Once you decide on a market where investment in single-family rentals is favorable, you’ll be confronted with homes to buy in a range of prices. Are you better off investing at the low end, right in the middle, or even at the high end?
A high-end property might seem a ridiculous investment – who can afford to pay the rent? – but some of the most promising markets in the country are those that lie right outside rapidly expanding cities – rural counties where home prices are much lower but won’t be for long. In these places, a high-end property can be a very reasonable rental for a large number of city folks.
Even in places that already have high home prices, there’s room for rentals at the high end. The average income of renters in such places is also high, so you’ll always find someone who’ll rent your property. Many people don’t just rent because they have to – they want to.
There’s also room to rent at the low end of the market. But you’ll want to carefully examine a low-priced property to make sure you know why the price is low and whether you’ll need to spend extra money to make the place rent-able. In addition, even though all rentals will need more on-going maintenance than owner houses, at the low end that will be a much bigger percent of your cash flow.
There are problems with high-end and low-end investments. At the high end, although there will always be some people who can afford the rent, there won’t be many. It may take a while to rent your place, you may have this problem every year, and you could be sitting with your property empty for months at a stretch. Another difficulty with expensive homes is that their resale value changes more than the value of the average home when times are tough. This doesn’t happen often, but it’s an added investment risk.
At the low end, if you ever want to sell your property you might find it frustrating – and for the same reason high-end properties are more difficult to rent: not many buyers. You can always make it happen eventually – but maybe not on the terms you wanted.
The point to this is the idea that investing in rental property is easiest if you buy at the sweet spot, the price where you’re most likely to find lots of renters but where you’ll have no trouble reselling your investment when the time is ripe.
The sweet spot, it turns out, is a range from 75 percent to 110 percent of the average home price.
This is where you will find a large number of renters and a large number of buyers – when you decide to sell. This is also the range where you’re most likely to pay the correct price for your investment in the first place, because it’s the most active part of the market.
Surprisingly, this rule of thumb works in places with high or low home prices, and with many or few renters. It’s just a rule of thumb – more accurate in some places than others – but it works pretty well everywhere.
The sweet spot doesn’t guarantee success with your investment – that’s up to you – but if you invest in this price range, you’ll have a large market for your product.