Welcome to the newest feature of BPInsights—Markets of the Month. Each month, I will discuss the markets I find the most interesting across the country. We’ll be looking at cities of all sizes and a variety of different metrics that help compare markets to one another. I am going to take a holistic look at markets using a variety of metrics, so I can share some under-the-radar markets that show investing potential. The point is to give our BPInsights subscribers potentially promising locales to explore before they become common knowledge.

Please keep in mind that these are the recommendations of one humble real estate investor and data enthusiast. That said, as one of the leaders of BPInsights and an investor with 10 years’ experience, I am confident in my analyses, and I believe I can help our Pro and Premium members identify strong markets. What you do with this information is up to you! I’m hoping to point you towards interesting opportunities, but you still have to do the work of finding a deal, analyzing it, and making sure the numbers work for you.

This month (and likely for the first few months), we’ll be focusing on traditional buy-and-hold markets. In future iterations, I hope to discuss markets conducive to short-term rentals, the BRRRR method, and flipping as well.

Rental Metrics

Because this is the first installment of this segment of BPInsights, I want to quickly discuss a few of the metrics I’ll be using and explain why they’re useful.

Rent-to-Price Ratio (RTP)

The amount of rent generated (monthly) divided by the purchase price.

As an example, if you get $1,000 per month in rent and you purchased the property for $100,000, then your rent-to-price ratio would be 1%.

This is a great way to evaluate markets, as it approximates cash flow. But note, this is a high-level metric (as are all the metrics in this article), meaning it helps you target markets, but not pick individual deals. In order to find a deal within a market, you need to do further research to understand expenses like taxes, insurance, maintenance, vacancy, utilities, and more.

Rent-to-Income Ratio (RTI)

The amount of income tenants put towards rent, on average.

To calculate this, you divide annual rent by the median income in the market. As an example, if the you make $12,000 per year in rent and the median income in your market is $36,000, the rent-to-income ratio is 33%. Generally, budgeting and personal finance experts recommend renters spend around 30% of their incomes on rent.

This metric is helpful in two ways. First, it helps you understand how stable the rental market is. A market where tenants are paying 40-50% of their incomes is a bad situation for everyone. It stretches your tenants’ budget beyond reason and prevents them from spending their money elsewhere in the community, lowering the economic prospects for the whole market. Secondly, it shows you how much room rent has to grow. If you have a 20% RTI, you have room to grow. If you have a 40% RTI, rent is unlikely to go up much more or is already overpriced.

Housing Price Appreciation (Housing CAGR)

The average amount of appreciation per year.

For this study, we’re going to use Compound Annual Growth Rate (CAGR) to ensure we account for compounding effects when examining appreciation.

This is important because appreciation is great! If your home appreciates, you’re building equity in your property and increasing your return.

Rent Appreciation (Rent CAGR)

The average amount rent grows per year.

For this study, we’re going to use Compound Annual Growth Rate (CAGR) to ensure we account for compounding effects when examining appreciation.

This is important because rent growth can help improve cash flows and overall returns for buy-and-hold investors.

Population Growth

How much has the population of a given market grown?

Why do we care about this? Because of the good, old-fashioned concept of supply and demand! If more people are moving to a market than are leaving, that drives up demand for housing. More demand is good for investors.

Dave’s 6 Markets for June 2020

Gary, Indiana

Gary, Indiana is a city of roughly 75,000 residents located on the Southern shore of Lake Michigan. A Midwest steel town hit hard economically in the latter half of the 20^th century, Gary is seeing a bit of a comeback. Just a few weeks ago, Alliance Steele announced a relocation of its headquarters to Gary.

Gary is just a 35-minute drive to downtown Chicago, making it a low-price market for people who work in and want to enjoy Chicago. With a median sale price of $39,700, Gary is the least expensive market on this month’s list. Even with that low entry point, Gary has averaged 3% appreciation since 2010—not stellar, but heading in the right direction.

Despite the low entry point for purchases, the median rent is $800, good for a rent-to-price ratio of 2%, by far the best RTP I’ve seen in a while. Rent has grown an average of 2% per year since 2010.

The median income in Gary is just over $30,000, making the rent-to-income ratio 32%—a bit high, but nothing overly concerning.

My primary concern about Gary is the population decline of 7% since 2010. It’s not a crazy decline in population, but certainly something you’d want to see moving in the other direction. Continued population declines can lead to decreases in both housing prices and rents.

Overall, Gary has the strongest cash flow income of all markets on this list. Modest yet positive appreciation rates for both home prices and rent make Gary a relatively stable market for investors, especially if companies continue to invest in the market and bring new jobs to the city.

Camden, New Jersey

Camden is a city of about 74,000 residents, directly across the Delaware River from Philadelphia. As of July 2019, Camden boasted its lowest unemployment rate in the city’s history. In fact, in 2017 the Bureau of Labor Statistics cited Camden as having the fastest growing employment rate in the country.

The median home price in Camden is just under $63,000, with a median rent of $1,075, giving the city an RTP of 1.7%—an excellent ratio and certainly one of the highest in the nation.

