Growing Markets with 1% properties

[Kent Lyons]

I'm an out of state investor looking for potential markets to invest in for buy and hold SFR rentals. After hours of scrolling around the map and trying various cities, I was not having much luck finding a market where the numbers made sense. Nothing was getting close to the 1% "rule". So I decided to do some data analysis across the US to see where those markets might be. Here is how I did it and the results. I hope you find this useful!

I wanted to find markets where there are 1% properties (the monthly rent is about 1% of the ARV). I downloaded the data from Zillow (https://www.zillow.com/research/data/) on median rental price by zip code, and the median sales price by zip. I used the most recent data from May 2019. There are 13059 zip codes with both rental data and sales data. I next filtered for zip codes that have a population of at least 7k people. I also picked only zip codes that have a median sales price of at least $100k. That filters down to 6440 zip codes.

Of those, per zip code I did the division to see how close it is to 1%. I selected the zip codes that were 0.8% - 1.2%. That drops to 965 zip codes - now we’re getting somewhere!

As one last filter, I picked zip codes that have a population growth of at least 25% (using usa.com data so 2010-2014). The idea here is to find markets that have a decent chance of appreciating over time.

And the final result is 99 zip codes. Here they are sorted by state!

• AL: 35040, 36567, 36582
• FL: 32025, 33936, 33981, 34109, 34110, 34114, 34287, 34465, 34472
• GA: 30038, 30122, 30168, 30213, 30291, 30296, 30331, 30349, 30701, 31088, 31525
• IL: 60002, 60073, 60443, 60446, 60505, 60538, 62221
• IN: 46235
• LA: 70520, 70726, 70785, 70820
• MS: 38637, 38671
• NC: 27127, 27834, 28217
• NJ: 08330, 08759
• OH: 43950
• OK: 73135, 73160, 74429
• SC: 29073, 29229, 29316, 29505, 29527
• TX: 75051, 75134, 75159, 76134, 76140, 76310, 77014, 77034, 77038, 77041, 77045, 77047, 77049, 77064, 77065, 77067, 77073, 77075, 77082, 77083, 77084, 77086, 77089, 77090, 77301, 77303, 77338, 77373, 77378, 77396, 77449, 77471, 77477, 77521, 77539, 77545, 77591, 78043, 78046, 78222, 78224, 78503, 78504, 78526, 79416, 79423, 79707
• WV: 26104

Some caveats: This is using median data from zillow for rents and sales. I'm sure that number has had some significant massaging before zillow puts it out. For rents in particular, it seems like some of these zips have no rentals or only very few - those should probably be thrown out. Also, median doesn't capture the diversity in a market. The median SFR rental may not be directly comparable to the median sale. Likewise, zip code is a very blunt geographical segmentation and misses variations of neighborhood, etc. And of course I filtered out a bunch of stuff as described above. Basically, I'm sure I missed out on areas that have 1% properties and not all of the properties in these zips will be 1%. But this should be a good starting point for doing detailed property analysis.

Hopefully this list is useful for those of you looking for new markets as I am. I’m happy to answer any questions.

[Rob Malda]

@Kent Lyons - nice. I would suggest dropping the 25% population growth filter and adding a rent growth filter instead. You've got many areas in the country growing fast, but if there is a large corresponding supply of land the population growth will not translate to rent growth or home price growth. On the other hand you've got places in the country with no population growth but insane rent or price growth due to high demand and constrained supply (ie bay area, jackson hole, many other resort towns). Drop the population growth filter since it's a poor proxy for rent/price growth and just filter on rent/price growth directly.