Invest in Real Estate in the 10 Highest Cap Rate Cities in 2019

Looking for the highest cap rate cities in the US to buy real estate property?

Every real estate investor aims to find an investment property that meets his/her criteria. To do so, there are a number of metrics that help in determining whether or not a certain property is good for real estate investing – one of which is the cap rate (short for capitalization rate). This real estate metric is a quick and convenient method for investors to evaluate a property’s value and see its potential return on investment. So, it helps you decide if an investment property is a good deal before making the purchase.

One of the smartest things real estate investors can do is buy rental properties in cities with high cap rates. In this blog post, we’ve put together a list of cap rates by city in the US housing market 2019. But before we get into that, let’s first explain how cap rate works exactly, what a good cap rate is, and why it’s best to invest in real estate in the highest cap rate cities.

How to Find the Cap Rate of Investment Properties

The cap rate is generally used by real estate investors that are buying long-term residential or commercial rental property. It is calculated based on an annual basis, meaning if a rental property performed well or poorly for one year, it’ll show up in the cap rate calculation. The formula for calculating cap rate is:

Highest cap rate cities - cap rate formula

Figuring out the NOI is relatively simple – you subtract the operating expenses from the gross rental income. Next, the real estate investor needs to figure out the property’s value. Remember, this is not necessarily the same as the property’s purchase price. There are a number of methods to find the value of a rental property – you can read all about them in this blog post: Determine Property Value Following These 3 Methods.

Alternatively, property investors have the option to use an online tool called the Cap Rate Calculator. This is one of the hottest real estate investment tools that Mashvisor offers to help investors find and analyze investment properties for sale in the US. To learn more about our product and how we can help you find high cap rate properties, click here.

As you can see, the cap rate doesn’t account for your mortgage payments or the costs associated with buying investment property like lender fees or closing costs. This is why the cap rate should not be the only reason to buy a property for real estate investing. Smart property investors look at the overall financial picture of the investment property and use the cap rate along with a few other real estate evaluation metrics.

What Is a Good Cap Rate?

Typically, a good cap rate is higher than 4%. However, when looking at cap rates by city and what the right cap rate should be for your rental property, you need to look at:

1) The Real Estate Market

The location where you’re investing in real estate matters because it’s what drives demand, supply, rental rates, demographic growth, and other trends in the housing market. This is why states, cities, and neighborhoods all have different cap rates. Market values and operating costs (which are part of the cap rate calculation) also differ in the highest cap rate cities.

For example, a 4% cap rate may be the norm in high-demand areas like those in or near large metropolitan areas and high-cost areas like New York City. In contrast, you may see a cap rate of 10% or higher in a lower-demand area like a rural or an up-and-coming neighborhood. So, while real estate investors use cap rate to compare the risk and profitability of rental properties, you shouldn’t use it to decide between properties for sale in different markets.

2) Real Estate Asset Class

Just like you can’t use cap rate to decide between properties in different markets, you can’t use it to decide between properties of different classes either. This is the type of rental property you want to invest in like single-family homes, multi-family homes, apartment rentals, and commercial properties. To make the right investment decision, a real estate investor must compare cap rates of similar rental properties for sale.

For instance, multi-family properties consistently have the lowest cap rate because they are considered to provide among the lowest risk. On the contrary, a large luxurious house that you rent out to a single family will have a higher cap rate because it has higher associated risks. In addition, commercial real estate properties typically have higher cap rates than residential real estate properties because they tend to have higher rents.

To start looking for and analyzing the best residential rental properties in the highest cap rate cities, click here.

3) Interest Rates

Investment property interest rates could also affect what is a good cap rate in the real estate market. Typically, rising interest rates mean a drop in real estate property values. This can lead to a rise in cap rates.

The relationship is actually a bit complicated and depends on different factors. So, even though real estate investors don’t have much direct control over interest rates, it’s still something to be aware of. See what direction interest rates might be headed and keep an eye on how cap rates are changing.

4) Your Rental Strategy

While you can’t control interest rates and other factors of the location, you do have a say in how to rent out the investment property. Deciding whether to invest in traditional or Airbnb rentals is something all property investors must do carefully with due diligence. The rental strategy doesn’t affect your property’s value, but it does play a role in your net rental income.

