Forbes: The Best Markets For Real Estate Investments in 2019

45 Replies

Hello Everyone!

I saw this article last night and I was wondering how many of you feel the same? They seem to be all over the place, which is probably a good thing! It looks like some of the older investment cities have fallen off the list and some newer ones have joined the list! I am from Cleveland and I am not surprised it made it, but some of these others are news to me! 

Read about it here: The Best Markets For Real Estate Investments In 2019

@Tom Ott   one thing i can tell you at least how it relates to Portlandia those rent figures are for apartments not houses.. 90% of rental units are apartments in most west coast markets.. not houses like you guys have were you live.

so i can see in those markets those rents are pretty accurate for the rental stock many sell.. I am thinking your product is on the high side of that since you deal in the top part of the SFR rental space.. when your not doing apartments.

Originally posted by @Jay Hinrichs :

@Tom Ott  one thing i can tell you at least how it relates to Portlandia those rent figures are for apartments not houses.. 90% of rental units are apartments in most west coast markets.. not houses like you guys have were you live.

so i can see in those markets those rents are pretty accurate for the rental stock many sell.. I am thinking your product is on the high side of that since you deal in the top part of the SFR rental space.. when your not doing apartments.

 Yes. I agree. Our SFRs can rent for around $1,000 (average) but apartments can be around $800 or so. All depends on multiple factors. I  guess that is why it is an average.

A major reason I love Cincinnati's future is that there is so much room for growth in terms rent$/mo. There are many neighborhoods that far surpass this number of $836/mo already.... but as more of the urban core neighborhoods continue to undergo development/gentrification/residential growth..... I can easily see this number being closer to $1000/mo in the next 5-10 years. 

I am very interested in Jacksonville's stats.  I live in Orlando, but I am familiar with Jacksonville and wouldn't mind investing there.  Seeing this and talking to a few agents from the area are good signs I hope!  Thanks for sharing this!

@Tom Ott I appreciate the information on Jacksonville, where I live and invest. I do agree that job growth is good and we have an unemployment rate lower than the national average, but that's good and bad. Instead of having a "talent pool", we have a talent puddle, its hard and getting harder to find good people for work. 

I do not believe home prices will appreciate 10% this year as they did in 2018. I think we will see a more normal 3-5%. There are so many more homes on the market in 2019 than this same time in 2018. Rates rising, and uncertainty in DC, makes for a lot of people not willing to make the change. The average sales price in Jacksonville is actually $258,000 with the median more like $216,000. Still a great place for the starter home market. 

All real estate is local and that's true of Jacksonville. The homes $150,000 and under are in HUGE demand, probably to satisfy the need of building rentals. The Days on Market are increasing for those above $150,000. Homes sitting longer, people unable to push the market. Too many people believe that the Refi value should be the sale value, its just not the case. 

Anyhow, for the actual #Jacksonville numbers, I'd welcome you to look at the NEFAR MLS data. Its published around the middle of each month for the previous month. I think that if you can get 1% of the sale price for the rent, you should be in good shape. Best of luck with your investing! - Jack 

Glad to see Minneapolis on this list! Homes are still relatively affordable and we have high rents.

@Tom Ott . Buying rentals in Raleigh is going to be tough because of how high the market is. They really only look at job growth and economic data not things like price to rent ratio

What does 'best' mean?

Let me do a quick analysis on a $295,000 house or apartment in Raleigh with a rental price of $1,116.

First, consider taxes as a percentage of gross rent. In Raleigh, the combined tax rate is 1.0926 of assessed value. Per Wake county tax page, 'Wake County performs reappraisals on a four-year cycle. The most recent reappraisal in Wake County was effective as of January 1, 2016.' So I will use 80% (the approximate average improvement part) of $295,000 as the assessed value basis which results in a roughly $2,600 (some fees added per WC.) That's $217 per month, or 19% of gross rent. Calculate in a few (2) % for vacancy, and management fees of 6% (I know, maybe a little low) and we're down to ...

