In Part 1, we focused on building a written investment strategy—your personal framework for making thoughtful, consistent decisions. Now, with that foundation in place, it’s time to move from the “why” to the “where”: identifying the right market for your residential rental investments.
Choosing the right location is more than just a geographic decision. It’s about aligning your investment strategy with the economics, laws, and day-to-day realities of a particular city, neighborhood, and tenant base. In other words, the market you pick will shape the performance of your investment just as much as the property itself.
Local vs. Out-of-State: What’s Your Comfort Level?
One of the first questions every investor needs to ask is whether they’re comfortable investing outside of their immediate area. Many new investors start close to home—it feels familiar, more manageable, and easier to control. That was true for us as well. Our first properties were within six hours’ drive (still out-of-state). It was comforting to know we could be on-site the same day if needed.
But over time, we came to realize that physical proximity isn’t a requirement for success. In fact, investing only in what you know can sometimes lead to poor outcomes—especially if you live in a high-cost, low-yield market. Familiarity is not a strategy. And while investing out-of-state can feel intimidating at first, it often opens the door to stronger returns, better tenant profiles, and a more resilient long-term investment.
What to Look for in a Market
If you’re open to exploring beyond your backyard, the next step is understanding what separates a good rental market from a great one.
Ideally, you're looking for a city with steady population growth, a diversified economy, and laws that allow you to operate your rental business effectively. Consider Kansas City, Missouri. It’s a mid-sized metro with a relatively low cost of entry, a growing job base, and a healthy balance of tenant demand and landlord protections. It also has multiple submarkets—some with strong cash flow potential, others with more appreciation upside—giving investors room to tailor their approach.
In cities like Kansas City, you’ll find neighborhoods that are accessible to working-class residents, a stable rental culture, and fewer barriers to entry than more speculative markets. These factors create opportunities for long-term investors who are focused on fundamentals rather than hype.
By contrast, smaller towns or college-centric areas might seem appealing on the surface, but often come with limitations—such as seasonally inconsistent demand, narrow renter profiles, or dependence on a single employer or institution. Rural areas may also present operational challenges, such as difficulty finding qualified tradespeople for maintenance or repairs.
The Policy and Tax Environment
Another key layer of market evaluation is understanding the financial posture of the city and state. Long-term budget issues, underfunded pensions, or aggressive tax authorities can all pose risks to your future cash flows—even if the numbers look good today.
For instance, states like Texas are often seen as investor-friendly due to their lack of income tax (which is great if you live in Texas, but really irrelevant if you live in a state like California and invest in Texas). But property taxes can be reassessed annually, and some counties are known for pushing valuations aggressively. That’s fine if you underwrite for it—but dangerous if you assume today's bill is what you’ll pay five years from now.
Other states, like California or Arizona, have property tax caps or limits on how much assessments can rise year over year, which adds predictability but may come with trade-offs in regulations elsewhere (e.g., more regulation, slower permitting, or tenant protections that are less favorable to landlords).
No matter where you choose to invest, assume that tax laws and regulations will change over time. Build in some margin for those shifts—because at some point, they will come.
Insurance and Environmental Risk
Don’t forget to account for the cost and availability of insurance. A property in an area prone to hurricanes, wildfires, hail, or flooding will typically carry higher premiums—and sometimes more extensive repair needs over the life of the investment.
That’s why it’s important to look at the full picture—not just the purchase price and rent, but also insurance, maintenance risk, and long-term capital improvement costs tied to the region’s natural hazards.
Do You Need to Be Nearby?
We understand the instinct to stay close. In the beginning, it helped us sleep at night knowing we could drive out to a property if something went wrong. But over time, we realized that what really matters isn’t distance—it’s your team.
If you have the right people on the ground—a solid property manager (or leasing agent, if you are self-managing), reliable contractors, a network of fellow investors, a responsive realtor—you can manage a property just as effectively from across the country as you can from across town. Some of our best-performing rentals are in cities we’ve visited only a handful of times. And we wouldn't hesitate to invest there again.
Drilling Down: Picking the Right Neighborhood
Once you've identified a city, the real work begins: choosing the right neighborhoods.
Early on, we made the mistake of targeting the cheapest areas, expecting high returns based on cash flow alone. But those properties often came with higher tenant turnover, more repairs, and lower overall stability. The “great deal” wasn’t so great once we accounted for the headaches.
These days, we look for working-class neighborhoods—areas where rents are reasonable, demand is steady, and the tenant base is generally reliable. These neighborhoods may not make headlines, but they offer a strong foundation for long-term investing.
It’s also worth understanding whether the area is improving, holding steady, or declining. Are new businesses opening nearby? Is there infrastructure investment happening? Talk to local property managers, other investors and realtors—they’re usually the first to spot trends that don’t show up in data for another year or two.
Once you’ve narrowed your focus to a few key neighborhoods, your property search becomes much more efficient—and much more strategic.
Up Next: Choosing the Right Property
Now that you’ve identified a market—and hopefully a few promising neighborhoods—the next step is finding the right property. Not all 1–4 unit rentals are created equal, and there are key things to look for (and avoid) that can make a big difference in performance over time.
In Part 3, we’ll walk through our criteria for evaluating individual properties and what we’ve learned the hard way—so you don’t have to.