Which cities in the US have the best rental properties?

50 Replies

Hello, 

My name is Dan and I'm new to Bigger Pockets and to real estate investing. There aren't many great deals in my area so I'm thinking about investing out-of-state and using a property manager. Where in the US can I get the highest possible cap rates for single family homes (preferably 3/2/2) without having to buy in bad neighborhoods that would have a lot of evictions/vacancies and other headaches? CBS is a must-have (no wood frames). Also, I would rather have a high cap rate than high appreciation on the properties. To me, appreciation is too speculative to give up cap rate for. I am willing to buy single family homes pretty much anywhere in the US as long as the cap rates are high, the construction is CBS, the neighborhood is decent (low crime/safe) with reliable tenants willing to live there, and the properties can be managed by a good, local property manager. Any suggestions as to which cities/zip codes can give me all this with the highest possible cap rates? 

Thanks! 

Dan

You should consider Kansas City. Great property prices and good ROI. Is definitely a good growth city with a lot of potential for holding property. Feel free to give me a shout! Always like to help if I can.

I forgot to include that I don't want to buy houses anywhere that has state/city income tax and I also don't want to buy in an area that is totally reliant on one company or one industry, such as a town where almost everyone works at a single manufacturing plant or a town that relies on a single industry such as oil.  Places like that have an extra element of risk, I believe.

I'm looking for CBS because  one thing I don't want to ever have to worry about is the basic structure of the house.  

Thanks!

Originally posted by @Jason Hawk :

You should consider Kansas City. Great property prices and good ROI. Is definitely a good growth city with a lot of potential for holding property. Feel free to give me a shout! Always like to help if I can.

 Thanks Jason.  Kansas City, Kansas, or Kansas City, Missouri?  What kind of cap rates could I expect to make there?

Dan,

Do some research on Omaha, NE and the surrounding areas including Bellevue, La Vista, Ralston and Papillion. I think you may like what you find in the area. 

I recommend revitalizing cities along the Rust Belt (except Detroit).  Consider Buffalo, NY; Cleveland, OH; or Columbus, OH.  These cities will offer healthy cash flow returns on SHF and multis.  I've seen many Turnkey offerings on the BP Investor Marketplace for rentals in Cleveland, OH.  Don't be afraid of these cities! 

Are you including a possible deflation in the house value in your calculations?

Some of the high caps are in areas that also experience high value swings when housing gets challenged.  

Originally posted by @Jay Hinrichs :

@Dan G.  Orlando  fits the bill for you I believe.. CBS  high cap rates large mutli dimensional city No income tax and something you can probably drive to in a realativily reasonable time frame

 Thanks Jay. My concern with Orlando is that the area is known for having a lot of sinkholes, which are relatively rare but still do happen. And I would also be worried that the next time we have a big economic recession or depression, it could affect tourism in Orlando which in turn could affect employment and lead to evictions and vacancies. 

Originally posted by @Len Grosso :

Are you including a possible deflation in the house value in your calculations?

Some of the high caps are in areas that also experience high value swings when housing gets challenged.  

 No, I wasn't taking that into account. How do I add that to my calculations? I'm not familiar with the particular areas that are prone to depreciation. 

Thanks! 

@Dan G.   good luck... sounds like you have a pretty high bar to get across.

sinkhole is  an insured loss  FYI I have funded well over 150 deals In Orlando last 3 years never lost a one.. but in reading our insurance policies if one got swallowed up then the insurance company owns it.

there is no Utopia in rental house investing.. High cap rate areas are basically interchangeable the socio demographics at play create these areas and they are the same all over the country.  I would venture to guess you probably don't really have a clue as to how intense it is to manage HIGH cap rate properties if your the nervous type might not be a fit for you...

Hi Jay,

I researched the sinkhole insurance and my understanding is that it only covers catastrophic loss - damage so severe that the government has declared the house to be uninhabitable. Any sinkhole damage short of that would have to be fixed out of pocket. 

I do understand that high cap rate properties have more headaches but I was planning on having everything managed by a property manager. 

Yes, I am the nervous type - I believe in Murphy's Law and I want to take as little risk as possible. Every area has pluses and minuses but I am looking for a sweet-spot where the risks are relatively low for the ROI I would be getting.

Thanks, 

Dan

@Dan G.

Have you looked into the Chicago area? I know you see Chicago on the news every night and most people associate the area with high crime. However, there are some decent South Suburbs where you can get a great cap rate/cashflow. It all depends on what you consider a "bad neighborhood."  Most of the areas I own in, I would feel comfortable living. 

One thing you'll like is that you can find brick construction everywhere, as brick bungalows are a staple out there. In general I also prefer the brick/cement block structure over the wood frame, but I think we have different reasons. 

I agree with Jay, there is no utopia in rental investing. If you are worried about sinkholes, you may have a tough time becoming a passive or out-of-state investor. 

Originally posted by @Jay Hinrichs :

@Dan G.   good luck... sounds like you have a pretty high bar to get across.

sinkhole is  an insured loss  FYI I have funded well over 150 deals In Orlando last 3 years never lost a one.. but in reading our insurance policies if one got swallowed up then the insurance company owns it.

there is no Utopia in rental house investing.. High cap rate areas are basically interchangeable the socio demographics at play create these areas and they are the same all over the country.  I would venture to guess you probably don't really have a clue as to how intense it is to manage HIGH cap rate properties if your the nervous type might not be a fit for you...

