Trying to decide on where to invest in real estate? Well, it doesn’t have to feel like you’re throwing a dart at a map and seeing where it lands. And although it may be easier to assume that the best real estate markets to invest in are close to home, that’s not always a safe bet. Choosing a real estate market is actually somewhat of a process. It requires research, access to real estate market data, and analysis.
How to Choose a Real Estate Market to Invest In – The Right Way
There are two main steps when it comes to how to choose a real estate market:
- You need to decide on a city.
- You’ll have to find a profitable neighborhood within that city to buy a rental property.
Where should you start your real estate market research? As it turns out, a lot of the best places to invest in real estate have similar characteristics. If you know what real estate market trends and statistics to look for during your research, you’re much more likely to find a good housing market. You’ll essentially be reducing a major risk of real estate investing- ending up with an investment property in a terrible location that you can’t rent out or sell.
Let’s break down the main things you should look for in a target city as well as a neighborhood. In addition to this list, I will show you a few shortcuts you can take when trying to find the best places to buy investment property in the US housing market. These shortcuts are reliable and will help you choose a profitable location for a real estate investment with confidence.
Finding the Best Cities for Real Estate Investment: What to Look For
So as to not be repetitive, it’s important to note that a lot of this information, for both cities and neighborhoods, can be found online. And with this list, it will be easier to find the market information you need since you’ll know exactly what to look for.
A Median Property Price That Fits Your Budget
The very first thing you’ll want to figure out is your budget. You should have an idea of:
- Whether you will buy a rental property with cash or a mortgage
- How much of your savings you want to put toward either the full price of an investment property or a down payment
- What you’ll have left from your savings to put into a cash reserve
- If you can qualify for a rental property mortgage if needed
Cities across the US housing market, even those in the same state, have median property prices ranging from very cheap to super expensive. And although you can almost always find affordable neighborhoods in any city and cheap investment property for sale, it’s easier to start your property search in a city with a median property price that fits your budget.
Once you know your budget, you’ll have to dig a little online to find out this real estate information. Most real estate websites will have data on property prices. To give you an idea, here is Mashvisor’s data on median property prices in 50 major US cities:
|City||Median Property Price|
|El Paso, TX||$211,758|
|Kansas City, MO||$266,786|
|San Antonio, TX||$274,041|
|Fort Worth, TX||$296,171|
|Virginia Beach, VA||$385,294|
|Las Vegas, NV||$422,379|
|Colorado Springs, CO||$436,500|
|New Orleans, LA||$436,883|
|Long Beach, CA||$832,401|
|San Diego, CA||$865,860|
|San Jose, CA||$939,546|
|Los Angeles, CA||$1,031,120|
|New York City, NY||$1,111,440|
|San Francisco, CA||$1,688,050|
So, do you have the budget to invest in the Los Angeles housing market or does the price of Houston income properties make more sense for you? It’s best to make a list of a few different cities that fit your budget for real estate investing. This will help narrow down your options right from the start. That way, you won’t have to carry out real estate market analysis on so many cities but rather just a few that you can actually afford to buy an investment property in.
Average Performance of Traditional and Airbnb Rental Properties
Before you dive any further into your real estate market analysis, you’ll want to look at some more real estate market data for the cities left on your list. Specifically, you’ll want to find out how the average traditional or Airbnb rental property performs in each location. You’ll need the following property data by city depending on your rental strategy:
- Traditional Rental Income
- Traditional Cap Rate
- Airbnb Daily Rate
- Airbnb Rental Income
- Airbnb Cap Rate
- Airbnb Occupancy Rate
How should you choose a real estate market based on this data? Because the market data will be broad and will include all the investment properties in a location, the values will be lower than they would be for a single investment property. For example, a good cap rate for rental property is somewhere between 8% and 12%. But most major cities that are actually good locations for real estate investing have a cap rate closer to 2%-3%, sometimes even lower. Keeping this in mind, you still want to select locations that have comparatively higher cap rates, higher rental income, and a higher occupancy rate.
