Choosing a part of town in which to buy can be a difficult decision. One may gravitate to the most expensive part of town but that isn’t always the best place for cash flow. I personally like middle-income areas. At the high end, the rent versus price ratio is always too low. There is a maximum that tenants are willing and able to pay each month that is almost always lower than what buyers are willing to pay each month in mortgage payments.
At the low end, high crime areas and trailer parks, you can have bad tenants. Tenants of the type that have all day to dream up ways of suing you. If you are considering buying an apartment complex, consider how many cars are parked during the day. That will give you an idea of whether the tenants work. If looking at single family homes, look at the roofs and landscaping in the area to see if there is pride of ownership. Also, crime maps are available for many cities. Sex offender maps are also available. You can look at these and avoid high crime areas.
While rental yields (cap rates) can be high in bad areas, a crime against a tenant can result in liability for you. You can be accused of providing insufficient lighting or security. One claim against your insurance, and your company may drop you. Rates for your other properties may go up.
In transitional areas, yields may be high but values may be declining, particularly if the area is getting worse instead of getting better.
If you ask around, you can get a good idea of what the preferred areas are in any town. You may not get this information from real estate agents, who may fear discrimination lawsuits. Some government officials test real estate agents to try to trip them up into steering them into certain areas. But ask restaurant wait staff, store owners, taxi drivers, and you will start to hear certain neighborhood names repeated.
Suburbs often tend to have lower crime rates. On the edge of a city, you can wait for growth to come your way, particularly if you have a long time horizon. Consider where new Costcos, Wal-Marts, etc. are moving in and this will give you an idea of where growth is happening. New infrastructure projects such as new highways and new bridges can make certain areas more desirable. Typically, people will accept up to a 20 minute commute to work.
Also check school ratings. Tenants, like owners, want to be in the best school districts.
After you’ve settled on a few areas, ask property managers what size properties are in most demand. It may be 2 bedroom units or 3 bedroom units, for example. This may differ by city and may change over time depending on what is being built.
Don’t worry too much about new apartment complexes. While they can take some demand, particularly if they offer big move-in incentives, new square feet always cost more than older square feet. Overbuilding can reduce rents though.
Builders tend to cycle between building and going bust. Even if an area is overbuilt, they don’t know how to do anything but build and will keep doing so even if there is no demand for what they are building. They then eventually go bust and go out of business or move to another city. Then rents start creeping up as growth continues and an area becomes undersupplied. Eventually the builders notice the need and move in again.