Agree with @Jay Hinrichs. My experience too has been that you get what you work for. High cap rates means you put in more more in management or you put in the work to turn a distressed property around. Sometimes, you may get lucky and buy a high cap rate property that no one wants, but t is rare. In Texas, one of the largest challenge in CRE is the high property tax rates that is killing investors. Often, investors exit when they cannot keep up with such expenses as taxes and mortgage plus the inability to attract income through getting tenants. Currently, true corporate NNN leases have rock bottom low cap rates (4-5%), but are maintainence free till the tenant decides not to renew lease. Remember those big box Blockbusters and K Marts?

@Dan G. Personally I think you're being short sighted on your criteria of only CBS construction and states with no income taxes. There are only 7 states with no income tax. TX is one of them but Dallas and Houston have comparatively low ROI's because of high property taxes and insurance rates. You need to look at the full picture. As far as CBS construction, I can see where that makes sense in markets like Fl and others prone to hurricanes and wood destroying pests. There are lots of 100 year old plus wood frame houses that are structurally sound. I think you'll have a hard time finding good opportunities if you limit yourself to only CBS in 7 states. If you broaden your criteria, you can get good cash flow in Indianapolis and Kansas City.

Originally posted by @Mike D'Arrigo :

@Dan G. Personally I think you're being short sighted on your criteria of only CBS construction and states with no income taxes. There are only 7 states with no income tax. TX is one of them but Dallas and Houston have comparatively low ROI's because of high property taxes and insurance rates. You need to look at the full picture. As far as CBS construction, I can see where that makes sense in markets like Fl and others prone to hurricanes and wood destroying pests. There are lots of 100 year old plus wood frame houses that are structurally sound. I think you'll have a hard time finding good opportunities if you limit yourself to only CBS in 7 states. If you broaden your criteria, you can get good cash flow in Indianapolis and Kansas City.

 I'm open-minded.  My only concern about that is in regards to minimizing risk, so if buying wood-framed houses in certain areas doesn't present extra risk, then I'm game!  When you say Kansas City, are you referring to Kansas or Missouri?  

Also, I've heard that some states will allow you to get around the taxes if you form an LLC, so if that's the case, then states like that would definitely work.

@Dan G.   I will take another swing at this... how about Las Vegas... very low maintenance in a desert environment ... no tax's  .... and industry that will never die at least not in vegas.. other areas but not there.   you can get a lot of low end rentals there... and there probably is block construction as well...

Originally posted by @Jay Hinrichs :

@Dan G.  I will take another swing at this... how about Las Vegas... very low maintenance in a desert environment ... no tax's  .... and industry that will never die at least not in vegas.. other areas but not there.   you can get a lot of low end rentals there... and there probably is block construction as well...

 I am not super-knowledgeable about this stuff, but my concern with Las Vegas is similar to my concern with Orlando - these areas rely heavily on tourism, so in the event of a severe economic downturn in the future that greatly reduces tourism, I could take a huge hit with vacancies and declining demand.  I understand that in an economic recession or depression, rental properties all over the US can be affected, but my sense is that the first thing people cut from their budget in bad times is vacations, so Orlando and Las Vegas may be more sensitive to severe economic downturns than other areas since their economies appear to rely very heavily on tourism.  I am looking to minimize my risk, so this is a big concern.  Am I off-base on this issue?

@Dan G.

No, you aren't off base and I wouldn't recommend Las Vegas for someone who is looking to buy cash flowing 3/2/2 in A/B neighborhoods. Most investors interested in these properties are after the appreciation. 

Las Vegas does have a large pool of renters though, due to the nature of the majority of jobs. If you're interested in the B/C range, you'll get reasonable Cap Rates and finding tenants hasn't been an issue.

Based on your original post (wanting cash flow and not caring about appreciation), the mid west is going to be the place for you to go. You'll be able to squeeze the most out of your money, but when you sell, the homes will likely be worth less what you paid for them. 

-Christopher

@Dan G.  I feel like rental demand in general gets slightly stronger during an economic downturn.  At least thats what I saw in 09, 10 and 11... in my market at least.   I felt like vegas and orlando rentals did just fine across that time period.  Investors that bought rentals during that time frame in those markets and phoenix (and few other markets) just killed it.  

Do you mean more sever than 08 downturn?    

Originally posted by @Christopher Brainard :

@Dan G.

No, you aren't off base and I wouldn't recommend Las Vegas for someone who is looking to buy cash flowing 3/2/2 in A/B neighborhoods. Most investors interested in these properties are after the appreciation. 

Las Vegas does have a large pool of renters though, due to the nature of the majority of jobs. If you're interested in the B/C range, you'll get reasonable Cap Rates and finding tenants hasn't been an issue.

Based on your original post (wanting cash flow and not caring about appreciation), the mid west is going to be the place for you to go. You'll be able to squeeze the most out of your money, but when you sell, the homes will likely be worth less what you paid for them. 

-Christopher

 Thanks Christopher.  Do you think being in an area where houses do not appreciate or even depreciate will hurt my cash flow in the long run, even if my plan is to buy-and-hold?  I'm concerned that if the houses never appreciate, then I will never be able to raise rents long-term.  One thing that I should probably be concerned with is the ability to gradually raise rents (such as by 3% per year) to keep up with inflation.  That way, if I am making $100K/year in net rental income today, 20 years from now, I'll be taking in $200K (or whatever it comes out to after 3% compounded increases each year).  If I'm making $100K/year in net income with high cap rate properties in the Midwest, will I be stuck making the same $100K/year 20 years from now, despite the fact that inflation has doubled the cost of everything I am buying?  $100K 20 years from now may only be worth around $50K in today's dollars, or less.  Or can I still increase rents by 3% each year in the Midwest, even if the properties don't appreciate or even depreciate?

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