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The Data is In: These Are the Best Cities for Rental Investing

G. Brian Davis
6 min read
The Data is In: These Are the Best Cities for Rental Investing

How’s the economy in your city? Is it in a growth spurt? Or is it just puttering along?

And how does your city’s economy compare to that of other cities?

A week or two ago, WalletHub released a comprehensive analysis of the economic growth of more than 500 U.S. cities. Experts broke down 15 metrics, weighted them, then ranked cities on their growth.

Pretty useful information for a real estate investor, right?

But if you’re a long-term investor (like me), you’re not just looking for potential appreciation. You’re also looking for cash flow, which means your returns rely on more than just economic growth. After all, it doesn’t make sense to buy a $500,000 property that only rents for $1,000/month, right?

So I decided to take WalletHub’s list and add a few more numbers, to build our own rental-investing crystal ball.

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First, WalletHub’s Numbers (And Where They Came From)

WalletHub examined cities based on 15 metrics, which they split into two categories: Sociodemographics and Jobs & Economy. Each category was given a 50 percent weighting.

Yet the Sociodemographic category only has three metrics, while Jobs & Economy has 12.

Sociodemographics – Total Points: 50

  • Population growth: double weight (~25 points)
  • Working-age (16-64) population growth: full weight (~12.5 points)
  • College-educated population growth: full weight (~12.5 points)

Jobs & Economy – Total Points: 50

  • Job growth: double weight (~3.7 points)
  • Increase in ratio of full-time to part-time jobs: half weight (~1.85 points)
  • Median household income growth: full weight (~3.7 points)
  • Unemployment rate decrease: full weight (~3.7 points)
  • Poverty rate decrease: full weight (~3.7 points)
  • Increase in number of businesses: full weight (~3.7 points)
  • Growth in regional GDP per capita: double weight (~7.41 points)
  • Increase in number of startups: full weight (~3.7 points)
  • Increase in venture capital investment amount: full weight (~3.7 points)
  • Median house price growth: full weight (~3.7 points)
  • Building-permit activity growth: full weight (~3.7 points)
  • Foreclosure rate decrease: full weight (~3.7 points)

If it seems like they’ve weighted the sociodemographic factors much heavier than the economic factors, well, think of it as looking long term. Local GDP will swing quarter to quarter, but population growth (especially among college-educated residents) is a strong predictor of future economic growth.

As for the timeframe for this data, WalletHub looked at trends over the past five years (although some data varied slightly by availability).

You’ll notice that the economic data already includes some real estate metrics: home price growth, building permit growth, and foreclosure rates are all classic measurements of housing market health.

All right, enough talking already! Here are the top 20 cities on the list:

Related: 5 Reasons the Midwest is Hands Down the Best Place to Invest

Price/Rent Ratio

As I mentioned above, strong economic growth isn’t enough to make a market a good long-term rental investment. You still need cash flow!

So, how do property prices compare to rents? What kind of income will my investing dollars buy me?

Enter: price/rent ratio.

It’s an extremely simple calculation:

Purchase Price

__________________________________________

Monthly Rent

For investors, a lower ratio is better—it means that prices are lower and rents are higher.

I can already hear the skeptics starting to grumble. “That’s all well and good, Brian, but there’s a lot more to cash flow than just the mortgage. Price/rent ratio tells me jack (poop) about vacancy rates, rent default rates, evictions, crime, and other factors that determine how a property performs!”

That’s true, of course. In fact, we went into some detail about this when we talked about why the “2% rule” is usually not worth the paper it’s scribbled on.

But WalletHub’s metrics have already been screened for these concerns, at least indirectly. Foreclosure rates are heavily correlated with eviction rates (for obvious reasons). Unemployment and poverty rates are also closely tied to rent defaults and vacancy rates.

And of course population growth (the heaviest weighted factor) and job growth both drive some serious demand for housing. Read: lower vacancy rates.

That’s why these numbers, together, provide a rounded, holistic glimpse into what markets make for good rental investing.

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How Accurate Is This Price/Rent Ratio Data?

The heckler retorts: “OK, wise guy, but price/rent ratio is notoriously inaccurate! In most markets, the kind of properties being rented are very different from the kind of properties being sold!”

Slow your roll there, killer. I have to give a shout out to Zillow, whose housing data rivals the federal government’s (and you can be sure it spends a lot less per datum to acquire it, too).

When Zillow produces its price/rent ratios, it only looks at properties listed for rent. It then takes the Zestimate (Zillow’s home-value estimate) to calculate the ratio.

“But Zestimates aren’t always accurate!”

All right, now you’re just being difficult. Data has to come from somewhere. Jerk.

