It’s that time of year again: BiggerPockets has released its 2017 Investment Market Index. This study takes a look at how investors across the country may have fared in the 50 most-populous metropolitan statistical areas (think the areas around big cities—the most populous places in the country). This is an entertaining backward-facing study, so do not confuse this for a forward-looking prediction. For spreadsheet junkies and data nerds, the entire dataset is available for free to all BiggerPockets members (Plus, Pro, and FREE) here.
The 10 Best Markets for Real Estate Investors
Nashville, Tennessee tops the list in 2017, with a combination of a massive 12.8% year-over-year appreciation rate and a middle-of-the-pack 6.32% rent-to-value ratio. The appreciation comes as no surprise to folks who live in Nashville, nor to those of us who have been watching Nashville during the past few years. Home to my alma mater, Vanderbilt University, Nashville saw perhaps the highest cost of living increase in the United States during this period of time, according to this study.
It was a good year for the South, with Memphis, Tennessee; three Florida cities (Tampa, Orlando, and Miami); Louisville, Kentucky; and Dallas, Texas all making the top 10.
Dallas earned the number one spot in the 2015 and 2016 investment market indexes, but it slightly fell to fourth place this year. This indicates that those who have invested in Dallas over the past few years may have seen some of the highest returns in the country.
Rounding out the top 10 are Seattle, Washington; Las Vegas, Nevada; and Josh Dorkin’s favorite—Detroit, Michigan.
The 10 Cities Offering the Most Opportunity for Real Estate Investors, 2016
- Nashville, TN
- Tampa, FL
- Detroit, MI
- Dallas, TX
- Seattle, WA
- Orlando, FL
- Las Vegas, NV
- Louisville, KY
- Miami, FL
- Memphis, TN
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The 10 Worst Markets for Real Estate Investors
For the most part, the worst markets in the country had weak price-to-rent ratios (investors receive relatively little rent per dollar of property value) and saw low or modest appreciation during the time period. California investors continue to see some of the lowest rent-to-value ratios in the country, although they still saw some pretty decent appreciation as this was a strong year for appreciation across the country.
Hartford, Connecticut offered the least opportunity for residential real estate investors overall, according to the study. In a year when average home value appreciation was just shy of 7%, Hartford residents and investors saw gains of just 1.31%. It’s not at the top of the pack for rent-to-value ratios either.
The relatively poor returns in Hartford were followed by the largest California markets. California investors, if they want to earn returns near the top of the study’s list, will have to see extraordinary appreciation rates, as the rent-to-value ratios in their major metropolitan statistical areas (MSAs) are some of the worst in the country.
The Maryland/Washington, D.C./Virginia region also saw a relatively weak year compared with the rest of the country — if the Washington D.C., Baltimore, and Virginia Beach, VA MSAs are any indication. Investors in those MSAs saw 3.3–3.6% annual appreciation, plus middle-of-the-pack rent-to-value ratios.
The other two cities to make the bottom 10 were New Orleans, and Houston, Texas. Note that this study uses data aggregated prior to the arrival of Hurricane Harvey.
The chart below shows the 10 worst markets for real estate investors:
The Top 10 Markets for Residential Property Appreciation
Appreciation gains drove much of the return for residential real estate investors. If we isolate the 10 markets with the strongest appreciation gains, we see a lot of overlap with the top 10 overall markets.
Nashville tops the list with a whopping 12.8% year-over-year increase in sales prices for residential real estate. Following Nashville are the long-time top-10 cities Seattle, Dallas, Tampa, Denver, and Miami. Breaking into the the top 10 are the new entrants of Milwaukee, Las Vegas, and Detroit.
The chart below shows the 10 best markets for appreciation for real estate investors:
The Top 10 Markets for Strong Rent-to-Value Ratios
Many investors prefer cash-flow potential of residential real estate over appreciation potential. While appreciation values are notoriously difficult to predict and highly speculative, it is perhaps more likely that the large metro regions in this study will continue to see similar levels of gross rent relative to the value of the property over the next few years. At the very least, the Department of Housing and Urban Development (HUD) releases the 2017 Fair Market Rents well in advance—and with a price floor set by the government, investors can perhaps more confident predict their cash flows than potential appreciation.
This study suggests that the best places to look for cash flow, given the returns over the past 18 months, are in Southern and Midwestern markets. Memphis, Tennessee offered residential investors the largest amount of gross rent in relation to property value for the third year in a row. It is trailed by Detroit and Birmingham, Alabama.