Narrow down your list even further by taking a look at Mashvisor’s traditional and Airbnb data for rental properties in the same 50 major cities:
Traditional Data by City
|City||Traditional Rental Income||Traditional Cap Rate|
|El Paso, TX||$1,148||0.53%|
|San Antonio, TX||$1,534||1.12%|
|Fort Worth, TX||$1,602||1.10%|
|Kansas City, MO||$1,198||1.01%|
|Virginia Beach, VA||$1,544||1.53%|
|Long Beach, CA||$3,267||1.14%|
|Colorado Springs, CO||$1,578||1.63%|
|New Orleans, LA||$1,571||1.30%|
|Los Angeles, CA||$3,629||1.35%|
|Las Vegas, NV||$1,375||1.42%|
|San Diego, CA||$2,729||1.20%|
|San Jose, CA||$3,021||1%|
|San Francisco, CA||$4,644||0.65%|
|New York City, NY||$2,676||0.59%|
Airbnb Data by City
|City||Airbnb Daily Rate||Airbnb Occupancy Rate||Airbnb Rental Income||Airbnb Cap Rate|
|El Paso, TX||$78||61.89%||$2,145||3.19%|
|San Antonio, TX||$120||51.05%||$2,298||2.75%|
|Fort Worth, TX||$141||54%||$2,610||3.17%|
|Kansas City, MO||$125||53.03%||$1,996||2.77%|
|Virginia Beach, VA||$177||51.24%||$2,531||3.61%|
|Long Beach, CA||$144||66.66%||$3,641||2.01%|
|Colorado Springs, CO||$128||52.72%||$2,283||2.87%|
|New Orleans, LA||$153||50.35%||$2,730||3.28%|
|Los Angeles, CA||$153||68.68%||$4,159||1.73%|
|Las Vegas, NV||$182||54.21%||$2,794||4.12%|
|San Diego, CA||$149||59.03%||$3,418||1.78%|
|San Jose, CA||$201||60.58%||$3,453||1.05%|
|San Francisco, CA||$216||71.11%||$5,848||1.11%|
|New York City, NY||$167||57.16%||$3,376||0.74%|
A Growing Economy and a Diverse Job Market
The next step of how to research real estate markets involves looking at the local economy and job market.
It’s important to know that if a city’s economy is in a bad state, then it’s likely that the real estate market is suffering as a result. The economy can impact things like local house prices and demand from buyers and tenants. When the economy is thriving, you’ll find that the local housing market is also doing well. This will be thanks to the fact that the median household income is on the rise and there are better job opportunities that attract tenants, resulting in higher demand for rental properties. As a real estate investor, this means that you can charge an attractive rental rate that local tenants can afford which simultaneously provides you with positive cash flow. It’s all connected.
One element of the economy that you may want to investigate is tourism. This is if you’re interested in buying an Airbnb rental property. Short-term rental properties can only generate a good return on investment if they are located in a city that attracts tourists regularly. You’ll want to find out:
- Is the city a hot tourist destination? And is it an important sector of the economy?
- How many tourists have visited the city on an annual basis in the last few years?
- How many tourists are expected to visit in the next year?
- What are the major tourist attractions and are they likely to stay popular for years to come?
Besides reviewing the general economic outlook for the next few years, you’ll want to look into the job market specifically:
- What is the current unemployment rate?
- How does it compare to the national unemployment rate (3.6% January 2020)?
- What have been the historic trends in unemployment? Has it been increasing or decreasing over the last few years?
- Are there plenty of job opportunities in a diverse range of industries?
- What’s the job market outlook for the next few years?
Remember that it’s key to look into the job and economic forecasts. When buying a rental property, you’ll likely be implementing a buy and hold real estate investment strategy. So it’s not only important to choose a location that has a supportive environment now, but one that will continue to help your rental property succeed for years to come.
