The 2020 BiggerPockets Insights Market Study examines the 552 largest markets in the United States to help investors of all types and experience levels understand how various locales across the U.S. compare to one another.
Over the next few months, we’ll be releasing more BPInsights studies similar to this one for mid-sized and small markets. But we’re starting with the 552 markets in the U.S. that have more than 25,000 occupied residences.
In this study, you’ll gain unique insight into:
- The top cities for cash flow over the past 10 years
- The top appreciation markets over the last 10 years
- The top performing “hybrid” (cash flow + appreciation) markets over the past decade
- How to know when you’ve found a great market
- Tips for conducting your own research
Before we get into the findings, let’s also talk about what this study is not:
- This study is not predictive. I am using historical data to show what has happened between 2010 and 2018. I am making no effort to predict what is going to happen in the future.
- This is not a comprehensive analysis of each market. This is a broad, high-level look at markets. If I say that Detroit has been a great cash flow market over the past 10 years, that by no means indicates that all investments in Detroit have performed. And if I say that San Diego has had poor cash flow returns since 2010, that does not mean there are no cashflowing properties in San Diego.
This study is meant to help you focus your own investing. Hopefully, it will help you identify a few potential markets and guide the way you think about which markets you invest in. But as always, it’s up to you as an investor to conduct your own research and select the markets and investments that make sense for your budget and goals.
If you want to see a full list of the 552 markets analyzed here and conduct your own research using the data I assembled, please visit the BiggerPockets FilePlace to download the full spreadsheet.
Lastly, this study is just a sneak peak of the new BPInsights offering, which will launch later in 2020. BPInsights will feature regular case studies, white papers, and data-focused analyses, as well as a new suite of products to help you research, transact on, and manage your investments in a data-driven way. In the future, BPInsights will be available only to Pro and Premium members.
But for now, enjoy this sneak preview!
Data & Methodology
The study was completed using 100 percent publicly available data, mostly from the U.S. Census. I used two different years of data from the Census 2010 and 2018 (which is the most recently available dataset). We are working to develop a proprietary dataset over the course of 2020 that will greatly expand on this public data, with most of that content becoming available for Pro and Premium members, who will have access to BPInsights.
In this study, we’re going to be using two financial metrics to conduct the analysis:
- Cash Flow: We will use cash-on-cash return (CoCR) to measure cash flow.
- Appreciation: We will use compound annual growth rate (CAGR) to measure appreciation.
Cash-on-cash return (CoCR) is a simple financial metric—but a good one to examine cash flow. Basically, it measures how much cash you take home for each dollar you invest.
CoCR = (Total Rent – Expenses)/Cash Invested
For the purpose of this study, the expenses we’re going to use are:
- Taxes: I got this from census data.
- Insurance (estimated): I calculated, on a state level, the percent of home value the average person pays in insurance annually. I then extrapolated to each location within that state.
- CapEx (estimated): This one is notoriously hard. I did my best to estimate the costs here, but this is the data I am the least confident in. You can see this forum post for more information on my methodology.
- Vacancy: Census data.
- Property Management: Generalized as 10% of gross rent.
Note: I am not including any financing costs here. In order to have the most consistent analysis across all markets, I decided to treat each property as an all-cash purchase. Again, this study is not meant to show CoCR or CAGR for your specific investments; it’s meant to guide your thinking about analyzing a market. You can download my spreadsheet here and conduct your own analysis—add a mortgage, change CapEx estimates, update my property management assumptions, or whatever you’d like to do to personalize this analysis.
Because I am considering all-cash purchases, that means that the “cash invested” part of the formula will be equal to the value of the house.
Let’s look at a quick example. Let’s say that Evansville, Ind., has the following averages:
- Gross rent: $755/month, or $9,060/year
- Expenses: $446/month, or $5,352/year
- Median Home Value: $92,300
The equation would be:
($9,060 – $5352)/$92,300 = 4% CoCR
I should mention here that there are some very valid criticisms of CoCR as a measurement of an investment (namely, that it doesn’t consider the timeframe of an investment), but for a broad market overview like this one, I think it makes sense. You’ll also see that I try to address that later, by showing CoCR for two different purchase dates.
