Last week, WalletHub released an outstanding set of data ranking hundreds of U.S. cities based on 15 economic indicators. As a real estate investor and writer, that perked my ears right up.

What cities are seeing a surge in demand? Where are jobs sprouting up, incomes rising, and poverty measures dropping?

But returns on real estate don’t just come down to demand and a booming local economy (much as they help). What good is a boomtown if prices are prohibitively high? (I’m looking at you, San Francisco.)

So as a rental investor, I also wanted to know how prices compare to rents in these booming cities. Because in my book, a surging economy mixed with low prices and high rents sounds like a pretty good place to start digging.

 

First Things First – How Is WalletHub Evaluating Cities?

WalletHub took 15 metrics, which they separated into “Sociodemographics” and “Jobs & Economy”. You’ll see that population growth accounts for a whopping 25% of the total score, while most metrics were only weighted at 3.7%:

Sociodemographics – Total Points: 50

  • Population Growth: Double Weight (~25.00 points)
  • Working-Age (16-64) Population Growth: Full Weight (~12.50 points)
  • College-Educated Population Growth: Full Weight (~12.50 points)

Jobs & Economy – Total Points: 50

  • Job Growth: Double Weight (~3.70 points)
  • Increase in Ratio of Full-Time to Part-Time Jobs: Half Weight (~1.85 points)
  • Median Household Income Growth: Full Weight (~3.70 points)
  • Unemployment Rate Decrease: Full Weight (~3.70 points)
  • Poverty Rate Decrease: Full Weight (~3.70 points)
  • Growth in Regional GDP per Capita: Double Weight (~7.41 points)
  • Increase in Number of Businesses: Full Weight (~3.70 points)
  • Increase in Number of Startups: Full Weight (~3.70 points)
  • Increase in Venture Capital Investment Amount: Full Weight (~3.70 points)
  • Median House Price Growth: Full Weight (~3.70 points)
  • Building-Permit Activity Growth: Full Weight (~3.70 points)
  • Foreclosure Rate Decrease: Full Weight (~3.70 points)

The data is based on change over the last five years.

As you can see, the data does include a few real estate-related metrics already, including home price growth, buildings permits, and foreclosure rates.

Source: WalletHub

 

Here are their top 20 metro areas by economic growth:

 

Overall Rank*CityTotal Score'Sociodemographics' Rank'Jobs & Economy' Rank
1Frisco, TX76.01127
2Kent, WA68.322138
3Lehigh Acres, FL67365
4Meridian, ID62.71469
5Midland, TX62.64614
6McKinney, TX62.42531
7Fort Myers, FL62.33810
8Bend, OR60.96271
9Austin, TX59.88157
10Pleasanton, CA59.69956
11Saint George, UT58.7263
12Murfreesboro, TN58.411247
13Irvine, CA58.067117
14Round Rock, TX57.871737
15Cape Coral, FL57.352421
16Odessa, TX57.182036
17Springdale, AR56.961661
18Milpitas, CA56.28462
19Boynton Beach, FL55.674112
20Charlotte, NC55.453439

 

 

Price/Rent Ratio

Economic growth is all well and good, but what about cash flow? How much rental income will my purchasing dollars buy me?

That’s where price/rent ratio comes into play. The ratio is a simple way to compare median real estate prices with median rents:

 

Purchase Price

_________________________________

Annual Rents (monthly rent X 12)

 

A lower ratio is better for investors: it means that prices are relatively low compared to rents.

“But wait a minute, what if homes being sold are more upscale than homes being rented?”

Good point. Which is why we pulled our data from Zillow, who takes only properties that have been listed for rent, and compares the rent with their Zestimate (Zillow’s home value estimate).

“What about other numbers that contribute to cash flow, like vacancy rate?”

Fortunately, an influx of population and jobs does wonders for slashing vacancy rates. Yes, cash flow is more than just rent minus mortgage, but if you look at the metrics WalletHub used, they paint a rounded picture of ballooning demand and shrinking poverty.

We cross-referenced the list of economically-booming cities with their price/rent ratio, to see which cities are a “bargain” for rental investors.

So, How Does the List Shake Out?

We split the list into three separate lists: large cities (300,000+ population), mid-size cities (100,000-300,000), and small cities (under 100,000 residents).

First, it helps us identify trends. But it’s also useful for investors who prefer to invest in smaller or larger cities.

