Top Six Cities for Rental Property Investing
As a real estate investor looking to scale their business, or a new investor trying to decide where to start, it can be overwhelming to sift through all the available data to determine the best places to invest. Many people looking to invest in real estate, especially long-term rental properties, often keep their search local so they can remain hands-on with their investment. However, for investors thinking about expanding their range, or gaining access to a stronger rental market than their immediate area, it becomes necessary to evaluate regions outside of their home base.
When researching new areas to purchase rental property, investors must consider more than just purchase price. Factors including unemployment rates, vacancy rates and the ratio of renters versus homeowners contribute to the likelihood that a property will produce positive cashflow and remain a valuable long-term investment.
To provide borrowers with insight they need to assess and narrow down their ideal location for long-term rental property investments, Asset Based Lending has evaluated six potential markets around the country. We have examined San Antonio, Houston, Oklahoma City, Indianapolis, Cincinnati, and Myrtle Beach as each market presents unique sets of benefits and appeal for rental property investors.
San Antonio, TX
San Antonio Texas offers many benefits for rental property investors as Texas does not require state-level property tax or income tax. Owning and operating rental properties generates monthly cashflow from rent payments which investors must show as income each year when they file their taxes. However, Texas does not require residents and business owners to file income taxes, allowing them to save more money each year. Real estate investors, who often show large deposits from their various investments, do not have to be concerned with calculating how much they owe to the state from their income, leaving them with more liquidity to reinvest into their portfolio. While investors in Texas still need to be concerned with city property taxes and Federal income taxes, they will have the ability to scale their businesses faster than if they were operating in many other cities.
Even though San Antonio is the second largest city in Texas, the average price of a home remains low when compared to other cities in the state. Because the purchase prices on homes are more reasonable, property owners can keep the cost of rent affordable and ultimately make it easier for renters to find housing. A strong rental market combined with low purchase prices and taxes ensures that investors will realize the return on their investment and be able to profit sooner than in more expensive markets in the country. Rental property investors in San Antonio can expect high demand for their rentals as well as consistency due to the low vacancy rates across the city.
As of June 2023, nearly half of San Antonio’s residents rent their home versus owning. The heavy military presence in this city heavily contributes to the demand for rentals as San Antonio plays host to the largest and most diverse joint base in the Department of Defense. Joint Base San Antonio employs a large portion of residents, many of whom were assigned to this base from out of state. With so many military personnel living and working in San Antonio, unemployment rates remain consistently lower than the national average and ensures reliable income for investors. ABL takes these factors into consideration when they are reviewing rental property investments with borrowers. In San Antonio, where low unemployment and vacancy rates as well as low purchase prices and taxes, it becomes much easier for a property to produce positive cashflow and makes lenders more confident in their borrowers.
Now that we have established the benefits of investing in Texas let’s look at another city with a strong rental market. Houston is the largest city in Texas and is the home to companies like ExxonMobil, Shell Oil, and Houston Methodist Hospital. Being home to such large employers means the unemployment rates remain low and as of April 2023, the unemployment rate in Houston is approximately 4%.
As of June 2023, the average monthly rent for apartments in Houston is approximately $1300. Though this is lower than the national average, the rent rates are in line with the average salary in this city. Single-family home rentals make up roughly 17% of the market, leaving the balance to apartment buildings of various sizes. Over the last few years as the housing market has been experiencing low inventory, many residents have had to pivot back to renting which has bolstered the rental market in Houston. For that reason, the demand for single-family rentals has been heightened and become very competitive.
Similarly, to San Antonio, Houston’s strong economy translates to a strong rental market. In Houston 58% of households are renter occupied rather than owner occupied. With such a large demand for rentals, real estate investors can be confident in their cashflow. In fact, of the portion of Houston’s population that are renters, 60% chose to renew their lease from 2022 rather than shop around for a new rental. When tenants remain in place year over year rental property investors are relieved from taking time and money to touch up apartments for showings and having to vet potential tenants. For rental property investors in Houston, as in San Antonio, the low vacancy rates contribute to the positive cashflow of the investment property.
Considering the low property costs, high demand for rentals, and the average rate of appreciation being roughly 2.4% year over year, Houston is a city where investors can find significant success.
Oklahoma City, OK
Taking our evaluation process north brings us to Oklahoma City. There has been an increase in population in Oklahoma City over the last few years because of the number of industries that have expanded in and around the city. Some of the top employers in the city include Tinker Airforce Base, Oklahoma State University, INTEGRIS Health and The Boeing Company, among many others. Introducing new industries also creates an environment for low unemployment rates and as of 2023 Oklahoma City boasts a rate as low as 2%. Rental property investors considering Oklahoma City as the next investment location can be confident in their cashflow with unemployment as low as it has been. With 41% of residents renting their homes instead of owning, Oklahoma City real estate investors stand to be successful with their rental property investments.