Strong Economic Growth, Low Housing Prices, High Rents

All right, cut to the chase already! Let’s see some data!

To compare apples to apples, we split the list into large cities (more than 300,000 people), mid-size cities (100,000-300,000), and small cities (under 100,000).

Here are the three lists, ranked based on economic growth:

WH Rank Large Cities WH Score P/R Ratio
1 Austin, TX 59.88 14.06
2 Charlotte, NC 55.45 11.62
3 Denver, CO 54.36 15.82
4 Seattle, WA 52.65 21.25
5 Nashville, TN 51.38 12.26
6 San Jose, CA 50.64 22.22
7 Miami, FL 50.01 12.16
8 Oakland, CA 48.99 18.68
9 San Francisco, CA 48.98 23.51
10 Raleigh, NC 48.87 12.69

 

WH Rank Mid-Sized Cities WH Score P/R Ratio
1 Frisco, TX 76.01 13.49
2 Kent, WA 68.32 14.98
3 Lehigh Acres, FL 67 10.19
4 Midland, TX 62.64 8.18
5 McKinney, TX 62.42 13.06
6 Murfreesboro, TN 58.41 12.51
7 Irvine, CA 58.06 20.07
8 Round Rock, TX 57.87 12.18
9 Cape Coral, FL 57.35 11.57
10 Odessa, TX 57.18 8.01

 

WH Rank Small Cities WH Score P/R Ratio
1 Meridian, ID 62.71 13.34
2 Fort Myers, FL 62.33 10.65
3 Bend, OR 60.96 17.33
4 Pleasanton, CA 59.69 23.87
5 Saint George, UT 58.7 13.61
6 Springdale, AR 56.96 10.11
7 Milpitas, CA 56.28 23.04
8 Boynton Beach, FL 55.67 10.69
9 Redwood City, CA 54.33 27.59
10 Concord, NC 54.11 11.65

Trendspotting

The first trend that pops out is that California, despite having several cities on the list, has some ugly price/rent ratios for investors.

“Shocker! California’s expensive—stop the presses!”

Okay, that’s enough out of you.

But truly, California investors will have a tough time finding good deals in these booming cities.

Another trend that emerges is that the smaller and mid-size cities tend to look better on both economic growth and price/rent ratio.

Check out the tenth-ranked mid-sized city on the list: Odessa, Texas. Its economic growth rating is higher than almost every city on the large city list. Only the best-ranked large city, Austin, has better economic growth than the tenth-ranked mid-sized city.

The same pattern holds true for price/rent ratio. Among the mid-sized cities, only one has a price/ratio above 15 (take a wild guess what state it’s in). But fully half of the large cities on the top 10 list have price/rent ratios above 15.

Remember a few weeks back when we talked about how rents are stumbling in large cities, but going strong in mid-tier cities? Case in point for rental investors!

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Related: 28 Smart Questions to Ask a Broker When Investing in Out-of-State Markets

What Cities Should I Avoid?

There’s always someone who’s into buying homes for $3,000 apiece in Flint, Michigan. And good for them, if they have a system in place to make money and not pull their hair out.

But there’s a word for that kind of investing: niche.

Investing in stagnating cities, or dying cities for that matter, is a recipe for disaster for the average investor. Shrinking economies mean shrinking demand, and it’s hard to make money as a long-term real estate investor in markets with shrinking demand.

Here are the bottom 20 cities on WalletHub’s list, a few of which may surprise you:

 

Side-by-Side Comparisons

Would you like to see the best and the worst listed side-by-side? Perhaps a breakdown of specific metrics, like which cities have the fastest population growth or fastest job growth?

Here’s a quick graphical breakdown from WalletHub:

Best and worst cities for rental investors 2017

Getting Out of Your Backyard

When we teach rental investing to our online students, we encourage them to stick within an hour of home.

Why? Because no one should invest in markets they don’t understand. Plus, it’s hard to learn and understand markets that are far from home.

But what if you live in San Francisco, and you’re more than three hours from the nearest state border? Or perhaps you’re an expert ninja investor, and don’t like the way your home market is shaping up?

That’s where this list comes in handy.

Hopefully, you’ll walk away from this article with 10-15 ideas for new markets to check out. The same rules apply, of course—if you don’t know a market well, you’ll either need to learn it or find a partner who knows it intimately.

But as we talked about in reviewing real estate industry tech trends, more investors are buying properties from a distance, sight-unseen. The world gets smaller every day.

If your market is starting to feel a little stale, maybe it’s time to try a new market where conditions are ripe for rental investors!

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Thinking about trying a new market for investing? Which ones? Have you ever bought properties long-distance? I’d love to hear your thoughts on the lists above!

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