Every city is different when it comes to rental properties. It may be the case that the city you currently live in is not one of the best cities to buy a rental property. Luckily, it’s become increasingly easier to purchase rental properties in other cities and manage them from wherever you are located. These cities tend to have affordable prices, better returns, and high demand for rental property. By utilizing technology and real estate platforms, you can get them up and running and start making income. 

How Do You Determine What Cities are Good for Rental Investing

Unlike flipping properties, rental investing is a long-term investment. Because of this, you need to look at the city long-term. Things like growth and demand and the projections for how they will look years from now are essential to consider. Below are some other data that goes into determining the best cities to buy a rental property. 

• Home Value Index: Average home value in any given area is critical to consider because it affects affordability. Areas where homes are priced incredibly high and require a massive down payment, may not even be worth your time. Zillow is an excellent tool for looking into an area’s home value index to get a general idea of home prices and how they may look in the coming year. 
•  Year-over-Year Home Price Growth: This number shows the percentage in which home values increased over the past year. Areas that are just starting to grow may be a good place to start. 
• Project One-Year Home Price Growth: This is a projection of what the increase in home prices is expected to look like over the next year. 
• Rent Index: This gives you the median rent in the area
• Year-over-Year Rent Growth: This percentage is how much rent has either increased or decreased over the past year. 
• Gross Rent Multiplier:  Essentially, this equation tells you have many years it would take you in gross rents to pay for the property entirely. It takes the ratio of home price divided by annual rent in a given area. 
• Unemployment Rate: Unemployment rate in any given area helps give a better look at its economic health. Places with low unemployment typically have a strong job market which could increase home value and drive new people to the area. It may also allow you to charge a higher rent price. 
• Year-over-Year Growth Rate: This is the total percentage of job growth in the area over the past year. 
• Median Age: Typically, a younger median age means more population and economic growth. 

How to Determine Price Rent Ratio

If you’re considering investing in property, you need to know how much monthly income is required to pay the mortgage every month. One way to start is by calculating the price rent ratio. You would take the property’s price and divide it by 12, which is 50% of a year’s worth of payments. The answer will be an amount in a specific duration to afford the property before it has paid for itself.

Do this for the property you are considering buying as an investment. If the price rent ratio is lower than 1.5, this means that the monthly payments are larger than 50% of your income. It may be a problem if you want to own real estate for a more extended period of time. Perhaps you can find other investments that would carry the property better for some time and will also make more money. The longer the time period, the lower the price rent ratio should be.

If you can afford any property with a price rent ratio of 1.5 or more, it still may not be suitable because too much of your income will be committed to your real-estate investments. This can be a bad investment, especially if you are a first-time investor and haven’t developed the ability to make more money than what you are already making.

The best investment property would have a low price/rent ratio; usually, you want to aim for anything below 1.2. You will also want to ensure the property has a high projected appreciation rate. This will prevent you from losing money in case income drops.

2021 Nationwide Average for Real Estate

• Home Value Index: $226,800
• Year-over-Year Price Growth: 6.1%
• Projected One-Year Home Price Growth: 2.8%
• Rent Index: $1,486
• Year-over-Year Rent Growth: 3.05%
• Gross Rent Multiplier: 12.72
• Unemployment Rate: 3.6%
• Job Growth Rate: 1.58%
• Median Age: 37.8
• Population Growth: 5.97%

2021 Best Cities to Buy Rental Property

Orlando, FL

Orlando is a city to look out for due to its economic growth. They’ve had a jump of 3.46% in jobs year over year, with an equally impressive population and rent growth. It’s a hot spot for tourism, offering plenty of employment for younger adults. It’s also a trendy area for retirement. 

Orland was listed in Forbes’ best places to buy a second home in 2019. It offers excellent job growth, a younger median age, and low unemployment. The only things it lacks are home value and rent index. 

Birmingham, AL

Birmingham is a strong city for rental property investing because of its large population and the change in the employment rate. It also makes up 8.37% of the state’s total population growth, with 4.55% of the total growth of people coming from other areas to work in Birmingham. With YoY rent growth sitting at 6.78%, this is a great city to start investing in rental properties. 

Charlotte, NC

According to CNBC, Charlotte, North Carolina, is in the top 3 best cities to start a business. It’s also a city on the rise – 12.14% of the total population growth in the recent decade was attributed to other areas moving to Charlotte. It has a great job and population growth because it is such a great city for businesses. Although property prices have increased, it is still a good city to buy an investment property. 