$1,116 - $217 - $89 = $810.

If an investor considers leverage at 80%, with current rates of 5% and $236,000 borrowed, per Interest.com you will be paying more than $810 per month in interest payments for almost a decade.

So, shelling out $59,000 (the 20% down) results in a negative return, from an operational standpoint, most likely for years to come until rent prices improve to get your investment to break even. Likewise cashflow will be negative. The silver lining may be that the taxable loss may offset other income but in many scenarios, the offset is limited. What I see from the article is 'best' must mean future appreciation more than cash flow or positive net income.

Note that I've not included potentially significant expense line items (repairs, etc.) or reserve set-asides so the numbers are actually worse than what I've presented. 

If this is the 'best' I'd hate to see the worst. The example above, using the numbers from the article, is an investment I would not make and I would not recommend to any of my investment partners/members. But that's just me. 

Also note the author states: "I’d have no trouble investing in any of these markets (although I’m not an investor)..." Take that for what it's worth. 

I LOVE living in Raleigh but we are an expensive market comparable to Denver or other areas above our weight class/size. 

Houses in Raleigh have appreciated a lot in the past 3-5 years.  But because the rents have not kept up, it's almost impossible to find a deal that meets the 1% rule anymore.  

"Appreciation makes you rich," but I can't afford to keep buying rental houses here with minimal cash flow, as I can't (quickly and easily) use this appreciation to weather a vacancy/eviction/repair.

@Chris Martin you have to pick between cash flow and appreciation, generally. I know there’s some level of speculation with appreciation. I think going to the surrounding areas of the triangle would give you a good combination of both. Of course, no investment is completely risk free.

@Tom Ott I have a hard time believing this study since in raleigh, houses in the low 200k rent for $1,300 to 1,500. so I do not believe their numbers. having said that, raleigh is getting difficult to find deals that provide positive numbers. the market had increased significantly in the last 2 years or so. looks like they simply took average numbers and did not put any real work into the analysis.
Originally posted by @Chris Martin :

What does 'best' mean?

Let me do a quick analysis on a $295,000 house or apartment in Raleigh with a rental price of $1,116.

First, consider taxes as a percentage of gross rent. In Raleigh, the combined tax rate is 1.0926 of assessed value. Per Wake county tax page, 'Wake County performs reappraisals on a four-year cycle. The most recent reappraisal in Wake County was effective as of January 1, 2016.' So I will use 80% (the approximate average improvement part) of $295,000 as the assessed value basis which results in a roughly $2,600 (some fees added per WC.) That's $217 per month, or 19% of gross rent. Calculate in a few (2) % for vacancy, and management fees of 6% (I know, maybe a little low) and we're down to ...

$1,116 - $217 - $89 = $810.

If an investor considers leverage at 80%, with current rates of 5% and $236,000 borrowed, per Interest.com you will be paying more than $810 per month in interest payments for almost a decade.

So, shelling out $59,000 (the 20% down) results in a negative return, from an operational standpoint, most likely for years to come until rent prices improve to get your investment to break even. Likewise cashflow will be negative. The silver lining may be that the taxable loss may offset other income but in many scenarios, the offset is limited. What I see from the article is 'best' must mean future appreciation more than cash flow or positive net income.

Note that I've not included potentially significant expense line items (repairs, etc.) or reserve set-asides so the numbers are actually worse than what I've presented. 

If this is the 'best' I'd hate to see the worst. The example above, using the numbers from the article, is an investment I would not make and I would not recommend to any of my investment partners/members. But that's just me. 

Also note the author states: "I’d have no trouble investing in any of these markets (although I’m not an investor)..." Take that for what it's worth. 

You're operating under the assumption that the average property sold is equivalent to the average property rented. That probably isn't the case. Rental properties are skewed to the low end, and little of the very high priced stuff that sells is put up for rent.

