In the last post, we discussed several criteria you should consider when choosing an investment property. In this post, I’ll go into a little more detail about city demographics and why you might want to research them when considering which rental property to buy.
First, Know Your General Area
If you are planning to buy a rental property near you, you probably already have a working knowledge of the local area. You know which cities are generally safe and which are not, and you might have an idea of the general city demographics within a 25-mile radius. Even so, it’s a good idea to check out the hard numbers on each area before you seriously consider buying.
There are probably several websites where you can do this, but some of my favorites are Trulia and City-Data.com. If you plug the property’s address into Trulia, you can scroll about halfway down the page and it shows a crime map of the local area. It may not be 100% accurate, but based on the areas I’ve searched, it does give you a pretty good idea of which neighborhoods are safer and which are more troubled.
City-Data.com offers much more detail. You can plug in a city name and see a wide variety of statistics for that city, including median household and per capita income, cost of living index numbers, population density, recent population growth, average education levels, and a whole host of other data. You can review the data to determine whether the city seems to be up and coming, whether its residents can easily afford the rent you’re charging, or even whether your city is more prone to smog or earthquakes than the average.
In a vacuum, that information might not mean all that much to you. But it can certainly help you if you’re whittling down your choices to just a few buildings and you want to compare the demographics of each of the cities. City-Data.com even has a City Compare search, where it will display the results for two cities side by side, so you can compare and see if one city would make a better investment than the other.
Do City Demographics Matter All That Much?
You may be wondering whether city demographics matter all that much. After all, if you’re looking at two buildings that have similar rental rates and you have a general idea about the area, what are the odds that the specific data on a city-wide level matters? It may not matter much in your specific case, but it might matter a lot.
When you are buying a building, you generally don’t know what the last owner has done in the lead-up to listing the building for sale. Many owners raise the rents dramatically, which can sometimes lead to an unstable tenant base. There might be a number of tenants who are looking to move but who haven’t given notice yet, and after you close escrow, you might be faced with a number of vacant units. All of a sudden, the city demographic data becomes very important. It may be virtually impossible to find tenants quickly who are able to pay the high rental rates if the median household income is much lower than the surrounding areas.
Zip-Code and Block-Specific Searches Are Even More Valuable
Even more helpful is searching data specific to the actual zip code where the property is located. Some cities, like Long Beach for example, are very large, and contain both affluent and not-so-affluent areas. A downtown Long Beach building might have high rental rates and very low vacancies, due to a flood of highly credentialed applicants every time an apartment comes available.
But in some areas of the city, such as where my boyfriend’s grandmother used to live, things can be a bit rougher. Every time we spent the night at her house, I’d be woken up in the middle of the night by the sound of breaking glass somewhere nearby, and a car alarm going off. Also, due to some strange zoning changes that took place in the past couple of decades, several small single family homes were torn down and replaced with apartment buildings with inadequate parking, so there was absolutely no street parking on the entire street. Those sorts of things may it very difficult to fill vacancies and to reduce tenant turnover.
A city-wide search averages the data from all areas of the city, good and bad, and can end up giving an inaccurate picture. To use Long Beach as an example again, the city overall looks pretty good. But if you zoom in on the map to look at the specific zip code or block where your potential building is, you might see the following demographic data (taken from a part of one Long Beach zip code): Median household income: $12,264, Unemployment: 8.75%, Residents below the poverty level: 27.6%. That is going to be a challenging building to own. A good percentage of the residents might be receiving Section 8 housing vouchers, which can bring its own troubles (which is why many experienced landlords, including the No Nonsense Landlord, don’t accept Section 8). If you were planning to buy the building and phase out of accepting Section 8 tenants, you might end up with an empty building.
Spend the Time to Get Detailed Information
This may sound like a lot of relatively meaningless homework if you’ve never tried it before. It is a lot of research work, to be sure. But choosing the right investment property is a decision that will impact your life and your finances for perhaps the next several decades, so spending an extra few hours doing research can really pay off in the long run.
If you own investment property, did you do a City Demographics search before you bought it? Do you think those searches are valuable or a waste of time?