Question: “I’m starting to feel overwhelmed about exactly where to look for houses. Should I just look all over the city so I don’t miss out on any hot neighborhoods? Is it better to focus in a particular neighborhood?”

Answer: “I feel your pain. It’s not easy to decide exactly where to start buying investment properties.

When I first got started, I was literally driving all over the city looking at properties. I didn’t have any business looking at some of those homes.

It is best to pick what is called a “farm area”. This is a neighborhood where you put your stake in the ground. Where you seriously concentrate your efforts on finding deals.

A farm area is an geographic area in which you intend to buy and lease properties. Why would you want to concentrate your efforts on certain neighborhoods at the exclusion of others? One of the major reasons is so you can learn your market very well. When you do business over and over in certain areas, you learn what properties are worth. You learn what your leasing customers in those areas are looking for. What they are willing to pay.

Another advantage is operational. When your properties are concentrated within a small area, it is easier to manage than if you have properties scattered all over your city. Maintenance becomes easier for your workers to handle when all your projects are concentrated. Making trips to properties becomes easier. Hopefully, your neighborhoods will be within a manageable distance from your home. We recommend that distance be less than 10 miles.

How large should your farm area be? Our recommendation is that you start out with an area of 1 to 10 square miles. Your farm area does not necessarily need to be within one contiguous area with neat boundaries. You may have many islands within one main area.

Here are few pointers on finding that ideal neighborhood: Have you ever heard any of those “You know you are a redneck jokes”? In many senses, you will know you are in the right neighborhood for good rentals if you see some of the telltale redneck signs in the neighborhood: For example, cars parked up on blocks, or old beater cars and trucks.

Some other clues are that it’s an older neighborhood. Even though newer construction is good in terms of being lower maintenance than older construction, the price per square foot of newer construction is also higher. Anything newer than mid-1970’s is questionable in terms of getting a strong enough rent to obtain adequate cash flow from the property.

In fact, a good rule of thumb is that the rents should be 1% to 2% of the total price of the property. Once the rent gets lower than 1%, its cash flow potential is dubious. If you can find a number of properties in a neighborhood that meet that criteria, you have found a good candidate.

Look for rental properties in neighborhoods where average, blue-collar families want to live. We stress families, because you want long term tenants. Turn over is expensive. That is why we don’t like student rentals, room mate situations, or other arrangements nearly as much as average, blue-collar families.