Investing in rental properties is one of the most tried and true methods of creating an additional income stream and building long-term wealth. The two primary ways investors make money from rental properties are through cash flow and appreciation.
If a property can generate more revenue from rent than it costs to own and manage, it will generate positive cash flow each month. Otherwise, if the rent can't cover ongoing expenses like mortgage payments, taxes and maintenance, the real estate investment can quickly become a losing deal.
Real estate investors can also make a substantial return from a property's price appreciation. For instance, the median sale price of single-family homes in the U.S. has increased by over 49% in just the past five years, according to data from Redfin.
However, the real key to success in real estate investing is finding a property that offers strong cash flow and the potential for above-average price appreciation. To help you do this, we analyzed data from Zumper's National Rent Report and historical median home price data from Redfin to find the markets throughout the U.S. that present the greatest opportunities for buying a rental property.
To find the markets that should provide the greatest cash flow, we calculated the price-to-rent ratio for the top metropolitan areas. The median sale price was divided by the average two-bedroom rent for each market. A lower ratio means you should be able to receive more rent compared to the price of a home.
We also examined each market’s monthly median sale price and calculated the average annual appreciation over the past ten years. If homes in these markets continue to appreciate at above-average rates, they could provide significant long-term capital gains.
Then, we scored each market on both metrics to pinpoint the cities that combine potentially high cash flow with high annual price appreciation. The markets with the highest total score have the greatest mix of both sources of real estate investment returns.
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Top 10 Cities Based on Price-to-Rent Ratio
A lower price-to-rent ratio indicates that homes are more affordable relative to the rental income they generate, potentially leading to higher cash flow for investors. Here are the top 10 cities based on this metric:
10. Buffalo, NY
Median sale price: $232,000
Average rent: $1,290
Price-to-rent ratio: 14.99
9. Miami, FL
Median sale price: $641,000
Average rent: $3,630
Price-to-rent ratio: 14.72
8. Rochester, NY
Median sale price: $230,000
Average rent: $1,400
Price-to-rent ratio: 13.69
7. New York, NY
Median sale price: $800,000
Average rent: $4,950
Price-to-rent ratio: 13.47
6. New Orleans, LA
Median sale price: $289,000
Average rent: $1,800
Price-to-rent ratio: 13.38
5. Detroit, MI
Median sale price: $175,000
Average rent: $1,100
Price-to-rent ratio: 13.26
4. Syracuse, NY
Median sale price: $204,000
Average rent: $1,370
Price-to-rent ratio: 12.41
3. Pittsburgh, PA
Median sale price: $220,000
Average rent: $1,600
Price-to-rent ratio: 11.46
2. Chicago, IL
Median sale price: $368,000
Average rent: $2,700
Price-to-rent ratio: 11.36
1. Cleveland, OH
Median sale price: $135,000
Average rent: $1,330
Price-to-rent ratio: 8.46
Top 10 Cities Based on Annual Appreciation
Investing in markets with high appreciation rates can lead to significant capital gains when it comes time to sell the property. These are the top 10 cities based on their average annual appreciation over the past 10 years:
10. Las Vegas, NV
Median sale price: $470,000
Average annual appreciation: 14%
Invest in Vegas’ continued growth through the Las Vegas Cityfund
9. Orlando, FL
Median sale price: $435,000
Average annual appreciation: 14%
8. Nashville, TN
Median sale price: $489,000
Average annual appreciation: 15%
Invest in Nashville’s continued growth through the Nashville Cityfund
7. Knoxville, TN
Median sale price: $372,000
Average annual appreciation: 15%
6. Reno, NV
Median sale price: $575,000
Average annual appreciation: 16%
5. Tampa, FL
Median sale price: $393,000
Average annual appreciation: 16%
Invest in Tampa’s continued growth through the Tampa Cityfund
4. Cleveland, OH
Median sale price: $135,000
Average annual appreciation: 16%
3. Boise, ID
Median sale price: $485,000
Average annual appreciation: 17%
2. Miami, FL
Median sale price: $641,000
Average annual appreciation: 17%
Invest in Miami’s continued growth through the Miami Cityfund
1. Detroit, MI
Median sale price: $175,000
Average annual appreciation: 23%
Top 10 Cities That Ranked Well in Both Categories
By combining scores for price-to-rent ratio and annual appreciation, we identified the top 10 cities that offer the best overall potential for cash flow and capital gains:
10. Charlotte, NC
Price-to-rent ratio: 18.52
Average annual appreciation: 13%
9. Orlando, FL
Price-to-rent ratio: 19.49
Average annual appreciation: 14%
8. Cincinnati, OH
Price-to-rent ratio: 17.01
Average annual appreciation: 12%
7. Fort Lauderdale, FL
Price-to-rent ratio: 17.10
Average annual appreciation: 13%
6. Knoxville, TN
Price-to-rent ratio: 18.34
Average annual appreciation: 15%
5. Tampa, FL
Price-to-rent ratio: 17.24
Average annual appreciation: 16%
4. Atlanta, GA
Price-to-rent ratio: 15.43
Average annual appreciation: 13%
3. Miami, FL
Price-to-rent ratio: 14.72
Average annual appreciation: 17%
2. Detroit, MI
Price-to-rent ratio: 13.26
Average annual appreciation: 23%
1. Cleveland, OH
Price-to-rent ratio: 8.46
Average annual appreciation: 16%
Passively Investing in Multiple Real Estate Markets
For investors looking to diversify their rental property investments across several of these top-performing markets without the hassles of being a landlord, platforms like Arrived and Cityfunds offer unique solutions.
Arrived allows individuals to invest in shares of single-family rental properties for as little as $100. The company handles all aspects of property management, while investors earn passive income through rental distributions and potential appreciation. By investing in multiple properties through Arrived, investors can gain exposure to various markets and property types. Click here to view rental properties available to invest in on Arrived.
Cityfunds takes a different approach, offering diversified portfolios of Home Equity Investments (HEIs) in specific cities. Each Cityfund allows investors to participate in the appreciation of a curated selection of properties within a particular market. As the value of the properties within a Cityfund grows, so should the value of the fund’s shares. This innovative model enables individuals to invest in the $32.6 trillion home equity market, which has grown by 211% since 2013. Click here to invest in your favorite city.
By leveraging platforms like Arrived and Cityfunds, investors can efficiently allocate capital to the most promising rental property markets while minimizing the time and effort required to manage individual properties. As always, it’s essential to conduct thorough due diligence and consider one’s risk tolerance and investment goals before making any investment decisions.
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