Depending on a number of factors, the same investment property can have a 4% cap rate as a traditional investment and a 10% cap rate as an Airbnb investment, according to our traditional and Airbnb data! This also applies for the real estate market as a whole as traditional and Airbnb rentals have different cap rate values in the same location.

For example, you might find that Florida is home to some of the highest cap rate cities due to the high demand for these rental properties. If you rent your property out traditionally, you might get a lower rental income than the one you would have gotten from renting out on Airbnb. In turn, this will affect your cap rate.

Want to find out which rental strategy yields higher rental income and cap rate in your area? Use Mashvisor’s Investment Property Calculator! Start out your 14-day free trial with Mashvisor now to give it a try.

Why Invest in the Highest Cap Rate Cities

What one real estate investor sees as a good cap rate, another might consider bad. Nonetheless, investors should generally aim to buy rental properties in the highest cap rate cities. Why? This is because a high cap rate means the value of the investment property is low. Real estate investors often search for houses for sale with lower values to realize a capital gain when selling the property sometime in the future for a profit.

Another reason to invest in the highest cap rate cities in the US housing market is that with a high cap rate comes a higher rental income compared to its price. On the other hand, a lower cap rate generally means lower rental income which could lead to negative cash flow. To avoid this, real estate investors should calculate the cap rate before deciding if a rental property in a certain city is worth buying or not.

Best Cap Rate Cities for Traditional Investments

Below is a list of the highest cap rate cities in the US that you should invest in if your strategy is to buy traditional rentals. The following data and analytics are provided by Mashvisor’s Investment Property Calculator – a tool that can also be considered a cap rate calculator! Here are the cap rates by city:

#1 Camden, NJ

Median Property Price: $86,873
Price/Square Foot: $62
Monthly Rental Income: $1,103
Price to Rent Ratio: 7
Traditional Cap Rate: 5%

#2 Lake Charles, LA

Median Property Price: $225,195
Price/Square Foot: $116
Monthly Rental Income: $1,826
Price to Rent Ratio: 10
Traditional Cap Rate: 5%

#3 Key West, FL

Median Property Price: $1,038,329
Price/Square Foot: $709
Monthly Rental Income: $5,481
Price to Rent Ratio: 16
Traditional Cap Rate: 4%

#4 Rochester, MN

Median Property Price: $345,856
Price/Square Foot: $1,553
Monthly Rental Income: $2,348
Price to Rent Ratio: 12
Traditional Cap Rate: 4%

#5 Jackson, MS

Median Property Price: $213,511
Price/Square Foot: $62
Monthly Rental Income: $1,285
Price to Rent Ratio: 14
Traditional Cap Rate: 3%

Interested in learning what the traditional cap rate for other major cities across the US housing market is? Read 2019 Cap Rates by City: What Real Estate Investors Should Expect.

Best Cap Rate Cities for Airbnb Investments

While Airbnb is legal in the following highest cap rate cities, each city has different regulations. So, before renting out on Airbnb in any of these real estate markets, we recommend that you first check the laws and regulations concerning short-term rentals in the city of your choice. Here are the cap rates by city:

#1 Portsmouth, VA

Median Property Price: $189,573
Price/Square Foot: $112
Monthly Rental Income: $2,749
Airbnb Occupancy Rate: 63%
Airbnb Cap Rate: 10%

#2 Columbus, GA

Median Property Price: $156,991
Price/Square Foot: $79
Monthly Rental Income: $2,294
Airbnb Occupancy Rate: 57%
Airbnb Cap Rate: 9%

#3 Springfield, MA

Median Property Price: $195,050
Price/Square Foot: $136
Monthly Rental Income: $2,135
Airbnb Occupancy Rate: 43%
Airbnb Cap Rate: 9%

#4 Napa, CA

Median Property Price: $815,315
Price/Square Foot: $437
Monthly Rental Income: $9,500
Airbnb Occupancy Rate: 55%
Airbnb Cap Rate: 8%

#5 Virginia Beach, VA

Median Property Price: $372,899
Price/Square Foot: $187
Monthly Rental Income: $3,409
Airbnb Occupancy Rate: 49%
Airbnb Cap Rate: 5%

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