Typically, if the economy is doing well and new job opportunities are popping up in a range of modern industries, you’ll find that the population is growing steadily. But there are two specific aspects of population growth statistics that you’ll want to look at:
- Net Migration: Some statistics of population growth include births. But what’s important to a real estate investor is that people are moving to the area and this is what is increasing the population.
- Renter Population: Be sure to check on the homeowner vs renter population. As a rental property investor, you want to choose a real estate market where a significant amount of the population rents rather than owns a property. The price to rent ratio will also be an indicator of this.
A Suitable Price to Rent Ratio
Because we have started to discuss the renter population, now is a good time to introduce you to the price to rent ratio:
Price to Rent Ratio= Average Property Price / Average Annual Rent
This value will help a real estate investor determine what is more affordable for local residents: buying a home or renting out a home. Here’s what the price to rent ratio can indicate:
- 1-15: It is more affordable for the average person to buy a home than to rent.
- 16-20: It is typically more affordable for the average person to rent than to buy.
- 21 or higher: It is much more affordable for the average person to rent than to buy.
Based on those real estate definitions, most experts would agree that the best real estate markets to invest in would be those with a price to rent ratio above 16. These are areas that are likely to have a high renter population because locals cannot afford to buy their own homes.
However, it’s important to understand that the price to rent ratio is just one number to look at in your real estate market analysis. Simply put, if you also cannot afford to buy an investment property in such markets, then investing in locations with a high price to rent ratio won’t make sense for you. Be sure to also look at the actual percentages of homeowners vs renters as well as the median property prices to come to a final decision on what is the best price to rent ratio for your investment.
To give you an idea of what the current price to rent ratio by city looks like for major US cities, here is Mashvisor’s data:
|City||Price to Rent Ratio|
|El Paso, TX||15|
|San Antonio, TX||15|
|Fort Worth, TX||15|
|Kansas City, MO||19|
|Virginia Beach, VA||21|
|Long Beach, CA||21|
|Colorado Springs, CO||23|
|New Orleans, LA||23|
|Los Angeles, CA||24|
|Las Vegas, NV||26|
|San Diego, CA||26|
|San Jose, CA||26|
|San Francisco, CA||30|
|New York City, NY||35|
A Low Crime Rate
There are two major reasons to check crime rates before you pick a real estate market to invest in:
- Tenants are more likely to move to and keep moving to a city where they feel safe.
- You don’t want to subject your rental investment property to a location where it is likely to get broken into, robbed, or vandalized.
Although you will want to check crime rates again when looking into specific neighborhoods, it’s best to get an idea of the crime rate on the city-level. A city with a really high crime rate may have initially drawn you in with low property prices. And you might find that you have to cross it off your list now of potential real estate markets before looking into neighborhoods.
Favorable Landlord-Tenant Laws
Becoming a landlord means following the local property and rental laws. Every location has its own laws in regards to rent increases, security deposits, evictions, right of entry, lease agreements, tenant and landlord rights and responsibilities, and more.
No matter where you choose to buy rental property, you’ll have to understand and follow the local laws and regulations. However, you can make things a little easier for yourself by investing in a landlord-friendly real estate market. These are locations where, for instance, there is no rent control. Or where the eviction process is set up so that it is quick and there is little tolerance for tenants who violate a lease agreement. Mashvisor has put together a list of the most landlord-friendly states to help you find the best cities to invest in real estate:
Learn more about each state as well as the best cities based on return on investment data by reading: Invest in Real Estate in the 5 Most Landlord-Friendly States.
