Best Places to Invest in Real Estate: An Analysis of 6 Cities

by | BiggerPockets.com

One huge advantage to having (and/or being part of) an investing club is that you meet smart, like-minded people with similar interests and resources. After hosting my last Denver women’s investment group, I was excited to receive the below chart from one of our participants: Jennifer Ward. Like so many people in the BiggerPockets community, Jennifer Ward wants her investments to be dictated by what makes the most sense, rather than sheer proximity. In other words, just because you live in an expensive city or state (ahem, Denver, ahem, Colorado) doesn’t mean you need to invest there.

The below chart reviews six U.S. cities for investor desirability: Atlanta, Cleveland, Memphis, Kansas City, Indianapolis, and Minneapolis. The final line is an average of the metric for the cities reviewed, and the boxes colored green mean that the city in question has a better score than the average for these six cities. Basically, the more green, the better.

Related: Why “Overpriced” Markets Like San Francisco May Be Healthier Than You Think

An Analysis of 6 U.S. Cities for Investor Desirability

Assuming all metrics are equal, Minneapolis is the clear winner for this data set. It outperforms the other cities in 7 of the 8 metrics, and is followed by Indianapolis, which has strong scores for 5 of the 7 metrics. Two major losers here are Cleveland and Memphis, both of which have high crime stats, poor population growth, and fairly high taxes.

What’s interesting about this chart is the pattern we see in the rent to value column. This is calculated by dividing the median rent by the median house/condo value. So, for Minneapolis, you see that the cost of homes is moving up faster than the cost of rent. On the inverse side, you can command more rent in Cleveland and Memphis compared to the cost of the home. That said, we still think Minneapolis is a better value with less headaches when you look at all the other metrics present here.

Thanks again to Jennifer Ward.

What do you think of this analysis?

Weigh in below!

About Author

Erin Spradlin

Erin Spradlin co-owns James Carlson Real Estate. She loves working with first-time homebuyers for their enthusiasm and excitement, and loves working with investors because she’s a fellow spreadsheet nerd. She and her husband own three properties in metro Denver and are currently in the process of acquiring a duplex in Colorado Springs. You can find Erin’s blogs here: https://www.biggerpockets.com/renewsblog/author/erinspradlin/ and her airbnb video series here: https://www.youtube.com/playlist?list=PLgSUZKLPRI9tK3Vd-qpH3Sk2Rh-_pIrNN.

43 Comments

  1. Kim Kaiser

    i would suggest a review of crime in memphis and Cleveland, there is a whole bunch of negatives that follow crime,,,,,,,, vandalism, drugs, drug cooking, lose one home due to a crack kitchen where they have to demolish, you will wish you were back in another city,,,

  2. Dave DeMarinis

    Great article Erin and chart Jennifer. What site did she use to pull the data? I use a similar chart but couldn’t find average insurance. I will add rent to income, that is a great idea. I also include % renters and % vacant. I was pulling from city-data but they changed their formatting recently. Thanks again for the post.

      • Erin Spradlin

        Yeah, when it comes to real estate investing, I think the diversity of the job market is a really important thing to look at. For instance, Denver has a lot of different industries that keep it strong: marijuana, health care, defense, tech, etc. This bodes well for the long-term housing market stability and city growth.

    • Cam Robert

      Dave – if you’re interested in more detailed market analysis, I’ve created a sheet [1] that helps pull together key stats across the ~300 largest MSAs. It captures most of the above points, and more. Largely pulled from a mix of zillow and government data (BLS etc.). For me, the key categories of information that matter are [2]:

      – Long term market trend – population, income and prices
      – Market volatility – price, rent and incomes over time
      – Demand dynamics – price to income, rent to price, mortgage & rent affordability
      – Supply dynamics – inventory & building permits (been meaning to add vacancy data too)

      Noticed you’re up in Santa Rosa. I’m in SF. Let me know if you’re interested in chatting more about market selection. It’s a pretty important thing for me, given that a lot of what I invest in is outside of California. Cheers!

      [1] https://ramenretirement.com/2018/05/14/market-selection/
      [2] https://ramenretirement.com/2018/03/30/real-estate-markets/

  3. Jeff Kehl

    That’s an interesting chart and a good way to analyze I think. ATL’s average appreciation is second highest, why isn’t it highlighted? Also I would add in job growth. To me, I just need to look at job growth and population growth and the rest of the factors are less important. More employed people is going to lead to price appreciation and rent growth. And even if a market is expensive R/V wise you can still find decent investments.

