No matter if you’re house hunting for a place to live in, or a real estate investor who wants to buy an investment property to rent out for a profit, you always want to make a smart purchase.
When property investors are looking to buy an investment property, one of the first things they take into account is the price of the said property. Home prices in the US real estate market are continuing to rise in many cities across the country, especially in urban centers like New York and Los Angeles. This creates a challenge for a beginner real estate investor thinking of buying his/her first investment property.
Related: Buying Your First Investment Property? Don’t Make THIS Mistake!
Having said that, there still are a number of cities or housing markets where homes are still affordable and where prices are expected to rise. In real estate investing, these are called “undervalued cities” and they are generally desirable for a real estate investor who wants to buy an investment property.
In this article, we break down what makes undervalued cities and why they are the best places to buy an investment property for a beginner real estate investor. We further provide you with a list of 2018’s top 9 undervalued cities in the US real estate market in which property investors should set their eyes on.
What Does “Undervalued Cities” Mean?
In simple terms, undervalued cities are those in which residential investment properties are selling for a price lower than what they are actually worth. In these housing markets, it’s expected that property values will increase over the long-term (i.e. appreciation). Thus, in order to determine whether a certain real estate market is undervalued, property investors need to know the median property price in that city.
In addition, housing markets where a real estate investor can buy an investment property with less than 20% down payment can also be considered undervalued. The opposite holds true – most cities in California are considered overvalued because property investors would have to put down at least 50% to buy an investment property.
According to a recent report from Forbes and the Local Market Monitor, which tracks more than 300 US housing markets, there are a number of cities that are currently considered undervalued but are expecting an increase in price, population, and jobs. In these markets, a real estate investor can buy an investment property that is affordable (and which they can purchase with only 20% down payment) and sell it later on in the future for a much higher price and yield a decent return on investment.
To identify undervalued cities, keep a close eye on median property prices in the markets where you are looking to buy an investment property. Read reports on whether median property prices are going up or down and try to understand the trends that cause property prices to change.
Property investors need to see if the undervalued real estate market has strong, diverse employment. In cities that are creating jobs that attract employees, salaries, median property prices, and rental rates will rise. As a result, the value of your investment property will rise too!
Why Undervalued Housing Markets are Great to Buy an Investment Property
Based on the above, you can definitely see the perks of buying an investment property in undervalued cites. Here’s a summary of why these housing markets are great for real estate investing:
First of all, undervalued means property investors can find and buy affordable investment properties. As you know, one way of making money from real estate investing is buying low and selling high, which is exactly what you can do when you buy an investment property in an undervalued real estate market. This also means that undervalued cities are the best to grow equity and real estate appreciation.
What goes up must come down – I’m sure you’ve heard of this saying before. This applies to real estate investing: the real estate market will keep rising until it hits a peak point and then start declining. So, when you buy an investment property in a market that is performing well, you can’t guarantee that this market won’t one day reverse order and you’ll be unable to sustain your desired return on investment. In addition, rental rates also go hand in hand with market conditions – when the real estate market’s economy starts declining, so will your rental income and return on investment.
Related: Real Estate Questions: What Is a Good Return on Investment?
Why face these risks when you can buy an investment property in an undervalued real estate market. In a city that is expecting population and economic growth, demand for real estate investing will increase and, as mentioned, so will property investors’ rental income and return on investment. Thus, to buy an investment property in undervalued cities is the best way for a real estate investor to ensure his/her investment is sustainable.
Top 9 Undervalued Housing Markets in 2018
Below is a list of undervalued cities across the US real estate market which offer great long-term investment opportunities for property investors looking to buy an investment property in 2018. This data is provided to you by Mashvisor’s rental property calculator – a real estate investing tool that provides property investors with up-to-date data regarding median property prices, rental income, cash on cash return, and cap rate for both traditional and Airbnb investment properties across the United States! To learn more about our product, click here.
