How to Choose the Best Rental Properties: A Guide for New Investors

As a new or seasoned real estate investor, you may find yourself asking, “Which types of properties should I invest in?” or “What should I focus on when evaluating rental properties?” While these are important questions, they’re not the best place to start. Real estate investing, like any major venture, begins with one key thing—setting clear goals. Every decision you make should align with those goals.
For most, the primary goal is financial freedom. But financial freedom goes beyond simply replacing your current income. It’s about having enough passive income to maintain your lifestyle for the rest of your life. To achieve this, the income from your rental properties must meet three essential criteria:

1. Rents Must Outpace Inflation
If your rental income doesn’t keep pace with inflation, your purchasing power will erode over time, making financial freedom impossible. Population growth is one of the key drivers behind rising rents and property values, so it’s crucial to invest in areas where the population is steadily increasing.
2. Income Sustainability
For true financial independence, your rental income must be sustainable over the long term. This means that your financial future is tied to the economic growth of the city where you invest. A city with a strong, growing economy is more likely to provide consistent, long-term rental income.
3. Income Reliability
Even during tough economic times, you need to be able to rely on your rental income. This depends on your tenants remaining employed and able to pay rent, even during downturns. Investing in properties that attract reliable tenants is key to ensuring steady income, no matter the economic climate.

The Investment Process
So, how do you choose the right rental property? It’s a multi-step process, starting with selecting the right location.

Step 1: Choose the Right City
The most important decision you’ll make as a real estate investor is the city where you invest. The city’s population growth, economic health, and long-term trends will have the biggest impact on the success of your rental property. When selecting a city, look for:
Significant and sustained population growth
A metro area with a population over 1 million
Low operating costs for landlords
These factors create a foundation for long-term rental income growth.

Step 2: Identify Your Ideal Tenant Segment
Once you’ve chosen a city, the next step is identifying a tenant segment that offers reliable renters. A reliable tenant is someone who pays rent on time, stays long-term, and takes care of the property. Reliable tenants are the exception, not the rule, so it’s important to focus on groups of people that are more likely to fit this profile.
To find these tenant segments, speak with local property managers and get their insights on reliable tenants. Once you’ve identified a reliable tenant group, create a “property profile” based on the types of properties they prefer. Your property profile should include:
Location: Where this tenant segment currently rents
Property type: Whether they prefer condos, single-family homes, or multi-family units
Rent range: What they’re willing and able to pay
Configuration: What features they’re looking for (e.g., number of bedrooms, garage space, yard, etc.)

Step 3: Select the Right Property
With a clear property profile, you can start working with your real estate agent to find properties that match your target tenant’s preferences. However, there’s more to property selection than just matching tenant needs. The property must also:
Meet your ROI and cash flow requirements
Be within your budget
Have a low vacancy rate (i.e., it rents quickly)
Require manageable renovation costs and have low risk
Be easy to maintain and inexpensive to manage

A knowledgeable property manager can help you get accurate rent estimates and advice on expected vacancy times, while an investment-focused real estate agent can provide guidance on pricing and renovation costs.

There’s a lot more to selecting great investment properties and successfully bringing them to market, but these foundational steps will set you on the right path. Focus on aligning your investment choices with your goals and finding properties that meet the needs of reliable tenants in growth-focused cities. With these fundamentals, you’ll be well on your way to building a portfolio that delivers long-term financial freedom.