Originally posted by @Curtis Mears :
@Tom Ott I have a hard time believing this study since in raleigh, houses in the low 200k rent for $1,300 to 1,500. so I do not believe their numbers. having said that, raleigh is getting difficult to find deals that provide positive numbers. the market had increased significantly in the last 2 years or so. looks like they simply took average numbers and did not put any real work into the analysis.

 The "average house" sold is not generally equivalent to the "average house" rented. Rental properties are skewed to the low end. Putting the "average sale price" column next to "average rental price" does not necessarily imply that the average house sold would rent for this price. They are two different data sets.

Originally posted by @Jeff Cagle :
Originally posted by @Chris Martin:

What does 'best' mean?

Let me do a quick analysis on a $295,000 house or apartment in Raleigh with a rental price of $1,116.

First, consider taxes as a percentage of gross rent. In Raleigh, the combined tax rate is 1.0926 of assessed value. Per Wake county tax page, 'Wake County performs reappraisals on a four-year cycle. The most recent reappraisal in Wake County was effective as of January 1, 2016.' So I will use 80% (the approximate average improvement part) of $295,000 as the assessed value basis which results in a roughly $2,600 (some fees added per WC.) That's $217 per month, or 19% of gross rent. Calculate in a few (2) % for vacancy, and management fees of 6% (I know, maybe a little low) and we're down to ...

$1,116 - $217 - $89 = $810.

If an investor considers leverage at 80%, with current rates of 5% and $236,000 borrowed, per Interest.com you will be paying more than $810 per month in interest payments for almost a decade.

So, shelling out $59,000 (the 20% down) results in a negative return, from an operational standpoint, most likely for years to come until rent prices improve to get your investment to break even. Likewise cashflow will be negative. The silver lining may be that the taxable loss may offset other income but in many scenarios, the offset is limited. What I see from the article is 'best' must mean future appreciation more than cash flow or positive net income.

Note that I've not included potentially significant expense line items (repairs, etc.) or reserve set-asides so the numbers are actually worse than what I've presented. 

If this is the 'best' I'd hate to see the worst. The example above, using the numbers from the article, is an investment I would not make and I would not recommend to any of my investment partners/members. But that's just me. 

Also note the author states: "I’d have no trouble investing in any of these markets (although I’m not an investor)..." Take that for what it's worth. 

You're operating under the assumption that the average property sold is equivalent to the average property rented. That probably isn't the case. Rental properties are skewed to the low end, and little of the very high priced stuff that sells is put up for rent.

Your observation is interesting. First, the article's author is a non-investor and why I started the post with the question 'What does 'best' mean?'

Your statement "You're operating under the assumption that the average property sold is equivalent to the average property rented" is false. The "average" sale, based on Wake county November sales of 2,570 properties, consists of 31% new construction and 69% 'existing' (not new construction) properties. New construction properties sold under $300K were 24% of all new home sales whereas existing properties sold under $300K were 62% of all existing home sales. These numbers and ratios aren't out of line with recent historical sales numbers over the past few years. So my operating assumption is that investors place into service existing home stock and acquisition price is under $300K.

I don't know what data sets you use, but I will use what I know. I am looking at the financial summary of the largest landlord in the Raleigh area. The company has 2,043 SFR classified as 'Raleigh' in my data set, purchased from 2012 through 2017. The Average Gross Book Value per Property is $181,619 with 19% of basis for land and 81% for depreciable improvements. The average square footage is 1,872 and the average age is 13.1 years old. The Average Contractual Monthly Rent Per Property is $1,453.

If we analyze the Book Value number ($181,619) and look at current valuation (as in a hypothetical 2019 acquisition), are the article's numbers that far off? Has Raleigh appreciated 62% on average for a ~$200K property purchased 5 or so years ago? Seems kind of high, but that segment of the market has been the 'sweet spot' for a while. So I contend the $295K number is plausible for a rental property like what American Homes 4 Rent bought, which is existing housing stock under $300K.

