Whether you invest close to home or in a different market depends on what your investment strategy is going to be. If you’re looking at short-term rentals to rent out on Air BnB or VRBO, then the first thing to check is whether the location you are interested in investing in even allows short-term rentals. A lot of cities actually prohibit them entirely, or they require you to live in the property full-time and rent out only part of it, or they require leases of no less than 30 days. So the first thing to look at is whether short-term rentals are allowed. For other types of investments, like long-term rentals and flips, the key is to make sure you have a really good understanding of whether the returns will be more than the costs.

When analyzing a potential investment, draw a search area in your target area in Zillow. Drawing the search area allows you to draw an irregular shape, avoid certain areas, or include only very specific areas such as those along the coastline or near public transportation routes. Within that area, look at “recently sold” properties. That will give you an idea of what properties in that area are actually worth. The “for sale” prices do not reflect the actual property value, according to appraisers, but they will give you a good idea of how much you might pay for a property if you were to buy today. Once you get a good idea of the “recently sold” and “for sale” numbers, go to a free mortgage calculator like Nerd Wallet, where you can plug in the home price, and it will estimate taxes and insurance for you and spit out an amortization schedule. An amortization schedule gives you your monthly payment, which covers the mortgage principal, interest, taxes, and insurance.

To get a better idea of taxes, find a specific property in your target market that is representative of the type of property you’re looking for. Research on the local city/township website what the local property tax rate is. Take the local property tax rate and use the tax assessed value to calculate the monthly taxes. You can find the tax assessed value on Zillow or on the local township or county property lookup site. If you search the name of the town/city/county and either “property looked” or “GIS map,” you will usually be able to find this information.

A less accurate shortcut way is to find what taxes have been paid in the most recent past years, and double them. This is definitely only a guesstimate, but doubling it will get you somewhere in the ballpark of what the taxes would be for a house that is not held as a primary residence AND that increases based on the current value of the home.

Add up the mortgage payment (including taxes and insurance) and now you have your absolute “not less than” amount that you need to be able to cover for your monthly costs. You will also need to factor in repairs and maintenance, as well as a property manager if you plan to use one. It is reasonable to assume that repairs and maintenance will be roughly $5k-$10k/year if you don’t have a more specific ballpark figure in mind. Property management will be a few hundred dollars per month, which you can find out by emailing a few local property managers.

Monthly rental income > Mortgage + Taxes + Insurance + Repairs/Maintenance  

To calculate the monthly rental income rate, go on Air BnB/VRBO to compare short-term rentals or Zillow to compare long-term rentals. For short-term rentals, look through the “availability” calendar for individual rentals to get an idea of how often they are renting the place out in the next few months. Check the nightly rate and do the math. You will never have 100% occupancy, and if the property is seasonal, you need to plan for high vacancy rates during the off-season. For short-term rentals, you’ll also need to plan to provide lawn care, snow removal (if applicable), fall leaf pickup, utilities, cleaning, and other costs you wouldn’t necessarily spend on a long-term rental.

To look for long-term rental rates, go to Zillow and return to your search area, but select “For Rent.” This will show you how much properties in that area are renting for. If you go to the history section of the listing, it will show how often the property has been listed and when the listing was removed, which will help you figure out how long it was listed for before they found a tenant. Longer periods of being listed can reflect lower demand or may reflect that the rent price was too high.

Now see if that monthly income rate is greater than the expenses. If it is, then you have yourself an investment market where the tenants will pay down the mortgage for you over time, and you will be left with an asset free and clear that you put very little of your own money into.

If the numbers aren’t working in the geographic area you searched in, move your search area and try again.

Once you’ve found an area that you think could work, double check (and then triple check) that there are no local ordinances, HOAs, or other regulations that prohibit the type of rental you are looking at. And, as a safeguard, ensure that the numbers work to sell the property or switch from a short-term to long-term rental if those regulations change.