Here are the lists:

 

WH RankLarge CitiesWH ScoreP/R Ratio Mid-Sized CitiesWH ScoreP/R Ratio Small CitiesWH ScoreP/R Ratio
1Austin, TX59.8814.06Frisco, TX76.0113.49Meridian, ID62.7113.34
2Charlotte, NC55.4511.62Kent, WA68.3214.98Fort Myers, FL62.3310.65
3Denver, CO54.3615.82Lehigh Acres, FL6710.19Bend, OR60.9617.33
4Seattle, WA52.6521.25Midland, TX62.648.18Pleasanton, CA59.6923.87
5Nashville, TN51.3812.26McKinney, TX62.4213.06Saint George, UT58.713.61
6San Jose, CA50.6422.22Murfreesboro, TN58.4112.51Springdale, AR56.9610.11
7Miami, FL50.0112.16Irvine, CA58.0620.07Milpitas, CA56.2823.04
8Oakland, CA48.9918.68Round Rock, TX57.8712.18Boynton Beach, FL55.6710.69
9San Francisco, CA48.9823.51Cape Coral, FL57.3511.57Redwood City, CA54.3327.59
10Raleigh, NC48.8712.69Odessa, TX57.188.01Concord, NC54.1111.65

 

If there’s one trend obvious at a glance, it’s that California is expensive for rental investors. None of the California cities listed above have price/rent ratios that are favorable for investors.

It’s also worth noting that the numbers tend to be more favorable in mid-size and smaller cities. For economic growth, the tenth-ranked mid-size city (Odessa, TX) is seeing faster economic growth than the second-ranked large city (Charlotte, NC).

Likewise, price/rent ratio tends to look better in the mid-size and smaller cities. Only one of these mid-size cities has a price/rent ratio over 15, while five of the large cities are over 15.

A few weeks ago we looked at how rents are collapsing in many large cities, but rising in mid-range cities. The numbers are looking good for mid-range cities right now, but less so for the largest cities.

 

Where Shouldn’t I Invest?

Cities with shrinking or stagnating economies make for bad long-term investments. While some landlords make a niche out of buying dirt cheap in decaying cities and then milking rents as long as possible, it’s exactly that: a niche.

In other words, don’t try it unless you know exactly what you’re doing.

Here are the bottom 20 cities in America for economic growth:

 

Overall Rank*CityTotal Score'Sociodemographics' Rank'Jobs & Economy' Rank
496Springfield, IL25.45432508
497Cleveland, OH25.4469497
498Kenner, LA25.26489482
499Lawton, OK25.25464499
500Peoria, IL25.04409511
501Las Cruces, NM24.79387512
502Syracuse, NY24.79483496
503New Britain, CT24.74503455
504Erie, PA24.46492489
505Topeka, KS24.09514417
506Waterbury, CT23.4501488
507Racine, WI23.24505481
508Fort Smith, AR23.21495500
509Davenport, IA22.98491506
510Baton Rouge, LA22.81513476
511Montgomery, AL22.72508480
512Decatur, IL22.54494505
513Fayetteville, NC20.97457514
514Jacksonville, NC19.06496513
515Shreveport, LA17.38506515

 

A Few Fun Comparisons

Want a few side-by-side looks at the best and worst? Or a closer look at individual metrics?

Here’s a quick (and graphical because that’s more fun!) breakdown:

best and worst cities for rental investors 2017

 

Beyond Your Own Backyard

In our Passive Income course, we generally encourage new rental investors to stick within an hour of home.

But if you’re ready to spread your wings and do some long-distance investing, the cities listed with high economic growth and low price/rent ratios are a good place to start.

When you choose a long-distance market you’re not familiar with, you have two choices. Either you become intimately familiar with it, or you partner with somebody who already knows it inside and out.

Option 3, investing without knowing a market, is better known as gambling.

Should you sell your stock portfolio and go put every penny into Lehigh Acres, FL or Midland, TX? Of course not, but this list can at least set your wheels spinning on options beyond your own backyard, and where you might be able to take your real estate investing to the next level.

Happy cash flow!

 

What to Do Now:

  1. Comment below: Have you ever done any long-distance investing before? Considering it now? If so, where are you thinking about?
  2. If you’re new to the rental investing game, download our free Recipe for Rental Income: 5 Steps for Your First $500/Month in Passive Income.
  3. Enjoy this article? Did it raise some questions and ideas that got you thinking? If so, your friends, colleagues, and family members will probably also get something out of it. Share it with them on Facebook or Twitter. You can also follow us on Facebook and or Twitter for awesome daily doses of, well, real estate awesomeness 😀

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