So you’ve decided you’re ready to buy a rental property, and you’ve decided you aren’t going to limit yourself to one area as far as where to buy said rental property, and now you need to figure out where to buy it. If you are looking outside of your local market to buy in, chances are you are doing so in hopes of gaining the best returns you can get on a property.
If you didn’t care about returns, you’d probably just buy in your own backyard. Maybe you aren’t even looking for the best returns; maybe you just want good returns (assuming your local market can’t give them to you). Regardless, if you are deciding on a market to buy in that is other than your local market, I’m betting it’s the returns that matter.
Assuming it is the returns that matter, the most important thing you can do while analyzing rental markets and properties is understand what factors impact returns. Factors like income and expenses, property condition, vacancy factors, tenant quality, market growth and desirability. Some of these things are obvious, and some of the others may be less obvious to the inexperienced investor — or maybe to experienced investors, too!
A million articles could be written as to how these factors can impact returns, and most of these factors are at least mentioned somewhere in various articles I’ve read, but there is one factor that I’ve never seen written or talked about anywhere that every rental property owner should be aware of.
What is over-saturation exactly? Well, it’s easy. In the case of rental properties, it means that a particular market or area is over-saturated with available rental properties — not rental properties available for investors to buy, but rental properties available for tenants to rent. Well what does that cause? If a market has a considerable number of rental properties available to tenants, tenants will have a ton of properties to choose from when trying to find a place to live. Call it a “tenants’ market” if you will. I just made that up, unless the term already exists and I just haven’t heard it, but either way that’s exactly what it is.
Tenants have gobs and gobs of rental properties to choose from! The problem for the rental property owner? You have major competition! Potential tenants for your property — and especially good tenants — have so many rental properties to choose from when looking for somewhere to park their families that you may find yourself having a really tough time getting your property filled. And the problem with this? Vacancy is one of the most costly expenses to a rental property owner.
My Real-Life Example of Over-saturation
A Rental Market’s Heyday
I can give you an example of over-saturation from personal experience (unfortunately). If you’ve followed a lot of my blogs, you know that my rental properties are in Atlanta. I bought my properties when Atlanta was in its absolute heyday. I mean, hedge funds were scooping up properties left and right, big-time buyers were fighting the hedge funds and taking what they could, every little guy was fighting their way through the crowds to get properties, and it was literally probably the top best city to buy investment properties in. This was just a few years ago.
Atlanta became the big hot spot for investors to buy in right after Memphis and Phoenix had topped the charts, and right before Houston and Dallas were making their way into the game. Atlanta was it, man. There was no better place to buy if you wanted the best houses for the cheapest prices and the highest rents. The price-to-rent ratios were insane! Hence why the market was so desirable for so many investors.