking for, where to look, who to contact, and how.

Once you settle on a property that’s worth your while, calculate its value and come back in a year to see how your earnings compare.