Houston, TX

The growth of the Houston area almost doubles that of the national population growth rate. With a 5.95% job growth, it is also growing rapidly. The average rent per month in the Houston area is $1,297 for a two-bedroom apartment. The median age in Houston is 34, with an unemployment rate of 3.6%. With an impressive job market, it’s no surprise that people keep flocking to Houston. It ranks third in the concentration of Fortune 1000 companies, just behind Chicago and New York City. Despite being such a profitable area, house prices are reasonably low and can give a great return on investment. 

Cincinnati, OH

The Cincinnati/Dayton area is excellent for investing because home prices are 25% lower than the national average despite being a growing area. The median home value is $152,200. The average rent for a two-bedroom apartment is $652 in the Cincinnati/Dayton area. The city has a population of 2 million and an unemployment rate of 3.3%. With such a reasonable growth rate, it’s hard not to see its appeal. Despite population growth not being high, job growth and unemployment are impressive. As they continue to grow as areas for employment, they could start showing impressive population and rent growth. 

Arlington, TX

Arlington, Texas, has had significant population and job growth within the last ten years. Employment growth is likely to continue being strong, which will lead to housing demand increasing. Texas is one of the fastest-growing states in the country, and as housing demand increases in Arlington, it will continue to grow. Rents have increased significantly, and with a young demographic and low unemployment, Arlington may be an excellent area to start investing in real estate.

Huntsville, AL

Huntsville is home to NASA and a lot of military industries, creating a very stable job market. It also has a very young median age, at 33.8 years old. Its popularity among younger people and a strong job market contribute to rising home values and rents. House prices are over 25% lower than the national average. Huntsville is a great city to start investing in real estate. 

San Antonio, TX

San Antonio has had impressive population and job growth due to being a growing spot for tech companies. Despite having such remarkable growth, home prices have stayed relatively affordable. In the last five years, the median price of a home in San Antonio has increased by only 20%. This is likely due to summer sales and the fact that housing here hasn’t been as expensive as in other areas of Texas. 

Tampa, FL

Tampa has seen population growth three times that of the national average. This is due to being both an excellent place for retirees and professionals. It is a spot for tourism, lots of Fortune 100 companies, and colleges. The city has a very high median age, at 38.8 years old, and very low unemployment. The housing market in Tampa is robust, and prices are growing at a rate of 4.9%.

Many factors affect the real estate market in Tampa, FL. The high median age and low unemployment are both factors that contribute to stable real estate markets. Since the population growth is so high, the demand for housing is also high. This means that home prices and rents will continue to rise as the city continues to grow.

What Cities to Avoid

Some cities are not doing well in real estate and should be avoided by real estate investors looking to invest in growing reliable markets. These cities have low average incomes and low demand for rental properties. This means that prices can move down quickly, even by a slight change in the economy or an increase in the interest rates. Here are some of these cities:

 

Bakersfield, California 

This city has among the lowest incomes on average. Because of this, rent has to stay low to attract renters. Low rent means very little return on investment for any real estate investor buying property in this area.  

Tulsa, Oklahoma

Tulsa is struggling financially and has a relatively high unemployment rate. Because of this, real estate investors should avoid investing here until the job market has stabilized. 

San Bernardino, California

San Bernardino, California, has had a lot of trouble with real estate lately. It’s seen a lot of bankruptcies and a skyrocket in the cost of living. If you are looking for a good long-term investment, avoid buying property in this city. 

Baltimore, Maryland

 Baltimore is one of the most depressed cities in the U.S. Because of this, it is not a stable place to invest, as an economic downturn will immediately reflect through high unemployment and low rent in this area. 

Myrtle Beach, South Carolina

 Myrtle Beach is doing poorly, and the rental market in this city is relatively small. These two things make it a city to avoid if you’re looking for a good real estate investment.

Hialeah, Florida

This city is starting to show signs of distress as there have been reports of many apartment buildings that are struggling financially. There has also been an increase in the crime rate, making it a city with high risks.

Long Beach, California

Long Beach has a high cost of living and rising crime rates. It’s not a good place to buy a rental property.

Akron, Ohio 

Many people are moving out here because they cannot support the costs. There is also a very high crime rate, which makes it an area that renters want to avoid. This makes it a bad place to buy rental properties.

Summary

When you are ready to look into the best cities for rental properties, you need to do your research. Look into things like median age, unemployment rate, job growth, rent growth, and average home costs. Understand your own capabilities and capital and make the decision that is right for you.