Compound Annual Growth Rate
Compound annual growth rate (CAGR) is a great way to evaluate how an investment performs over time—which is exactly what we want to do when measuring home value appreciation. For this equation, we need just three inputs: beginning value (what was the property worth when you bought it), ending value (what is it worth now), and the time you’ve held the investment.
Written arithmetically, it looks like this:
CAGR = (Starting Value/Ending Value)^(1/Timeframe) – 1
So, let’s say we bought a property in Brighton, Colo., for $204,800 in 2010. And then in 2018, nine years later, that property was worth $278,000. The equation would look like:
($204,800/$278,000)^(1/9) – 1 = 3% CAGR
In short, this means that the average property in Brighton has averaged 3 percent appreciation over the last nine years.
CAGR is a bit more complicated than CoCR because it takes into account compounding appreciation and the timeframe of the investment. I am not going to get much into those details here, but if you’d like to learn more, here is a link with some helpful tips.
Now let’s get to the good stuff! In this next section, I will break out the top 25 markets based on three different types of analysis. The first will be purely based on CoCR, the second will be purely based on appreciation over the last nine years, and the last one will be a hybrid of the two models.
You might be thinking, “Just give me a list of the best markets,” which I agree would be great! After all, that is what I set out to do when I started this project. But unfortunately, the answer is not that simple, and I’ll quickly explain why.
Here is a scatterplot of CAGR vs. CoCR for each of the 552 markets in this study. The horizontal axis shows price appreciation (CAGR), and the vertical axis shows cash flow (CoCR).
What is the best market? Top left? Bottom right? Right in the green blob in the middle? The answer to which market is “best” is really based on your personal beliefs about the market, your risk tolerance, and your own investment thesis.
Because there is no single “best” market, I will strive to show you which markets have performed the best for various strategies.
But first let’s talk about a few observations from this scatterplot that convinced me I cannot provide a simple answer to which market is “best.”
- The outliers for great CoCR performance are also outliers for poor CAGR performance.
At first glance, it looks like these three are by far the best investments, right? Flint, Mich., has a CoCR of over 14 percent percent! That is seven times greater than the average for this dataset (1.9 percent). But if you compare CoCR to CAGR, you see Flint is also an outlier for CAGR—but this time, it’s an outlier in a less flattering way: Flint has a -9 percent CAGR, 20 times worse than the average for this dataset (0.4 percent).
So, is Flint a good investment? It’s hard to say. This graph certainly gives me pause, but I’m a relatively conservative investor. If you’re looking for pure cash flow, then the data suggest you can’t do any better than Flint.
- There is a negative correlation between CAGR and CoCR.
Given the findings about those outliers, I was curious to see if that pattern held true across the entire dataset, so I measured the correlation between CAGR and CoCR.
As a quick reminder for those of you a few years removed from math class, correlation measures how two variables move together. In our case, we’re talking about how CoCR and CAGR move together.
A positive correlation means when one variable goes up, the other one also goes up. A negative correlation means that when one variable goes up, the other one tends to go down.
Correlation is measured on a scale of -1 to 1, with a score of -1 meaning the two variables are “perfectly negatively correlated” and a score of 1 meaning the two variables are “perfectly positively correlated.” A score of 0 means that the relationship between the two variables is not correlated at all.
When I measured our two variables, I received a score of -0.49, which is a fairly strong negative correlation. This does not mean that in every instance a high CAGR means a low CoCR, but it means that in general, you can expect that type of relationship. It means that much of the time over the past decade, markets either returned a strong CAGR or a strong CoCR.
It also means that if you find a market with high CAGR and a high CoCR, you’re likely looking at a good opportunity!
Cash Flow Markets
As we get into the markets that have performed best for cash flow, I am going to break it out into two different analyses. First, we’ll look at cash flow in the most recent year of our data—2018. Next, we’ll look at what your estimated cash flow would be if you bought in various markets in 2010.