In the unfortunate event that a tenant does not make their monthly rent payments, Oklahoma City has favorable regulations for landlords. Much like the state of Texas, Oklahoma City is known to support the rental property investors by moving quickly on eviction proceedings which helps landlords replace unwanted tenants faster and avoid the impact of vacancies. Due to rental property investor friendly regulations, the vacancy rate in Oklahoma City is about 5.5%. For investors looking to find their next rental investment, Oklahoma City presents many attractive characteristics.
Moving on to the midwestern city with the highest job growth, Indianapolis is considered one of the best long term real estate investment markets in the country. Indianapolis residents benefit from the diverse range of industries that operate out of this city. Companies like Eli Lilly and Company, Anthem, and tech companies like SalesForce have offices located in Indianapolis and draw many people to relocate to this city for their career each year. With a growing population, it is expected for the rental market to be one of the strongest in the Midwest for the foreseeable future.
Not only is Indianapolis’s rental market very strong, but it is also affordable. Rental rates in Indianapolis remain lower than the national average making it easier for renters to find affordable housing. As a city with affordable rent and a vacancy rate of approximately 7%, rental property investors have less trouble finding tenants for their properties than many other cities.
Rental property investors in Indianapolis find that this is a unique city to grow your portfolio. Barrier to entry costs are much lower in this city not only because property values are affordable, but also because Indianapolis has some of the lowest closing costs in the country, as well as low property taxes. For investors looking to close a deal in Indianapolis, they can look forward to closing costs as low as 1% of the purchase price. When rental property investors need less money up front and can consistently cashflow on a rental, they have more flexibility and opportunity to scale their business quickly and effectively.
Another midwestern city that has experienced a fast rate of growth in their economy in recent years is Cincinnati. As the third most populous city in Ohio with 61% of households being renter-occupied, Cincinnati is another market for rental property investors to target.
The strong rental market in Cincinnati boasts a vacancy rate of 3% due to the affordable cost to rent. The average monthly rent in Cincinnati trends approximately 8% lower than the national average, but the investors benefit in this market as it is much easier to acquire affordable properties and maintain low overhead in this city.
In Cincinnati the largest employers include the University of Cincinnati, Kroger Company, and Procter and Gamble. There has been a recent economic boom which can be attributed to manufacturing, financial and professional service companies bringing offices to the Cincinnati area. Because these employers moved to this city, they brought with them new residents, especially in the case of the University of Cincinnati. The affordable cost of housing makes it possible for new residents to find housing and for rental property owners to keep their properties producing positive cashflow. Much like Oklahoma City, the presence of a university guarantees demand for rental property and contributes to the strength and viability of rental property investing.
Myrtle Beach, SC
Short term vacation rentals can be an outlier when discussing real estate investment strategies since many lenders shy away from these deals because the income can be considered inconsistent. Asset Based Lending doesn’t require income documentation for our financing, which benefits short term rental investors that rely on seasonality rather than a steady income stream. One area that sees a lot of success with short term vacation rentals is Myrtle Beach. Located off the coast of South Carolina, Myrtle Beach has one of the hottest short term rental markets on the east coast.
Myrtle Beach’s housing market is comprised of 42% renter-occupied properties and averages a 4.6% vacancy rate. For properties that are specifically rented through Airbnb, the occupancy rate ranges from 35% in December to 97% in July. Though the winter months do not provide the same steady income stream as the summer months, with an average rent of $3,000 a month for the peak seasons, rental property owners can cover their expenses for the entire year with one summer’s profit.
Rental property investors not only benefit from the influx of approximately 14 million annual visitors spending money on vacation rentals, but also from the favorable tax environment that South Carolina provides. Many retirees make the decision to relocate to South Carolina, especially Myrtle Beach, because there is no state inheritance or estate taxes, and very low property taxes. With the favorable tax regulations and mild weather, the standard for overall quality of life in Myrtle Beach is relatively high.
Rental properties provide investors with consistent cashflow and long-term appreciation benefits when they can find the right areas and properties. Determining what makes a successful investment property is a daunting task with many factors to consider, that is why it is important to have specific investment goals fleshed out prior to closing a deal.
For instance, if an investor is looking to build a portfolio without taking on a lot of risk targeting areas like Oklahoma City where property purchase prices are low and laws favor property owners is probably a better decision than a location with more expensive properties and less favorable regulations like Boston or New York City. Once an investor has made these determinations for themselves and is ready to begin their investment journey or scale their business, it’s a good time to reach out to lenders and begin the process of acquiring funding.