Airbnb Regulations That Favor Real Estate Investors
If you’re planning on buying an Airbnb investment property, there’s another set of laws you need to investigate: Airbnb regulations. Many cities across the US real estate market ban non-owner occupied rentals. This means that real estate investors aren’t able to buy property for Airbnb and rent out the whole unit while living somewhere else. Here is a list of cities where there are currently no Airbnb legal issues for real estate investors:
- Milwaukee, WI
- Gatlinburg, TN
- Columbus, OH
- Indianapolis, IN
- Memphis, TN
- El Paso, TX
- San Antonio, TX
- Philadelphia, PA
- Kissimmee, FL
- Cleveland, OH
- Phoenix, AZ
- Tempe, AZ
- Mesa, AZ
- Eugene, OR
- Tampa, FL
- Dallas, TX
- Cape Canaveral, FL
- Fort Lauderdale, FL
- Atlanta, GA
- Houston, TX
Learn more about how Airbnb investment properties perform in each city by reading: 20 Cities with No Airbnb Legal Issue in 2020.
Besides checking if it’s legal for you to rent out an investment property on Airbnb, also take a look at things like:
- Zoning laws
- Airbnb taxes
- Airbnb occupancy rate limits
- Rental property codes and regulations
- Required licenses and permits as well as any associated one-time or recurring fees
Although some cities seem Airbnb-friendly because these short-term rental properties are not banned, the Airbnb regulations may actually be strict and costly. You need to be aware of this before selecting such a real estate market for your Airbnb investment.
Affordable Property Taxes
Although there are plenty of rental property tax deductions that you’ll be able to take advantage of, you will be responsible for paying property taxes as well. Some states have very high property taxes that could hurt your chances of generating a positive cash flow. So it’s best to look at local property tax rates before selecting a rental investment market. You may find it easier to conduct the research by looking for property taxes by state.
Seller’s Market or Buyer’s Market
I’ve left this factor for the end of this section. Although it’s important information to have before you start your investment property search in a certain housing market, it shouldn’t necessarily be a deciding factor for location.
If you’re unfamiliar with the two terms, here is a brief definition of each one:
- Buyer’s Market: A real estate market where the conditions favor property buyers. The housing inventory is high compared to the number of buyers in the market. Supply > Demand. This usually means lower property prices.
- Seller’s Market: A real estate market where the conditions favor property sellers. The housing inventory is low compared to the number of buyers in the market. Supply < Demand. This usually means higher property prices.
From those definitions, you might think to try to choose a real estate market that is currently in a buyer’s market. And this could be a smart move. However, the issue is that, in the US housing market, most of the hottest real estate markets are seller’s markets. Not all- but most. But you can still find good real estate deals in a seller’s market. So rather than writing off a seller’s market and hopelessly looking for a buyer’s market, just make sure all of the other characteristics on this list are found in the location of your choice. That way, whatever the inventory and competition are like in the market, you should still be able to find profitable investment properties for sale.
Want to Take a Shortcut?
While I’m not a big fan of cutting corners when it comes to any step of real estate investing, I do have a quick way for you to check on the real estate market outlook of many major locations across the US housing market. And that’s Mashvisor’s resources. You can choose to look at some of our in-depth real estate market reports or visit our blog where we list key real estate market statistics on some of the hottest housing markets in the US. We’ve already done the market analysis for you and we use our real estate database to ensure you’re getting all the return on investment forecasts you need to make a wise investment decision.
Finding the Best Neighborhoods for Real Estate Investment: What to Look For
The best possible outcome at this point is having one or maybe two cities on your list. If you still have too many to choose from, I suggest you learn more about how to find rental property for sale using AI and Mashvisor’s powerful Rental Property Finder. This tool allows you to search for the best investment properties for sale in multiple cities at once. This will help you decide on a city quickly and easily.
But if your list is short and you’re ready to find the best neighborhood for real estate investment, let’s look at the features of such a place:
An Affordable Median Property Price
Just because you’ve chosen a real estate market that you know you can afford, that doesn’t mean that every neighborhood will have investment properties for sale that fit in your budget. So, you’ll have to continue with your market research on house prices. Try to pinpoint neighborhoods with an affordable median property price. You can skip to the next shortcut to find out an easy way to do this. Otherwise, you have a lot of online research to do!
