Best Places to Invest in Real Estate Based on Cap Rate

The first question most investors ask when they are plotting their investment plan is what is the best place to invest in real estate?

This question is extremely common yet its answer has so many dimensions. It is difficult to answer with a certain city without conducting an in-depth study of the market. One thing to look out for to get a basic idea of the best places to invest in real estate would be the capitalization rate.

The capitalization rate or most commonly known as the cap rate, is a metrical measure of the profitability of an investment. It describes the rate of return of a rental property irrespective of the investment method. Why is this important? Understanding the cap rate of the property you will purchase gives you an identification of the level of risk of that investment. The cap rate is also able to provide you with information about your potential expenses. This is extremely useful because it can allow you to control and make adjustments to your expenses in order to improve your cap rate.

While the cap rate gives a clear indication of potential returns on your investment. It should not be the only factor for you to make an investing decision. A major flaw in the cap rate is that it doesn’t take into consideration the rising value of properties over the years. Appreciation of investment properties should always be a factor when considering the best places to invest in real estate. There are so many investors who are purchasing property for the whole purpose of reselling it when its value rises.

All of this knowledge about the cap rate leads us to the most important question. What are the best places to invest in real estate based on the cap rate? We will be analyzing some cities that offer the best cap rates. Keep in mind these averages are city averages, meaning a property’s averages should be higher.

Houston

Houston is one of the most populated cities in the State of Texas with over two million inhabitants. Its housing market is indeed on the rise with its appreciation showing an increase of almost 4% annually in the past 10 years. The investment opportunities in Houston are worth the risk because the city’s appeal has allowed its success in both traditional and Airbnb rental prospects. Airbnb Houston is still not legally regulated helping in its rise in the city with an average occupancy rate of 59%.

Rental Income
- Airbnb = $2,751.57
- Traditional = $2,719.81
Cap Rate
- Airbnb = 8.76%
- Traditional = 8.47%
Median Price = $415,000
Airbnb Occupancy Rate = 32%

Tampa

Tampa is one of the major cities in the State of Florida with around 4 million people occupying the Tampa Bay area. The city has seen significant growth in the real estate market because of its high paying jobs, low property costs and high returns on rental considering its location. Airbnb is showing huge development in Tampa because of its coastal weather and its appeal for tourists. It can be considered one of the best places to invest in real estate considering its low prices at the moment.

Rental Income
- Airbnb = $1,690
- Traditional = $1,528
Cap Rate
- Airbnb = 9.3%
- Traditional = 7.88%
Median Price = $280,471
Airbnb Occupancy Rate = 50.54%

Chicago

As one of the major cities in the United State, Chicago has shown great promise in the real estate market. Airbnb has proved to be a very useful platform for the city with lots of listings that have been met with huge demand. Chicago’s Airbnb analysis has shown that properties have made more profit renting out entire homes on Airbnb rather than private rooms.

Rental Income
- Airbnb = $2,045
- Traditional = $1,840
Cap Rate
- Airbnb = 8.77%
- Traditional = 7.61%
Median Price = $378,395
Airbnb Occupancy Rate = 47.78%

Orlando

The second major city in Florida to be on the list to basically support the analysis that investing in Florida is recommended. Orlando has seen its Airbnb usage rise because of its popularity as a tourist destination for Americans and foreigners alike. However, a must know about its Airbnb is that it is divided into zones; there are zones in the city where short-term rental is not allowed. If you are looking for one of the best places to invest in real estate based on cap rate then Orlando ranks high in the list.

Rental Income
- Airbnb = $1,883
- Traditional = $1,389
Cap Rate
- Airbnb = 10.32%
- Traditional = 7.61 %
Median Price = $308,800
Airbnb Occupancy Rate = 49.5%

Pittsburgh

Real estate in Pittsburgh has been consistently profitable for years. It offers low media prices, livability, amazing tourist destinations and a strong job market. Pittsburgh can be considered a smart investment choice for both traditional and Airbnb rentals.

Rental Income
- Airbnb = $2,010
- Traditional = $1,331
Cap Rate
- Airbnb = 11.66%
- Traditional = 7.49 %
Median Price = $219,721
Airbnb Occupancy Rate = 46.57%

Austin

One of the most in demand real estate markets out there. Austin has seen its property prices rise in the last years because of people’s investment in rental properties. Airbnb has become a success there due to its good return on investment and its annual South by Southwest festival. However, traditional rental is still successful in Austin because of its ability to accommodate families in high-ranking school districts and the limited number of tourists all year round.

Rental Income
- Airbnb = $2,537
- Traditional = $3,566
Cap Rate
- Airbnb = 8.94%
- Traditional = 7.49 %
Median Price = $517,501
Airbnb Occupancy Rate = 28.34%

Each city’s cap rate and incomes are variable as seen in the study above and this is where your decision and personal preference comes in. Choosing the city that best describes your needs whether it be Airbnb rental or traditional rental. High cost or low cost. The purpose of the cap rate analysis for these cities is to guide you in making a decision and knowing your potential profits when choosing the best place to invest in real estate. It is important to understand that cap rates are also changeable over time. The city with the least cap rate could provide you with the biggest profit years later.

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