Cash Flow 2018
So, here it is! The top 25 markets for cash flow in 2018. I haven’t included all of the expenses and formulas here for ease of viewing. To see them all, download my spreadsheet here.
The first thing I noticed when looking at this table is the geographical representation of these cities. The top seven cities for cash flow are all in the so-called “Rust Belt”—Michigan, Ohio, Indiana, and Pennsylvania. In total, 16 of the 25 top markets were in those four states alone! If you add Florida to that group, 80 percent of the top cash flow markets were in just five states.
While the full table has more detail, I charted the appreciation vs. cash flow relationship we’ve been exploring below so we can see visually how these two metrics relate.
What struck me most about this graph is that aside from the three outliers—Flint, Detroit, and Youngstown—the CoCR for the remaining 22 cities are remarkably close to one another. That remains true for much of the rest of the dataset, as well. In fact, 211 of the 552 cities in this study have a CoCR between 2 to 4 percent.
Also, note that all but five of these markets have a negative CAGR (and two of the five that are positive are just barely positive).
Cash Flow Since 2010
Now let’s look at the same data but presuming that you invested in the given market back in 2010.
You’ll notice in the table above an additional column (CoCR 2010). This calculates what your CoCR would be if you purchased in 2020 (Home Value 2010 column) and had 2018 rent (Rent 2018 column).
Notice that 16 of the 25 cities are the same, and the concentration in the Rust Belt remains—14 are in Ohio, Michigan, Indiana, and Pennsylvania combined.
Now looking at appreciation vs. cash flow, what really jumps out to me here is that Youngstown, Ohio, and Flint, Mich., are still at the top for cash flow, but they are no longer “outliers” (anomalies in the data) and instead are just slightly ahead of cities like Buffalo and Pittsburgh.
Secondly, the lack of variance in the top 25 percent holds true. There simply isn’t that much separating the top market and the 25th best market here.
Before you yell at your computer that there is a huge difference between a 6 percent and a 3 percent return, let me clarify—I am not saying they are equal. Remember, these are averages. Therefore, it’s very likely that you can find a 6 percent CoCR in any of these markets. By rule, if the average for Birmingham, Ala., is 3.6 percent, that means there are properties with returns in that market that are both higher and lower.
At this point, let’s look at the top 25 appreciation markets since 2010. I know a lot of investors will say that planning for appreciation is a bad idea (I tend to agree), but I think this dataset is worth looking at. Yes, it’s hard to predict appreciation, but if you get it right, it can turn a solid investment into a home run.
First, let’s state the obvious: California, Texas, and Colorado have absolutely crushed it in the appreciation game since 2010. A whopping 22 of the top 25 cities are in just those three states. There is basically no overlap from a geographic basis with the cash flow chart.
Next, let’s look at CAGR between 2010 to 2018 for the top 25 cities for that metric (blue bars). The green and orange lines show the CoCR (2018) and CoCR (2010)—the two different metrics we just looked at in the cash flow section.
Something very interesting stands out to me here. The negative correlation between CAGR and CoCR does not seem to be as strong in these markets. (Remember, the -0.49 correlation does not mean the relationship applies to all markets.) In fact, only four of the top 25 markets here have negative CoCR.
While only a handful of these markets (mostly in Colorado), have top-tier CoCR, most of them hover around the average (1.9 percent). Meaning, in these markets, since 2010, you could enjoy average CoCR with top-25 level appreciation.
While I agree that looking at appreciation alone is a bad strategy, the data suggest that the top appreciation markets are still able to deliver CoCRs that are around the average for the dataset. To me, that suggests that starting with the top appreciation markets could be a strong strategy for conservative investors unwilling to assume the risk of depreciating housing prices that we saw in the top 25 CoCR markets.
Lastly, let’s get to what I am calling the “hybrid” model. I made up this analysis when looking through the data, but the more I think about it, the more I think it makes sense.
The hybrid model is simple. I filtered out any markets that have a negative CAGR since 2010.
This is just my personal position (feel free to disagree), but if a market has seen depreciation since 2010, that is a huge red flag to me. Housing prices across the country have soared since 2010—if a market didn’t grow at all in that period of time, I’m not interested.