  4. Cody L.

    Crazy that Houston wouldn’t be on the list. The market has gone crazy. I get called/emailed daily (no joke, literally daily) from brokers or direct buyers asking if I have anything I’d want to sell. It would be easily for anyone that bought right in the last few years to sell for 2x what they paid for it. I was offered $3.2m from a legit buyer on a property I closed on 5 months ago for $2.4m

    • Erin Spradlin

      Because of flooding, etc. I have concerns about that entire area. There’s two ways of looking at it: because of flooding, etc. there might always be demand for housing in Houston as people continue to get displaced. On the flip side, your property might always be getting flooded, acquiring insurance may become more and more difficult, finding contractors in those areas could get challenging, etc. For now, I’ve lost interest in the coasts.

  5. Joseph Delia

    What’s funny about this article is that when I saw this list, I immediately thought, “why the heck were these 6 cities even picked, the only one I would even consider is Minneapolis.” Low and behold, Minneapolis is the winner of this list of 6 pitiful choices.

    Here’s a better method. Invest where the 21st century jobs are growing. Focus on those cities. That’s all you need to know. You’re welcome ;-).

  6. Charles Bellanfante

    I am looking to make Atlanta one of my target area. Is there a reason why the 2.29% Avg annual appreciation is not highlighted in your analysis? Is there anyone that invest in Atlanta that agrees with this yearly appreciation rate? Not being critical, but trying to get more data. Thanks. Great Post.

  7. John Murray

    I have a few simple requirements. A side walk, more than 1 bathroom, more than 2 bedrooms and the last is would I live there. Answer all questions yes and I buy. Pretty simple and made me a multimillionaire.

      • John Murray

        My approach is a bit different from all that ConC, ROI and cap rate stuff. I’m an entrepreneur and we think a bit different. We are constantly taking in information and willing to relocate to follow our freedom plan. We buy when others are selling and we sell when others are buying. In between we collect rent and pay low taxes, it’s pretty simple and the most effective way I have become a multimillionaire.

  8. Eric Fernwood

    As in the article above, many people use the rent/price ratios to select locations or properties. However, except in very narrow circumstances, the ratio is more misleading than informative. For example, below are two properties.

    Property 1:

    • Purchase price: 252,500
    • Estimated rent (Mo): 1,700
    • Property tax (Yr): 6,022
    • Insurance (Yr): 1,625
    • Rent/Price ratio: 8.1%

    Property 2:

    • Purchase price: 255,000
    • Estimated rent (Mo): 1,490
    • Property tax (Yr): 1,511
    • Insurance (Yr): 500
    • Rent/Price ratio: 7.0%

    Based on the rent/price ratio Property 1 is the better option. However, let’s calculate cash flow for both properties. I will assume the following for financing: 20% down, 5% fixed, 30 year term and that both properties are located in states with no income tax. The formula I will use for cash flow:

    Cash Flow = (Income – DebtService – Insurance – Tax)

    Property 1:

    • Debt service (P&I): 1,084
    • Cash Flow = (1,700 x 12 – 1,084 x 12 – 1,625 – 6,022)
    • Cash Flow = -255/Yr

    Property 2:

    • Debt service (P&I): 1,095
    • Cash Flow = (1,490 x 12 – 1,095 x 12 – 500 – 1,511)
    • Cash Flow = 2,729/Yr

    If you selected a Property 1 based on the rent/price ratio, you would have made a serious financial mistake. Rent/price ratios do not indicate a performing property.

    Also, I agree with the comments above regarding jobs and crime stats. Follow the job growth when selecting an investment location.

    • John Murray

      Another great formula is Price/Rent ratio. Specifically, Median Home Value/$12,000. When the ratio reaches 30 it makes sense for the average person to rent. Cities like Vancouver BC Canada the ratio can approach 100. The Asian immigration policy has driven up the median home value beyond most affordability. Take any city in the US and the investor can make a logical decision. I live in PDX Oregon so my math is $430K/$12K which is about 36. Makes sense that 66% of the population are renters and 33% are home owners. Take any major city in the US and you can compare numbers. Canada is a bit harder since they don’t have the same mortgage machine like our big 3.

      • Erin Spradlin

        That is super interesting. Denver has a price/rent ratio of 34.86 and Colorado Springs has one of 23.11 currently, but I think that’s going up. Where does the $12K come from though? Is the thought that most people don’t/can’t pay more than a $1K/month on rent?

        • John Murray

          You got it Erin the $12K is $1K/Month. The $1K/Month is a constant that someone though of that is much smarter than I am. I would assume that the $1K/Month will remain constant and the output would resultant would be under interpretation. Inflation and appreciation would change the output interpretation. Until then I think the output of 20 will tell the investor much.

  9. Ray Danner

    I’m investing in Cleveland (Heights) and can anecdotally confirm that the rent to price ratio here is great but taxes are indeed very high, especially here in Cleveland Heights and Shaker Heights. Crime, however, probably doesn’t look great in the data sets but so much of that is neighborhood to neighborhood here and even street to street. I’d be wary investing from afar, but I personally feel very comfortable being a boots on the ground investor. I know my tenants, see my properties all the time, and they cashflow very well. Just my two cents.