So I respectfully disagree with your statement telling me what my operating assumptions are. I stand by my conclusion in my prior post. 

https://www.sec.gov/Archives/edgar/data/1562401/000156240118000029/amh12311710k.htm
https://www.sec.gov/Archives/edgar/data/1562401/000156240118000029/amh12311710k.htm
http://www.wakegov.com/tax/statistics/Pages/residentialsales.aspx

Originally posted by @Asif Aman :

@Chris Martin you have to pick between cash flow and appreciation, generally. I know there’s some level of speculation with appreciation. I think going to the surrounding areas of the triangle would give you a good combination of both. Of course, no investment is completely risk free.

I can agree with the last two sentences, but want to comment on the first. 

No, I don't have to pick between cash flow and appreciation. I choose both (or an opportunity to achieve both) or I don't play. In my first post, I explained why the 'average' Raleigh investment (using numbers provided in the article, written by a non-investor) is not an opportunity worth pursuing for me. Others may be happy paying money for an investment that may or may not appreciate in value. I'll pass. 

Rant = on {
Directed at anyone = No.

The 'paying money for an investment that may or may not appreciate in value' phenomenon, referred to as "feeding the alligator" many decades ago, is not unique to real estate. I know small business owners who have revenue streams that just don't work out. When a chosen investment is financially marginal or the business premise is weak, or when a decision maker has limited experience (or limited competence) and builds faulty financial projections, it's time to cut losses. On occasion an outsider, a mentor or new partner for instance, can quickly see problems and salvage a project/investment/whatever you want to call it. Diworsification is what it is. 

So to conclude, diluting a real estate portfolio with negative cash flow property by design makes no sense to me.
}

@Chris Martin

That sure was a lot of words, but it doesn’t change fact that rental property investors simply do not buy an evenly distributed selection of properties across the full price spectrum and put them into service. They’re generally heavily skewed toward the lower end. The average home sold is not the average home rented in any given market. Period.

@Chris Martin

Looking at a map of Raleigh right now with the last 6 months of sales prices overlaid with what’s currently offered for rent reveals that properties renting in the $1300-1400 range are in areas selling at around $200k or less. There’s a whole neighborhood of new construction that sold in the 150’s-170’s in that time frame and are many are rented / for rent at 1300-1400 currently.

IMO Forbes is the best among financial/business news sources and the only financial periodical I subscribe to (15 years and counting).

However, I do question their assessment and recommendations here. 

Perhaps Forbes should've just sent a survey out for opinions from their Forbes 400 list since many of them are RE investors and arguably all of them should have some state/national macroeconomic awareness.

Perhaps an illustration is worth a thousand words. This is Raleigh. Yellows are sales in the last 6 months. Purples are rentals. I'm not seeing the $295,000 properties renting at $1100 a month. That's because the average sold property and the average rental property are two entirely different things. Misunderstanding the Forbes data may have some believing that there's no return to be made in these markets. That just isn't the case. I see a lot of properties hitting nearly the 1% rule in Raleigh, even some new construction. That's pretty incredible. Click the images to expand them.. the preview is just too small.

Originally posted by @Jeff Cagle :

Perhaps an illustration is worth a thousand words. This is Raleigh. Yellows are sales in the last 6 months. Purples are rentals. I'm not seeing the $295,000 properties renting at $1100 a month. That's because the average sold property and the average rental property are two entirely different things. Misunderstanding the Forbes data may have some believing that there's no return to be made in these markets. That just isn't the case. I see a lot of properties hitting nearly the 1% rule in Raleigh, even some new construction. That's pretty incredible. Click the images to expand them.. the preview is just too small.