But I’m also a buy and hold investor, and I am primarily looking for cash flow. So, I sorted the markets that way.
In other words, the hybrid model answers the question, “What are the top 25 cash flow cities that have a CAGR greater than 0 percent?”
To me, this is a very strong, low-risk way to identify markets. Why is it low risk? You have two potential ways to make money: cash flow and appreciation. You’re not making a tradeoff on either metric here. Hopefully you get both, and your deal is a home run!
What Should I Do Next?
Now that we’ve looked at the top markets for various strategies, you may be wondering what to do with this information. I have two suggestions:
- Do more research into each of these markets.
My suggestion would be to further your knowledge on each of these individual markets and learn about the details of their economies and their net migration patterns. This is particularly true with any market that has seen home price depreciation since 2010.
A few things to research:
- Are more people leaving the city than moving there (net migration)? That is likely to drop housing prices (and rent!) down even further (less demand in the market = lower prices).
- Did the government of a city just attract a major employer to town, bringing high-paying jobs with it? That could mean a recovery in housing prices and further rental appreciation.
Because the data here are backward-looking, you need to come up with your own thesis about the markets you’re considering investing in.
Let’s use Flint, Mich., as an example here. If you’re not aware, Flint has been devastated by a public health crisis centered around its drinking water over the last decade. This has likely caused the massive -9 percent CAGR since 2010 and given Flint a bad name across the country. So, as an investor, you could look at this one of two ways:
- “Flint has suffered a horrible decade, and it’s unlikely for the city to face so many challenges going forward. It has hit rock bottom, and things are bound to recover. I am going to buy low, enjoy the massive CoCR right now, and presume that things will turn around in Flint, leading to neutral or even positive appreciation over the life of my investment.”
- “Flint has suffered a horrible decade. The public emergency has severely battered the reputation of the city. People are leaving in droves, which will likely put downward pressure on rent and price appreciation. Because of its negative reputation, new investment in the city is unlikely, meaning wages are unlikely to grow, leaving the prospect of an economic recovery doubtful. The CoCR is great, but depreciation is likely to continue, and I will likely have a hard time selling when it comes time for me to exit my investment.”
Could go either way, right? As an investor, you have to do your homework and develop your own thesis. This list is meant to help guide your thinking and focus in on a few markets, not to tell you what will happen next.
- Look in your own backyard.
The low variance among the top 25 markets (and the entire dataset in general) suggests to me that there are deals to be found in most cities. There is a tight band of CoCRs between 2 to 4 percent. But that is just the average for that market. If the average CoCR for Charlotte, N.C. (not in the top 25) is 2.7 percent, that means there are properties with returns in that market that are both higher and lower than 2.7 percent. So, if you live near Charlotte, don’t stress yourself out trying to find the best market in the entire country. Do your homework, learn your local market, find yourself a deal with a 5 to 6 percent CoCR locally, and pull the trigger.
The data suggest these deals exist in almost every major metro. Go find them!
I say this because investing somewhere you know well is simply easier. While the averages suggest that these 25 cities are the most likely to produce a top-tier CoCR, the low variance in the CoCR data suggest that it’s also very likely that you can find a top-tier CoCR in your own market if you can locate the right deal.
I hope this analysis of the top cash flow and appreciation markets helps you focus on a strategy and maybe even some specific investment opportunities. To me, the three big takeaways are:
- Appreciation and CoCR are negatively correlated. Often, you will have to make a tradeoff on one of these key metrics.
- Don’t get seduced by high cash flows without looking into appreciation. Selling a house for less than you bought it for has the potential to turn a deal with great cash flow into a poor overall return.
- Planning for appreciation is unwise, but looking at markets with strong historical appreciation and above-average cash flows is a low-risk way to target markets.
I encourage everyone to download the spreadsheet I have uploaded to the BiggerPockets FilePlace and conduct their own analysis of this dataset.
Please keep an eye out for more from BPInsights. We will be continuing to release data-centric studies in the coming months!
Share your thoughts below!