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Q & A With America's Real Estate Professor: Best Cities to Buy Rentals

Zillow • Feb 5, 2013 at 4:11 PM

By Leonard Baron

Best City to Buy Properties

Q. I’ve been watching a housing index and it notes where prices are going up the most in certain cities. I’m interested in buying a rental property and was wondering what cities in your opinion are the best places to buy property? Donald M., Tulsa, OK

A. That’s an easy one; the best city to buy property is the city where you plan to reside for the foreseeable future. Even if you have a property manager, real estate ownership and management takes time, energy and effort and you need to be able to visit your property if issues come up. If you buy a property that is more than an hour away, it’s a major hassle to get to the property if you need to and you will not be happy. Do the hard work to find a nice cash flow positive property somewhere within driving distance from your home. So the answer is: the best city to own rental property real estate is the city where you live!

Vacation Rentals

Q. I understand that the summer rental income from a beach vacation rental can pay the mortgage for an entire year. But I’m a little concerned about the expense side of things -- what have you seen on these? Sara K., Hermosa Beach, CA

A. Yes, expenses are high. While normal rental property may have an expense ratio of 35% to 45% -- and that’s before taking out the mortgage payment -- a vacation rental is like a hotel, with a 70% to 80% expense ratio. You may collect a lot of rental income, but when $.70 to $.80 of every dollar you collect goes to paying maids, utility bills, property taxes, credit card charges, advertising, management, supplies, furniture, etc., there isn’t much left over. Then the mortgage payment takes you into a negative cash flow situation. Generally speaking, vacation rentals are one of those investments that sound too good to be true.

I’m not saying that you cannot make them work, but they tend to be difficult. If you talk to actual vacation rental owners, and they are being truthful with you, you’ll probably learn that financially speaking, there are much better investments. Do a lot of thorough research and figure out realistic rents and expenses on these, and you’ll probably come to the same conclusion. Good luck!

Leonard Baron, MBA, is America’s Real Estate Professor® - his unbiased, neutral and inexpensive “Real Estate Ownership, Investment and Due Diligence 101” textbook teaches real estate owners how to make smart and safe purchase decisions. He is a San Diego State University Lecturer, blogs at Zillow.com, and loves kicking the tires of a good piece of dirt! Email Your Questions to: Leonard@ProfessorBaron.com

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