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Investor’s Dilemma: Finding Cash Flow in the United States

Investor’s Dilemma: Finding Cash Flow in the United States

3 min read
Dave Meyer
Dave Meyer is a real estate investor and the VP of Data & Analytics at BiggerPockets. Follow him @thedatadeli.

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If you’re frustrated trying to find a rental property investment that generates solid cash flow, you’re not alone. Properties that cash flow are hard to find right now! But don’t worry, we’ve put together an interactive map that can help you select a market where rental property investors can earn excellent cash flow. But before we get to the (very cool) map, let’s talk about the state of cash-flowing real estate investments in 2021.

Trending data

On one hand, good things are happening for cash flow. Rent is actually growing at a fast rate right now! According to recent data from Zillow, the median rent price in the U.S. rose was up by over 11% year-over-year, as of August 2021. This is huge! For context, in a typical year, the average rent nationally only goes up by 2% to 4%.

This trend bodes really well for existing rental property owners, who have already locked in their mortgages and are now hopefully seeing improved cash flow. It’s also important to note that despite inflation posting ugly numbers around 5% recently, rent growth is nearly doubling that number. So investors who already own some rental property are increasing cash flow in real (inflation-adjusted) dollars. This is welcomed news for any existing rental property investors.

But that’s where the party ends. For investors who want to land their first deal or expand their portfolio, it can feel almost impossible to find solid cash flow. And this is not imagined! The data says it’s actually much harder to find cash flow now than it has been since 2011.

The cause is simple: Even though rents are rising, housing prices are rising even faster. According to the same Zillow data, the median home price has risen nearly 18% year-over-year. As home prices rise, so do an investor’s expenses, because for almost all investors their mortgage is their single biggest expense. When mortgage payment growth outpaces rent growth, that makes for a difficult climate to generate cash flow.

It’s easy to want to blame the pandemic for this phenomenon, but this trend really started way back in 2011. To measure the cash flow prospects of any investing market, I like to first look at the rent-to-price ratio (RTP) of that market. RTP compares the median monthly rent of a market to the median home price of that market, and this metric is closely correlated (.86) to cash flow. Basically, when RTP goes up, so do cash flow prospects. When RTP goes down, so do cash flow prospects.

Rent to Price Ratio

As you can see from the chart above, RTP has been steadily declining since 2011. The cause, again, is because home price growth has exceeded rent price growth over that time period. Of course, that is not true in every market, this is a simple look at national-level trends.

 

What action you can take

But despite these frustrating trends, there is still hope. There are many good markets that produce strong cash flow for rental property investors. Which ones you might ask? Well, check out our brand new interactive RTP map below and see for yourself.  We have data from almost all zip codes in the United States. The greener the color the better the cash flow prospects. And remember if the RTP is above 1% you’ve found an excellent market (this is the 1% rule after all). But as I’ve shown in some other recent analyses, any market or zip code that has an RTP of .7 or above warrants consideration. Remember, these are just averages. By rule, that means there are deals in that market that are both better and worse than the average. It’s your job as the investor to find a great deal.

So get in there and see if you can find a great market that produces strong cashflow prospects for rental property investors. You can zoom in and pan around to find a market that interests you. Have fun exploring and I’d love to hear which markets you’re interested in in the comments below.

Also! This is one of the first times we’re posting something with interactive data into our content, so we’d love to hear your feedback in the comments. Is this useful? What other data would you like to see? What can we do better? Let us know!