The chart below shows the 10 markets that offered the best rent-to-value ratios for residential real estate investors:
Purpose: This index seeks to determine which of the 50 most-populous U.S. metro markets were most likely to have provided strong returns for residential real estate investors between early 2016 and early 2017. This index measures both appreciation and gross rents as a percentage of average purchase prices.
Analysis: Investor returns in real estate are largely driven by two key factors — appreciation and cash flow. Appreciation is fairly straightforward in most calculations. In this study, it is simply the price-increase percentage in residential real estate over the time period studied. Cash flow, conversely, is a function of both gross rents collected and expenses. Because a large number of factors influence rental property expenses, and many of these factors are difficult to accurately quantify (landlord “friendly” versus ”unfriendly” laws, for example), we ignore expenses for the purposes of this study, focusing solely on gross rents as a percentage of purchase price.
Calculations: Gross rents are calculated as a function of average Fair Market Rents (FMRs), as provided by HUD, as well as median property values in early 2014, as provided by Zillow’s Home Value Index. Where possible, actual sales data from Zillow was used for median home-price calculations. In the case of several markets, sales data was not available, and Zillow’s Home Value Index was used instead.
For example, a property purchased for $100,000 in early 2015 may have received $1,000 in monthly rent in 2016 and $1,100 in 2017, thus averaging $1,050 per month—or $12,600 annualized. Gross rents in this instance average out to 12.6% of the initial value.
Appreciation is calculated as the change in price from the beginning of the period studied to the end of the period studied. For example, if the average purchase price in an area studied was $100,000 in early 2015, and it increased to $105,000 in early 2016, then appreciation would be 5%.
Method: This study aggregates data from Zillow and HUD. It then uses that data to estimate appreciation and rent-to-value ratios for the top 50 most populous metropolitan statistical areas in the country. The goal of this is to give residential real estate investors a clear look backwards at the growth and decline of major markets around the country.
Aggregate property data ultimately derives from Zillow’s research center. Here, we look at the median sales price. For those looking to dig deeper, an original copy of the dataset is available upon request or at www.zillow.com/research/data.
The data for actual sales prices in the respective regions studied is a reflection of Zillow’s data. To combat the limitations of Zillow’s data, which may not be robust enough in smaller cities, the study is limited to only the top 50 U.S. metropolitan markets as measured by population. Higher population regions are more likely to experience a higher volume of transactions, giving Zillow more data points to work with, therefore increasing the likelihood of an accurate reflection of sales prices. Furthermore, by taking an average of sales prices across six months, we increase our sample size and lessen the risk of certain months significantly skewing our results.
In the first six months of 2016, the average property value is considered the “initial” property value or “purchase price,” while the average value across the first six months of 2017 is considered the “final” property value or “sale price.” The difference between the the two prices is then used to calculate appreciation.
Rent data is pulled directly from HUD (https://www.huduser.org/portal/datasets/fmr.html). HUD FMRs vary by county and were not readily available by metro. In order for the study to compare FMRs to the property values taken from Zillow, county data needed to be converted to reasonable estimates for each metro area. This study converts the data using a weighted average of FMRs across each of the counties comprising a given metro area.
In calculating a weighted average, many metrics could have been used, including population, land area, total housing units, etc. In this study, FMRs are weighted by population. This “weighted average” of FMRs is then applied to the entire metro area.
Note that FMRs also vary by number of bedrooms. This study takes the average FMR of units with up to 4 beds for each county.This process is repeated using FMRts for both 2016 and 2017.
The FMR for the each metro area is then used to calculate gross rents as a percentage of the purchase price. Again, as mentioned previously, a $100,000 property generating $1,000 in rent in 2016 and $1,100 in 2017 would average $1,050 per month, or $12,600 per year. Gross rents per dollar invested would come to about 12.6%.
The final step in this process adds appreciation (as a percentage of initial property values) to average gross annual rents (as a percentage of initial property values). This calculation reveals, in percentage terms, the markets where residential real estate investors were most likely to receive a favorable combination of both gross rents and total appreciation per dollar invested, over the period from early 2016 to mid 2017.
It will be obvious to any investor who looks at this data that expenses are not included in this study. Expenses vary widely across the 50 metros studied and are impacted by factors such as taxes, insurance, climate, cost of living, landlord laws, contractor costs, and other similar variables. Furthermore, even if accurate data on each of the many expenses listed were readily available to the public, expenses can also vary from investor to investor based on non-market forces like diligence in property management, variations in tenant screening processes, experience with contractors and handyman work, and other experience-related advantages. Due to the complexity of creating any kind of index that would measure expenses in the top 50 metro areas, expenses were excluded from this study entirely.
Special thanks to Umar Javaid for helping with much of the data entry for this 2017 Investment Market Index!