5 Markets With Promising Rent-to-Income Ratios: September 2020 Markets of the Month

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All landlords want reliable tenants—and one key metric that sorts the reliable tenants from the less-so is rent-to-income ratio (RTI). This metric evaluates how much of a tenant’s income goes towards their rent. An RTI of 20 percent means, that on average, a tenant devotes 20 percent of their income towards rent in that market.

For investors, calculating a market’s overall RTI can identify locations with solid investment potential. Here’s why:

• Budgeting experts recommend tenants spend around 30 percent of their income on housing, at most. Therefore, an RTI over 30 percent could indicate that renters are stretching their budgets to afford housing.
• RTI helps investors understand if rent growth is sustainable. Many markets have seen rapid rent growth over the last few years—but past performance doesn’t indicate future success. If rents have shot up but the current RTI is 45 percent, that gives me pause. Perhaps rents grew too fast and could soon fall.

For reference, I calculated RTI across the largest 500 markets in the U.S. It came out to 28.6 percent—just under that 30 percent marker.

If you want to take a deep dive into RTI – how to calculate it, why it’s important, and when to use it—check out this recent article I wrote.

Also, I will discuss two other classic macro-level metrics in this article: rent-to-price ratio (RTP) and population growth. As a quick reminder:

• RTP is a crude proxy for cashflow—and the higher the better. Anything near or above one percent is excellent, and I generally look for markets above 0.5 percent.
• Population growth helps us interpret supply and demand. When population grows faster than new housing units are created, demand goes up and pricing increases, too. When population shrinks, demand and pricing tend to fall.

5 Markets with a Promising RTI Ratio

My objective is simple: I want to help you identify markets warranting further consideration by you, the investor. By no means am I saying that every deal in the markets below is a good one. Nor am I saying that markets with an average RTI of 30-plus percent lack good deals. Neither of those things is true.

In short: I am not saying that these are the “best” markets. I am saying that based on a few macro-level metrics, these markets merit further research.

Montgomery, Alabama

Alabama’s state capital shows interesting prospects for real estate investors. With nearly 200,000 residents, Montgomery is a decent-sized city—and its RTI is an extremely healthy 21 percent.

As a recap, that low RTI means that residents pay, on average, just 21 percent of their income towards rent. That’s well below the national average and indicates that rent might have room to grow. Montgomery has already seen a two percent annual rent growth since 2017—and that RTI ratio indicates that growth is likely sustainable. With the median home landing just over $92,000, the city already boasts an excellent RTP of 0.92 percent.

Despite the fact that Montgomery is primed to deliver strong returns, there are a few metrics that don’t look so great:

• Home prices have mostly remained flat over the last few years—and have actually declined about two percent per year since 2017.
• This decline is likely driven by a decreasing population. The city shrunk three percent between 2010 and 2019.

These are important factors to consider if are considering investing in Montgomery.

Springfield, Illinois

Springfield is our second state capital on this month’s list, with an interesting mix of metrics to consider.

• Springfield has a low RTI—just 19 percent, indicating that rent is affordable for tenants.
• That low RTI indicates that the two percent annual rent growth since 2017 is likely sustainable.
• The RTP is 0.64 percent. That’s a step down from Montgomery’s excellent RTP, but it still means good deals can absolutely be found in Springfield.

While the population of Springfield has dropped two percent since 2010, home prices are actually appreciating—four percent per year since 2017. This is a curious dynamic worthy fo further investigation. Typically, when a city loses population, demand for housing decreases and housing prices fall.

That being said, a two percent population loss over 10 years is not a dramatic change. Wage growth could be driving increased rents.

Akron, OH

Of all the cities on our list, Akron offers the lowest entry point for investors, with a median home price of $86,000. That number has risen, on average, seven percent per year since 2017. Investors who have been in this market for a few years have seen fantastic appreciation.

However, during that time, rent has remained flat—around $700 per month on average. But the 20 percent RTI means that there is potential for rent to increase in the future.

The population of the city has decreased one percent over the last 10 years. No, that’s not the direction you want to see the population moving, but I don’t think it’s a major red flag, either. Overall, Akron offers promising fundamentals, like its 0.81 percent RTP and 20 percent RTI.

If rent grows in the coming years, Akron may deliver excellent returns with a relatively inexpensive entry point.

Cedar Rapids, IA

After noticing that many of the cities I’ve pinpointed have seen stagnant or even negative population growth since 2010, I wanted to find a city that boasted both a low RTI and a population increase. That city is Cedar Rapids. 

Cedar Rapids has two major benefits: RTI and population growth. Its 16 percent RTI is the lowest on our list. And the population has grown six percent since 2010, meaning renter demand could provide further upward pressure on prices.

Where Cedar Rapids lags is its RTP. At 0.52 percent, its the lowest on our list. That lower RTP is because Cedar Rapids has one of the highest median home prices on the list—$154,000. Don’t think this means that deals cannot be found, though. There are likely great cash-flowing deals to be found.

Independence, MO

Of all the markets on the list, Independence offers the most well-rounded metrics. Its 20 percent RTI is well below the national average. It’s especially impressive because Independence has averaged nine percent rent growth since 2017.

Normally, when I see nine percent rent growth, I think, “That is not sustainable.” But given that the RTI remains so far below average, this rent growth could be legitimate—and even have further room to grow.

Independence’s RTP is 0.59 percent. That’s towards the bottom of our list, but still solid. And that lower RTP is offset by the huge price appreciation the city has seen since 2017—a whopping 16 percent! That’s a huge number. Yes, there might be some COVID-related wonkiness there (some markets are seeing huge spikes in prices this year that would be very abnormal in other years), but it’s still encouraging to see. After all, Independence demonstrated 10 percent growth (and more!) in 2017 and 2018, before the wildness of 2020.

However, with flat population growth since 2010, it’s important to understand what is driving Independence’s property values up—and if it’s likely to continue.

Remember, when evaluating markets on a high level, we’re just looking at averages. It’s the job of the investor to validate these numbers and find a great deal.

Do you already use RTI as metric? Is this something you’ll start using when evaluating markets or neighborhoods?

Comment below and let us know.

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