The Best Cash Flow Market in Each U.S. State

One of the most common questions I get from experienced and aspiring real estate investors is, “Where should I invest?” Sometimes the person posing the question lives in an expensive city like San Francisco or New York and wants to invest elsewhere, or other times people just want a hot tip on the next up-and-coming market.

With the Beta launch of BPInsights, I figured it was a good time to take a look at the best markets for potential cash flow in each state.

For this study, I am going to use one of my favorite metrics for comparing different markets: rent-to-price ratio (RTP). If you’re not already familiar, RTP is a great metric for two reasons: It’s incredibly simple to calculate, and it approximates cash flow. Here’s how:

Calculating RTP requires only two data points: rent (monthly) and home price. Because this particular study looks at markets as a whole, I am going to be using median rent and median home price for each market in the study. All I did to calculate RTP was divide the median rent by the median home price. For example, if in Warwick, Rhode Island you get $1,000 per month in rent and the median home costs $100,000, you divide $1,000 by $100,000 and get 1%. It’s that easy!
RTP is useful for approximating cash flow because it (in a very simple way) shows how much monthly rent you can expect for every dollar of your purchase price. It’s similar to a cap rate, but much simpler because it does not take into account operating expenses. You may have heard of the 1% rule as the barometer of a good RTP, and this rule holds some validity. A deal with an RTP of greater than 1% is likely a great deal. But that doesn’t mean all deals must pass this threshold. I’ve done several deals that don’t pass the 1% rule that have been home runs.

Methodology

Let me briefly talk about how I found and prepared this data. Feel free to skip over this if you don’t care, but my grad school professors ingrained in me the need to explain my methodology, and I want to make them proud. Plus, the point of BPInsights isn’t just for you to listen to my ideas—but for you to learn how to do this analysis for yourself.

First, I pulled this data from BPInsights! We license data from some of the top providers in the country to get the most recent rent and sales metrics available. You can find rent data on our Rent Estimator tool, and you can download median sales price data from BPInsights: Data Downloads.

Once I had the data, I broke it down by state and town and did the simple calculation to determine RTP. That’s it—pretty simple.

But let me also explain that I didn’t actually look at every single town in the U.S. There are some markets that are simply too small to pull meaningful data from. If there is not sufficient rental and sales activity in a given market, the data becomes unreliable. Therefore, I excluded markets that lacked consistent data. In the list, I made sure to show the average number of arms-length sales transactions over the last several months so you can get a feel for the size of the city and the long-term accuracy of the data (the higher the number is, the more confident you can feel about this analysis).

Also, if you haven’t heard, there is a pandemic going on, which is causing all sort of atypical economic behavior and data. To mitigate that, I averaged the median sales prices from the periods of February to April 2020 to get sense of the true medians. If you download the data and see some crazy fluctuations between the beginning of the year and now, that’s the coronavirus in action.

Lastly, remember this study is just a point in time. Nothing I wrote here means that these cities are always the best cash flowing cities in their respective state, nor does it mean it will continue. What I am showing is if you are looking for a property right now, taking into account COVID craziness and all, here are a couple of places you should absolutely look into further.

Overview

Looking at the data in aggregate tells us some interesting things about prospective cash flow. First, let’s look at this breakdown of the markets.

I purposely removed the names of the states here because I wanted to show the distribution—how RTP is represented across all 50 states. What stands out to me here is:

Only two states have an RTP above 2%. I didn’t even know 2% RTPs were a thing these days, so that is some elite-level cash flow. Without looking at the list below, take a guess as to what two states they are. What region of the country do you think this percentage exists in?
Only nine states have an RTP above 1%. Does that mean that there are 41 states that have poor cash flow prospects? Absolutely not. Remember, I am using averages here. So if a city has an average RTP of 0.8%, that means there are deals both above 0.8% and below 0.8%. You just have to find them. A market with a higher average RTP does mean finding those great deals might be a bit easier.
Twenty-nine of the 50 states have an RTP between 0.5% and 0.8%. Once you get below 1%, there isn’t much difference between the top markets in each state.

OK, now that you have plenty of understand of context and methodology, let’s get to the list!

Summary

The upper Midwest absolutely dominates this chart! Michigan, Indiana, and Ohio snag the top three spots, which honestly didn’t surprise me much. I do this type of analysis fairly regularly, and those states (along with Pennsylvania) often come up towards the top. What does surprise me is the strength of the East coast in general: Vermont, Maryland, New Jersey, New York, and Florida all have RTPs of over 1%.

Because there has been so much upheaval in the real estate market due to COVID-19, it will be interesting to see how this list changes when we update it in a few months.

Please let me know what you think in the comments below!

I’d love to hear if anyone is looking at these markets, owns in these markets, or has tips for other places to look in their home state.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.