What are the Best Cities to Invest in Single-Family Rentals? Part 2

How well do local residents care for their neighborhood?
How educated are residents in an area?

Before I answer these questions and explain how I identify cities that fit, I want to remind you what we covered in Part 1. In Part 1, we started out asking the question – Why do rentals perform better in some markets that others? In order to answer that question, we look at the following demographic data:

  • Job Growth
  • Population Growth
  • Income Growth

We also discussed:

  • Why this data point is important to our analysis?
  • Where do we get this data?
  • How do we use this data?

If you haven’t read part 1, you should read it first.

Answers to Today’s Questions…

I want to invest in areas where the residents like their neighborhoods and want to keep their neighborhoods desirable areas to live.

I want to invest in areas where the general population is on average educated enough to keep steady jobs and keep steady levels of household income. I’m not talking about only college-educated residents. That’s not realistic. I’m talking generally about most people having at least a high school education and at least an average number of college-educated residents compared to the national averages.

Remember that in Part 1 of this topic I talked about wanting to invest in areas with growing household income to support rental payments. That need needs to be supported through a reasonable level of education across the local population.

Through research with other successful investors in residential real estate, we have found that the best indicator of how well residents care for their neighborhood and levels of education is crime statistics.

Why are Crime Statistics Important?
Crime statistics are generally lower in areas where people are interested in taking care of their neighborhoods and also indicates higher levels of education across the population.

So, we want to find areas where crime statistics have been in a downtrend for quite a few years and the trend is continuing.

Where do we get this data from?
We can get this data from a website we already used in our last post. http://www.city-data.com/ has crime data for cities. Here is a snapshot of how the website looks for Birmingham, AL (just an example). If you scroll down the page, you will find an area like the picture below showing crime data.

I circled in red the two numbers we are interested in. The first is a crime score 15 years ago. The second one is the most recent score.

How do we use this data?

We need to look for two things:

  • We are looking for cities where the current score is lower than the historical score, and
  • We are looking for cities where the current score is below 500.

These are used more as qualifying data points. In other words, each city will be screened in or screened out based on the two factors above.

The downward trend in crime statistics shows that the city is improving over time.

The 500 score is a level where we have seen a descent demarcation between good city locations and bad city locations. The economics of investing isn’t demonstrably better the lower the score goes. It’s just better when it’s lower than 500. So we don’t rank cities by this score. It’s used as a screen.

There are more factors that I look at to further separate cities and I will describe why and how I use that data in some future posts.

How do you determine what cities are good for investing in rental properties?

Please comment below or email me with your thoughts.