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6 Cash Flow Unicorn Cities: March 2021 Markets of the Month

Dave Meyer
4 min read
6 Cash Flow Unicorn Cities: March 2021 Markets of the Month

Let’s just get this out of the way: I’m not a fan of the 1% rule. Many long-time BiggerPockets readers are probably gasping right now—that stance is blasphemy!—but I just don’t think it’s that important.

For those unfamiliar, the 1% rule states that a property’s rent-to-price ratio (RTP) should meet or exceed 1% in order to proceed with a deal. RTP is a great proxy for cash flow, and I think it’s a great metric every investor should understand. But just like any single real estate investing metric, it has to be used in context and as part of a thorough analysis.

Why is the 1% rule outdated?

I have two problems with the 1% rule:

  • A 1% RTP is no longer feasible in a lot of markets. And that’s okay! You can absolutely invest in properties that don’t meet the 1% rule and generate excellent returns.
  • RTP is often high because home prices are stagnant (or even depreciating). If home price goes down and rent stays the same, RTP goes up! But I don’t think that is a scenario any investor really wants.

Just look at this graph:

1616778055 image­The higher the RTP, or cash flow, the lower the property appreciation is, generally speaking. That doesn’t mean that is always true, but there tends to be a tradeoff between cashflow and appreciation, and it’s something each individual investor needs to balance.

The benefits of cash flow

Now that I’ve thoroughly bashed the 1% rule, I will admit: Cash flow is great. A high RTP is a great signal, and as long as you make sure to thoroughly evaluate every deal, it can be a good way to screen markets.

I took a look and found a handful of markets that do, on average, meet the 1% rule.These markets are hard to come by—only six of the largest 268 markets in the country hit 1% RTP on average.

In the tech world, they call companies that have unusually great performance “unicorns,” which is pretty dumb. Is the implication that like these companies, unicorns are extremely rare? Cause last time I checked unicorns go beyond rarity—they’re nonexistent. But I’m adopting this dumb moniker anyway because, frankly, I think more people will click on it if I do and I want people to read my articles.

Six cash flow unicorns

So, with that, let’s get to these six cash flow unicorns—all of which average above a 1% rent-to-price ratio.

Brownsville, Texas

Brownsville is one of the smaller cities on our list with just under 200,000 residents. Like many cities in Texas, however, the city is growing 0.37% per year, on average, since 2010. Brownsville’s RTP is 1.02% and property appreciation is -1.58% on average in the last decade.

Brownsville does also sport the highest income growth since 2010, at 3% per year. This type of macroeconomic improvement bodes well for a market’s future performance,

Memphis, Tennessee

Memphis has a RTP of 1.04%, with the best appreciation rate for any city on this list. Hpwever, appreciation is still negative on average since 2010, coming in at -0.73%.

Memphis does offer strong cash flow potential. If you purchased a home at the median sale price of approximately $103,000, put 20% down, and paid a property management company, we expect you’d be able to generate more than $4,000 in cash flow in year one.

A lot that is due to Memphis’ low tax rate of just 1.6%—by far the lowest on our list. All told, Memphis could generate a roughly 20% cash-on-cash return

Kansas City, Missouri

In 2020, Kansas City had an RTP of 1.04%. While property prices have been declining since 2010, the city does continue to see strong rent growth, with a 6.6% compound annual growth rate for rents.

Another bright spot for Kansas City is its population growth—a key indicator for future performance. Since 2010 Kansas City has grown on average 0.7% per year. That may not sound like a lot, but many of the other cities on this list have actually seen population declines since 2010. This is a positive indicator for Kansas City’s future rent growth and appreciation.

Baltimore, Maryland

Baltimore is generally a cash-flowing market with an RTP of 1.25%. However, the city does have negative price appreciation—a 3.5% decrease since 2010. But just like many of the other cities on this list, the last year has seen the trend reverse. Sales prices have risen more than 30% year-over-year—but take that with a grain of salt, given COVID-19.

Another positive datapoint for Baltimore: The city has seen income growth average 2.7% per year since 2010. That’s one of the highest marks on our list.

Gary, Indiana

Gary is another perpetual winning in terms of cash-flowing markets. Located on the shores of Lake Michigan, Gary has an RTP of 1.89%. This is coupled with a home price compound annual growth rate (CAGR) of -5% since 2010—meaning homes have been, on average, losing value over the last few years.

That said, Gary is an intriguing market for cash flow investors. If you were to invest in the median home in Gary and put 20% down, you’d need about $9,000 for your down payment—but would produce about between $4,000 and $5,000 in cashflow in year one. That’s a great cash-on-cash return.

Detroit, Michigan

Detroit is the king of cash flow when it comes to broad market-level analysis. The Motor City not only meets the 1% rule, but it also actually has an RTP above 2%! Far and away the best of any city in the United States.

For years the rub against Detroit has been home prices—and that’s fair. Since 2010, home prices in Detroit have averaged a 4.7% decline annually. But things seem to be turning around. Since March of 2020, the median sales price in Detroit has gone up a staggering 37%. This may be artificially high due to all the COVID-induced housing market wonkiness, so keep that in mind.

But one thing remains true—if you’re a pure cash flow investor, Detroit can’t be beat.

All told, these 6 unicorns offer cash flow potential way above the median market in the U.S. (0.54%). But remember, strong cash flow often comes with a tradeoff—appreciation. Here’s how these markets stack up:

1616778868 image

The relationship I showed above holds true. Generally speaking, the higher your cash flow, the lower your appreciation.

Because of these trade-offs, I encourage investors to really look at their total return. How much will you make in terms of appreciation, cash flow, and principal pay down over the lifetime of your investment? Don’t fall in love with any one metric. This can easily be done using the BiggerPockets calculators.

However, if you do have a strong preference for cash flow—I know many investors do—these six cities stand above all the rest. Go check them out and see if you can find a deal that meets your needs and investing philosophy. Make sure to report back!

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.