If you are thinking about investing in real estate, the first thing you have to decide on is the location where you will buy a property. Rental properties can be a profitable investment strategy as long as you go for a top performing real estate market.
Traditional or long-term rental properties are those which you rent out on monthly basis, as opposed to short-term rentals, which are rented for only days or weeks at a time. Short-term rentals, such as those offered on Airbnb, have rapidly grown in popularity, but traditional investments still offer several key advantages including lower turnover and a more reliable, passive stream of income.
What Makes for the Best Markets for Investing in Long-Term Rentals?
The best places to buy a rental property are those which yield the highest return on investment. One of the most popular metrics for return in real estate in the capitalization rate, or cap rate for short. The cap rate is the ratio between the net operating income (NOI) and the current market value (CMV) of the property. The cap rate allows investors to compare the return which they can expect in different markets in order to choose the most profitable one.
To help out beginner as well as experienced real estate investors choose where to buy in 2019, we have put together a list of the six best markets in the United States for investing in traditional rentals this year. We used data provided by Mashvisor, a real estate data analytics company that helps investors find lucrative rental properties.
2019's Top 6 Rental Investment Markets
Camden, NJ
Camden, NJ has been and remains a top choice for investing in real estate. A main driver of the Camden real estate market is the proximity to New York, which pushes rental demand up. A major benefit of buying a rental property there is the very low median property price, at $86,400. This makes Camden an affordable option even for first-time property investors who usually work with a limited budget. The average cap rate for traditional rentals in Camden is 5.5 percent, which exceeds the value in many much more expensive U.S. markets. The average rental income for long-term rentals amounts to $1,100.
Fayetteville, NC
Next up is Fayetteville, NC, where real estate investors can expect a cap rate of 5.0 percent if they choose the traditional rental strategy. One of the most important characteristics of the Fayetteville real estate market is the low median property price, estimated at $181,700. This is much below what property buyers face in bigger cities in North Carolina as well as nationwide. The average monthly rental income is $1,340. The affordable home values and the high cap rate make Fayetteville rental properties an excellent choice for out-of-state investors.
Rochester, MN
Real estate investors will be happy to hear that Rochester, MN was ranked the number one place to place to live by Livability.com in 2017. Such a position translates into strong demand from tenants to move and live there. In March 2019 the average cap rate for long-term rentals in Rochester was 4.9 percent, which exceeds the rate which most major US cities offer at the moment. The median property price is $338,700, which means that Rochester is still an affordable destination for investors. The average rental income is $2,610.
Federal Way, WA
Federal Way, WA is just a few-minutes drive from Seattle and offers significantly lower real estate prices, which attract both tenants and investors. For comparison, the median home value in Federal Way is $345,800, while it is more than double in Seattle, $749,500. The average monthly rental income is $2,570. The average city-level cap rate for Federal Way rental properties is 4.8 percent.
Lake Charles, LA
Another top market for real estate investments which you should consider if you are interested in investing in the South is Lake Charles, LA. The Lake Charles housing market offers a cap rate of 4.7 percent for long-term rentals. The median property price is $223,700, while the average traditional rental income is $1,780.
Shreveport, LA
The final market on our list is Key West, FL. This relatively small town provides high return with a cap rate of 4.4 percent. However, financing a Key West investment property can be challenging, as the median property price is $967,100. This makes Key West affordable mostly for wealthy real estate investors and those who work in a partnership. The average income from long-term rentals is $4,920. An important advantage of buying an investment property in Key West is that it can yield a very high return if you decide to rent it out on short-term basis. The cap rate for Airbnb rentals in the local housing market is 7.1 percent, which makes it one of the top performing locations for this rental strategy.
The old cliché that "location, location, location" is the number one rule in real estate still holds true. If you're hoping to succeed as a real estate investor, you have to buy in a top market.
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