Jacksonville, Florida
- Median Property Price: $280,635
- Traditional Rental Income: $1,328
- Airbnb Rental Income: $584
- Traditional Cash on Cash Return: 1.31%
- Airbnb Cash on Cash Return: 0.14%
- Traditional Cap Rate: 1.31%
- Airbnb Cap Rate: 0.14%
- Cost of Living Index: 73.58
Ogden, Utah
- Median Property Price: $214,495
- Traditional Rental Income: $1,004
- Airbnb Rental Income: $1,318
- Traditional Cash on Cash Return: 1.25%
- Airbnb Cash on Cash Return: 1.37%
- Traditional Cap Rate: 1.25%
- Airbnb Cap Rate: 1.37%
- Cost of Living Index: 86.80
Clearfield, Utah
- Median Property Price: $254,632
- Traditional Rental Income: $1,071
- Airbnb Rental Income: $1,372
- Traditional Cash on Cash Return: 1.15%
- Airbnb Cash on Cash Return: 0.88%
- Traditional Cap Rate: 1.15%
- Airbnb Cap Rate: 0.88%
- Cost of Living Index: 92.50
Springfield, Missouri
- Median Property Price: $226,000
- Traditional Rental Income: $953
- Airbnb Rental Income: $1,169
- Traditional Cash on Cash Return: 2.05%
- Airbnb Cash on Cash Return: 0.6%
- Traditional Cap Rate: 2.05%
- Airbnb Cap Rate: 0.6%
- Cost of Living Index: 40
Fort Worth, Texas
- Median Property Price: $314,004
- Traditional Rental Income: $1,565
- Airbnb Rental Income: $1,429
- Traditional Cash on Cash Return: 0.45%
- Airbnb Cash on Cash Return: 0.33%
- Traditional Cap Rate: 0.45%
- Airbnb Cap Rate: 0.33%
- Cost of Living Index: 81
Arlington, Texas
- Median Property Price: $273,823
- Traditional Rental Income: $1,542
- Airbnb Rental Income: $1,627
- Traditional Cash on Cash Return: 1.5%
- Airbnb Cash on Cash Return: 3.22%
- Traditional Cap Rate: 1.5%
- Airbnb Cap Rate: 3.22%
- Cost of Living Index: 63
San Antonio, Texas
- Median Property Price: $277,470
- Traditional Rental Income: $1,551
- Airbnb Rental Income: $1,214
- Traditional Cash on Cash Return: 0.85%
- Airbnb Cash on Cash Return: 0.3%
- Traditional Cap Rate: 0.85%
- Airbnb Cap Rate: 0.3%
- Cost of Living Index: 60.92
Des Moines, Iowa
- Median Property Price: $154,044
- Traditional Rental Income: $873
- Airbnb Rental Income: $1,457
- Traditional Cash on Cash Return: 0.62%
- Airbnb Cash on Cash Return: 5.07%
- Traditional Cap Rate: 0.62%
- Airbnb Cap Rate: 5.07%
- Cost of Living Index: 69.37
Columbus, Ohio
- Median Property Price: $209,291
- Traditional Rental Income: $1,115
- Airbnb Rental Income: $1,572
- Traditional Cash on Cash Return: 1.33%
- Airbnb Cash on Cash Return: 1.13%
- Traditional Cap Rate: 1.33%
- Airbnb Cap Rate: 1.13%
- Cost of Living Index: 73.47
To start looking for and analyzing the best investment properties in your city of choice, click here!
The Bottom Line
Buy an investment property in an undervalued city and you’ve found your road to riches in real estate investing. Savvy property investors always keep an eye out for these housing markets as they offer great investment opportunities for the long-term. If you’re wondering how to start your search for an investment property in such cities, you’ve come to the right place!
Sign up for Mashvisor and use our Investment Property Calculator – A versatile tool that allows property investors to calculate the different values related to an investment property, including the Cash on Cash Return, Cap Rate, Cash Flow, and Occupancy Rate.
You’ll also get access to another useful real estate investing tool and that is the Investment Property Finder – A powerful and heavily customizable search tool that allows property investors to search for rental properties based on specific criteria, such as finding properties of a certain type, in a certain neighborhood, or with a certain Cap Rate. This tool also comes with a Heat Map Function that allows property investors to find rental properties much faster using visual cues.
Related: Mashvisor: A Real Estate Investing Tool for All Your Investment Needs
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