 It's true that you can't really compare average price to average rent.  However, you are doing a similar apples to oranges comparison, but for a particular section of town.  Those familiar with the local market ( @Chris Martin , for example) know that, in reality, it is extremely difficult to find properties that hit the 1% rule in Raleigh - at least for properties outside of war zones.  Find one that gets 0.75% and you do well.  That $295K will probably rent for 2-2.1K.  

BTW, South-East Raleigh, the area you picked for your example is generally pretty rough and far from the "preferred part of town"

Originally posted by @Andrew S. :
Originally posted by @Jeff Cagle:

Perhaps an illustration is worth a thousand words. This is Raleigh. Yellows are sales in the last 6 months. Purples are rentals. I'm not seeing the $295,000 properties renting at $1100 a month. That's because the average sold property and the average rental property are two entirely different things. Misunderstanding the Forbes data may have some believing that there's no return to be made in these markets. That just isn't the case. I see a lot of properties hitting nearly the 1% rule in Raleigh, even some new construction. That's pretty incredible. Click the images to expand them.. the preview is just too small.

 It's true that you can't really compare average price to average rent.  However, you are doing a similar apples to oranges comparison, but for a particular section of town.  Those familiar with the local market ( @Chris Martin , for example) know that, in reality, it is extremely difficult to find properties that hit the 1% rule in Raleigh - at least for properties outside of war zones.  Find one that gets 0.75% and you do well.  That $295K will probably rent for 2-2.1K.  

BTW, South-East Raleigh, the area you picked for your example is generally pretty rough and far from the "preferred part of town"

 Sure, but that's where the rentals are. I did see whole neighborhoods of $500k-$600k houses too. Guess what? None for rent. By the way, if your example of a $295k house renting for $2000-$2100 his correct, then the Forbes numbers are off by nearly 100% if you conflate the average home sales price to average rent. Thank you for proving my point.

Originally posted by @Jeff Cagle :
Originally posted by @Andrew S.:
Originally posted by @Jeff Cagle:

Perhaps an illustration is worth a thousand words. This is Raleigh. Yellows are sales in the last 6 months. Purples are rentals. I'm not seeing the $295,000 properties renting at $1100 a month. That's because the average sold property and the average rental property are two entirely different things. Misunderstanding the Forbes data may have some believing that there's no return to be made in these markets. That just isn't the case. I see a lot of properties hitting nearly the 1% rule in Raleigh, even some new construction. That's pretty incredible. Click the images to expand them.. the preview is just too small.

 It's true that you can't really compare average price to average rent.  However, you are doing a similar apples to oranges comparison, but for a particular section of town.  Those familiar with the local market ( @Chris Martin , for example) know that, in reality, it is extremely difficult to find properties that hit the 1% rule in Raleigh - at least for properties outside of war zones.  Find one that gets 0.75% and you do well.  That $295K will probably rent for 2-2.1K.  

BTW, South-East Raleigh, the area you picked for your example is generally pretty rough and far from the "preferred part of town"

 Sure, but that's where the rentals are. I did see whole neighborhoods of $500k-$600k houses too. Guess what? None for rent. By the way, if your example of a $295k house renting for $2000-$2100 his correct, then the Forbes numbers are off by nearly 100% if you conflate the average home sales price to average rent. Thank you for proving my point.

I think you misunderstood me.  Your point is correct that Forbes is wrong in using the two averages to draw their conclusions.  I think pretty much everyone in this thread agrees with that.

I just meant to give a REAL number of a rent that you can reasonably expect for that $295K house as an illustration of what the market in Raleigh looks like.  Realistically, you will be fortunate to achieve the "0.75% rule" for any rental in a decent to good part of town.  Yes, there may be the occasional exception where you find a better deal, but that will be rare and competition will be fierce.  I wanted to offer this fact as a counterpoint to your claim implying that "1% rule properties" are abundant in Raleigh.  They are NOT (at least not in areas of town where most people prefer their rental properties).

Regarding, "sorry, but that's where the rentals are":  well, I guess that's where many of the AVAILABLE rentals are.  None of mine are there... 

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