  10. Jennifer Ward

    Hello everyone, sorry for the delay in chiming in…just returned from a little getaway. First, I chose to analyze these six cities because I am looking to do the BRRRR strategy and to purchase a SF between 50 and 70k. These cities for the most part have enough inventory within this price range. Also, I chose to initially analyze these cities because they were mentioned continuously in out of state investing forums and in REI meetings I attend.
    Here are the sites I used to pull my data:
    http://www.city-data.com

    https://www.neighborhoodscout.com
    https://www.valuepenguin.com/average-cost-of-homeowners-insurance:

  11. Jennifer Ward

    oops, wasn’t finished…
    Here are the sites I used to pull my data:
    http://www.city-data.com: Rent, Income, Home Value, Crime, Population, Unemployment
    https://www.neighborhoodscout.com: Average annual appreciation
    https://www.valuepenguin.com/average-cost-of-homeowners-insurance: Insurance

    I converted all of the data I found on the above websites into ratios. For example, Avg rent in Atlanta is $1,084 and avg home value is $262, 600, therefore (1084/262,600)x100= .41

    This may help understand the randomness of these cities. I would not say these cities are the “Best Places to Invest in Real Estate” but like I mentioned…for the strategy I am pursuing and the price point I need, they are a start. Most of all you have to decide to place a pin somewhere and this is my method to decide on where to put that pin. Now, I am trying to develop the contacts needed to pursue the BRRRR strategy. Based on this analysis and networking on BP, I am leaning towards Indianapolis.
    I will say for most of these cities, it is very neighborhood specific and you still need to do in depth research on the neighborhoods before investing.

    Final note, some folks decide to place the pin where they have existing contacts, despite the city data. I also think this is a good strategy because you can find deals anywhere…and a deal is a deal. However for me, since I don’t have long standing REI relationships, I need to start with the data.

    Thanks @Erin Spradlin for summarizing the data and for everyone sharing your input.

  12. Ike Ekeh

    Great article and interesting analysis. I know its tough to quantify, but do you consider climate in your decision making process? I would imagine repairs, maintenance & capex would be higher on average in cold weather cities.

    • Erin Spradlin

      We didn’t consider it in this analysis, but I’ve run across it in other resources. I think that’s a valid point, but places with intense heat (aka, CO, AZ) also have issues that need to be dealt with. On a broader level though, I am weary of places that I think could also be affected by client change (talking to you, Florida and Texas.)

  13. John Murray

    I have been playing this game a very long time. The key to becoming a multimillionaire is understanding sub markets. There are 8 sub markets, each one contains population, income, foreclosures, vacancies and age of buildings. When you can purchase for a lower price than building this is a key indicator. Infill urban areas are a indicator of a healthy city in which it is just a push of buy and restore or demolish and build new. If the city falls this test the city is in decline. The surbanization of the post WW2 housing boom and the maintenance of those areas is a key indicator of the health of family oriented housing. The American dream my still be alive, but it has become a further reach for the millennials and latter Gen-X. Early and late boomers are hanging on to them and driving prices higher as well as maintaining their livability and value. . New housing starts are a key indicator of the nations health on a whole and are usually expanded when the urban growth boundary is expanded. In the US housing keeps up with inflation on a whole. Understanding how the sub markets function, government regulation (or lack of), tax payer bailouts, tax structure and the big one investor confidence is a large equation to solve. We are smart people, but the wild card is government regulation. The new Tax Act is a great example, the upper middle class just took it in the shorts. We will see how they adjust to their Brave New World.

  14. Cam Robert

    Erin & Jennifer – thanks for sharing this. I really liked the taxes & insurance to value perspective. Something I’ve always accounted for implicitly, but never explicitly. The takeaways also gel with my general perspective on those markets. Curious how / why you chose those six to compare together? I kind of feel the relevant comparison is KC, Indy, Memphis and Cleveland, as more yield oriented markets. Then put Minneapolis and Atlanta in a different bucket of larger, potentially higher growth markets? Of course, that kind of comes out in the data with the lower rent-to-value and higher population and appreciation growth.

    With all of these things it’s hard to say ‘this market is better than that one’ in absolute terms, because it all depends on what you’re looking for: yield? appreciation?

    If you’re interested in digging into this sort of information further, I have a sheet that compares much of this information for any MSA across the US [1]. You’ll see that I try to bucket different markets into ‘personas’ based on their characteristics – i.e. ‘High growth markets’, ‘Yield markets’ – which I think helps with creating a mental model for new markets you’re considering.

    [1] https://ramenretirement.com/2018/05/14/market-selection/

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