While home prices have appreciated at a steady 5% since 2010, rents have actually dropped about 1% per year since 2010. Combined with an RTI of 48%, there are signs that rent prices are too high. Having tenants paying 48% of their income to rent is not a good situation for anyone. Still, with such a great RTP, rent does not need to grow—and could even decline further—and continue to deliver elite cash flows.

With population declining 5% since 2010, it is possible that rents will continue to decline due to a decrease in demand. But overall, Camden strikes me as market worthy of consideration. With strong job growth over the last several years and rock-solid cash flow prospects, it could make for a great long-term investment.

Dearborn, Michigan

Dearborn is a suburb of Detroit—one of the most polarizing cities for real estate investors. It’s a large city in its own right with nearly 100,000 residents (but has shrunk by 4.5% since 2010). The median home price is $143,500, up from $66,000 in 2010, good for an excellent 8% home price CAGR (the best on this list).

Rent has grown from $1,040 in 2010 to $1,300 in 2018, good for a 2.3% rent CAGR and a rent-to-price ratio of 0.9%. The rent-to-income ratio is 30%, dead on what experts recommend for tenants to spend on rent.

Overall, Dearborn offers strong cash flow prospects, with a history of elite-level price appreciation. If you buy in to the recovery of Detroit (I tend to!), then Dearborn is another market to consider as a well-rounded locale with multiple avenues to strong returns.

Scranton, PA

Any fans of The Office out there?! Well, despite being the home of fictional paper company Dunder Mifflin, Scranton has some serious potential as a market for real estate investors.

Scranton has a low entry point for investors, with the median home price coming in at nearly $75,000—up from $60,000 in 2010 (2% price CAGR). Median rent is $875, which is down 1% per year on average since 2010 ($960). Combined, this gives Scranton an RTP of 1.2%, which is a great indicator of cash flow potential.

Additionally, a rent-to-income ratio of 27% and a modestly growing population (0.7% since 2010) show that rent may have room to grow and offer even better cash flow than its current (and excellent) 1.2% RTP. To me, Scranton feels like a strong, relatively low-risk market for buy-and-hold investors.

Naples, FL

Naples offers a much different economic profile than the other cities discussed on this list so far. With a median income of over $94,000 per year, its three times higher than Gary and Camden, and nearly double Dearborn and Scranton.

Accompanying that higher income is a much higher median home price of $355,000. The median home price in 2010 was just $180,000, meaning the CAGR of home prices has grown 7% per year. That is excellent—and second only to Dearborn on our list.

Rent is up to nearly $3,800, from $2,350 in 2010, boasting a rent CAGR of nearly 5%—more than double any other city on this list for rent appreciation. Investors often think that higher-priced cities don’t offer cash flow, but Naples bucks that assumption with an RTP of 1.1%, lower than some of our other cities but still great compared to the rest of the country.

All of this appreciation (both rent and home prices) is likely driven by a decrease in demand—the city has grown 11.5% since 2010. Again, this is the best population growth of any city on this list.

Holding back Naples is its 48% rent-to-income ratio. That is very high and makes me wonder if the rent growth Naples has seen is too much and might reverse at some point. But overall, Naples is a very promising market if you can afford the higher entry point for properties. It has elite appreciation rates for both rent and home prices and has the highest population growth of any city on this list. The price point and higher RTI may make Naples on the riskier side of this list, but with larger upside.

Providence, RI

Providence is a charming town, under an hour from Boston. It’s home to a number of colleges, as well as my wonderful sister, who just got engaged last week (congrats!). It also has some really great restaurants, which is not relevant to this article whatsoever. But as those who know me can attest, I am food obsessed and cannot help mentioning how much good food there is in Providence despite its relatively small size.

Providence has a similar investing profile to Naples, except has a cheaper entry point with the median home price coming in at $236,000. That is up from $123,600 in 2010, good for a 7% price CAGR—same as Naples, and excellent.

Rent price CAGR is 1.8% (up from $1,428 to $1,700), which is strong. While it’s not as good as Naples, this is still third best on our list—and excellent compared to the rest of the country.

In another similarity to Naples, the RTI in Providence is also 48%—very high. A part of me wonders if this is due to the high percentage of college students in the city, but that is just a guess. Providence has grown 1% since 2010, which bodes well for the city long-term.

Summary

All six of these markets, in my opinion, warrant further research for investors looking for new markets to consider. I thought it would be helpful to show these six cities on a scatter plot to visualize the relationship between cash flow and appreciation.

While all six of these cities offer excellent prospects for investors, there tends to be a tradeoff between cash flow and appreciation. Notice that the best cash flow city (Gary) is also one of the lowest for appreciation. Meanwhile, the best city for appreciation (Dearborn) is on the lower side for RTP. Again, these cities are all strong (way above average for both metrics), but this tradeoff is something to consider as you determine where to invest.

Below you can see a summary of all the key statistics I mentioned in this article.

Remember that this list uses averages to find cities that are likely to have strong performance. By rule, using averages implies that there are deals in each of these cities that are better than the average—and deals that are worse than the average. It’s your job as an investor to go out, do your research, and find a deal that works for you.

I hope this article has been useful to our BPInsights audience. Given that this is the first installment of a monthly series, I would appreciate any feedback on this article—what you like, what you don’t, and how we can improve.

Please feel free to message me on BiggerPockets or comment below and let me know what you think.

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