Introduction

When considering a rental property investment in the United States, the primary focus often lies with the cap rate. However, while cap rates are important metrics to evaluate potential returns, they are not the only factor to consider. In this article, we explore why looking for a deal is more important than seeking the 'best city,' and we delve into how to find and analyze such deals to ensure they are sustainable and profitable investments.

Why Deals Matter More Than Cap Rates

The phrase 'Don’t look for the best city. Look for the best deals.'

It is essential to understand that the key to successful rental property investment is identifying a deal that offers a value upgrade to the property, rather than simply targeting a city with a high cap rate. A compelling deal involves a property and a location that can be improved and enhanced over time, ultimately leading to higher returns and a more sustainable investment. If the location or the property itself does not support such an upgrade, what you have is merely a depressed asset in a depressed area.

Research and Evaluation

Extensive nationwide research can be conducted online, making it possible to identify potential deals from any location.

First, extensive research on potential deals is necessary. This should involve a detailed analysis of the property in question as well as the surrounding area. The research should include:

Property condition and potential for improvement Local market trends and demand Tenant turnover and rental income potential Cost of maintenance and potential revenue increases

Only after thorough research and analysis, you can determine if the deal truly offers an opportunity for value enhancement.

The Limitations of Cap Rates

Cap rates can be misleading and sometimes deceptive:

High cap rates often indicate higher risk, typically associated with sketchy areas and frequent maintenance issues. Tenant turnover can be more frequent in these areas, leading to increased operational costs and reduced stability.

For these reasons, I believe it is better to search for good investments in areas you can manage closely. Remote management can lead to unauthorized and costly interventions, which can undermine the investment's potential.

What Cities are Most Pro-Landlord?

Instead of focusing solely on cap rates, the key should be identifying cities with favorable landlord policies and straightforward eviction procedures:

Pro-landlord policies: Easier and cheaper eviction procedures and less likelihood of tenant retaliation or legal challenges.

Landlord-friendly cities often have clear and straightforward laws and processes for evictions, which can help protect your investment and reduce the risk of legal entanglements. Examples of such cities include:

Arlington, Texas Phoenix, Arizona Fremont, California (Note: Be cautious as online misinformation can sometimes portray California as landlord-friendly, which is often not entirely accurate due to stringent tenant protection laws).

Understanding Cap Rate Manipulation

Cap rates can be manipulated to make a property appear more attractive:

Entities can purchase property late in the tax year and inflate accounts to show inflated rents and higher occupancy. The following year, they can pay taxes based on the improved income and present this as proof of a high cap rate. In areas like Los Angeles, where eviction processes can be challenging, this manipulation can be particularly harmful to new buyers.

Conclusion

When investing in US rental properties, it is crucial to look beyond cap rates and focus on finding genuine deals that offer value enhancements. While cap rates are valuable tools for initial investment evaluation, they can be deceptive and misleading. Instead, prioritize your search for cities that are pro-landlord and have straightforward eviction procedures. With careful research and due diligence, you can find the right deal and build a successful rental property portfolio.