Average Performance of Traditional and Airbnb Rental Properties
Just as real estate investors should understand how the average rental income property performs in a city, this information is key to choosing a neighborhood. For this neighborhood analysis, you’ll need the following data:
- Traditional Rental Income
- Traditional Cap Rate
- Airbnb Rental Income
- Airbnb Cap Rate
- Airbnb Occupancy Rate
When it comes to getting access to this kind of neighborhood data, it can be very difficult. Just like with trying to compare median property prices of multiple neighborhoods possibly across multiple cities, it’s going to take a lot of time and a lot of online sleuthing. Luckily, there’s a shortcut.
Want to Take a Shortcut? Then You Need to Use a Real Estate Heatmap
In order to quickly and easily find the best neighborhood to invest in real estate, you’ll want to use Mashvisor’s Real Estate Heatmap. This neighborhood analysis tool allows you to select filters that match the list of data above, including Listing Price. Check it out:
Note: Cash on cash return and cap rate are equal until financing is taken into account. With Mashvisor, you can conduct an investment property search based on your investment property financing by setting the filters. Get Started.
Once selected, neighborhoods will be color-coded based on how they perform. For example, if you want to find a neighborhood with Airbnb rental properties for sale that promise a high rental income, you’ll have to set the filter for Airbnb Rental Income. Then, start your search in the areas marked in green as these will be the neighborhoods with the highest Airbnb rental income.
Within minutes, you’ll have completed your neighborhood analysis of an entire real estate market using the Heatmap. If you want to try this real estate investment tool for yourself, Sign Up for a 7-Day Free Trial.
A Low Crime Rate
I’m putting this on the list again for your neighborhood research as it is crucial. Plenty of safe cities across the United States have very bad neighborhoods. And you don’t want to be buying rental property in such neighborhoods unless you have the experience to deal with this kind of investment. Be sure to look for neighborhoods with low crime rates.
High Real Estate Appreciation Rates
Although you may be more interested in finding out what kind of rental property cash flow you can generate immediately in a location, it’s important to also find a place that promises real estate appreciation. Real estate appreciation is the increase in property value over time. While a real estate investor can force appreciation through rental property upgrades and the like, natural appreciation rates will depend mostly on the location. It’s best to look for neighborhoods within the city that have a high real estate appreciation rate.
So what is a “high real estate appreciation rate”? Well, Zillow forecasts that the average appreciation rate for properties in the US housing market as a whole will be 4.1% in 2020. Try to aim for neighborhoods with historical and future appreciation rates close to the US average.
Close Proximity to Public Transportation or a Good Walk Score
At the end of the day, you’ll only be making money with rental properties if they attract tenants. And something that is really important to tenants is the ability to get to work, school, shopping centers, supermarkets, and other bustling centers in a city. This means that when choosing a real estate market to invest in, you have to check out how accessible (and affordable) public transportation is. Better yet, you want to try and find a neighborhood with a high Walk Score. The Walk Score is a number assigned to a location based on how “walkable” it is or how easy it is for residents to get around. The best neighborhoods will have a Walk Score closer to 100.
Desirable Neighborhood Amenities
Speaking of attracting tenants to your rental property, another important element is neighborhood amenities. Tenants might fall in love with a rental property, but if it’s in a neighborhood that is nowhere near a market or the best schools or a hospital, you may have just narrowed down your tenant pool tenfold simply by the choice of location. The more desirable the neighborhood amenities, the higher the occupancy rate, and usually, the more you can charge for rent.
Found a Real Estate Market to Invest In?
If you follow this guide closely, you’ll soon see that understanding the real estate market and making a good choice isn’t too difficult. If you’re ready to actually start looking for investment property for sale, Sign Up for a 7-Day Free Trial with Mashvisor. Just as we have lots of useful data on cities and neighborhoods, we have property data to aid you in a complete investment property analysis. This will ensure you choose the best investment property in the best location.