Cities With the Best Real Estate Investing Potential in 2021

There are a number of different ways to try to project the “best areas” in which to invest in real estate. Although the question does identify the type of real estate (single family homes, condos, and apartments) and does identify a basic technique (rentals), there’s still a lot that could be defined. Among the variables:

• Over what period of time will the buyer hold the property? (The question specifies “the coming decades,” but that still can be a wide range.
• Is “best” measured by cash flow, appreciation, or a combination of the two?
• Is “best” measured by return on investment (ROI), return on equity (ROE), or some other measure?

Also, there’s a big difference between apartments and single-family homes.

For example, I know some investors who invest in inexpensive inner-city property. They’re getting excellent cash flow and excellent return on investment. On the other hand, they expect nothing in the way of appreciation and the time they hold the property doesn’t much matter. On the other hand, I know some investors who invest in high-end vacation-type properties. They’re interested in reasonable positive cash flow, but their focus is more on appreciation. They also rely heavily on owner financing, which boosts their ROI.

And that raises the point that the right marketing and skilled negotiation can produce good investments even in areas that aren’t on anyone’s list.

Injecting uncertainty into the equation are the longer-term variables that are difficult to predict. For example, the increasing incidence and severity of wildfires in the western states may make those states less desirable, long-term, as places to live and, therefore, places in which to invest. Or, on the other hand, certain cities that appear on some of the lists below (Portland, Minneapolis) have recent been sites of civil unrest. That probably won’t affect long-term rental prospects, but may have an effect on short-term buying, selling, and renting.

Still, let’s look at a number of different items and see if there’s any overlap among them.

In September 2019, the website SmartAsset calculated the “price-to-rent” ratio in 84 U.S. cities. That ratio measures the relative affordability of renting and buying in a given housing market. Although the research was presented as finding areas more favorable to homebuyers (the lower the ratio, the better) and those areas more favorable for renters (the higher the ratio, the better), the same ratios can indicate which areas produce the greatest return on investment. (Again, the lower the ratio, the better.) The complete list is at https://smartasset.com/mortgage/price-to-rent-ratio-in-us-cities

The highest ratios—those that would represent poor rental investments as measured by return on investment—were in:

City;                                                     Ratio;               Home Price (for a $1,000 rental)

San Francisco, California;                   50.11;                           $601,362

Oakland, California;                            41.05;                           $492,611

Honolulu, Hawaii;                               39.50;                           $474,014

Los Angeles, California;                     38.59;                           $463,135

New York, New York;                        36.83;                           $441,987

On the other hand, the lowest ratios—those that would represent good rental investments—were in:

City;                                                     Ratio;               Home Price (for a $1,000 rental)

Detroit, Michigan;                               5.35;                             $64,194

Cleveland, Ohio;                                  8.31;                             $99,716

Memphis, Tennessee;                          9.53;                             $114,368

Toledo, Ohio;                                       9.68;                             $116,148

Buffalo, New York;                             10.66;                           $127,862

Pittsburgh, Pennsylvania;                    11.14;                           $133,622

Corpus Christi, Texas;                         12.14;                           $145,670

Milwaukee, Wisconsin;                       12.43;                           $149,148

And other cities with relatively low ratios include:

Lubbock, Texas;                                  12.78;                           $153,333

El Paso, Texas;                                    12.79;                           $153,486

Indianapolis, Indiana;                          13.18;                           $158,161

San Antonio, Texas;                            13.34;                           $160,043

Fort Wayne, Indiana;                           13.63;                           $163,523

Wichita, Kansas;                                  14.32;                           $171,883

Tulsa, Oklahoma;                                14.35;                           $172,256

Houston, Texas;                                   14.67;                           $176,065

The cities with the lowest ratios—and ones that contain properties that cash flow nicely—tend to be older, rust-belt cities—Detroit, Cleveland, Buffalo, Milwaukee. Still, there are some cities with apparent growth potential, such as Memphis and Corpus Christi. And the cities in the last grouping tend to be those in which many companies offer turn-key rentals to investors: Indianapolis, San Antonio, Houston, and some of the others. (In fact, the turn-key rental companies do selectively offer properties in areas with lower ratios, such as Memphis.)

In 2019, the website BiggerPockets did an analysis of “the best cities for rental investing.” See https://www.biggerpockets.com/... It relied in part on data from WalletHub and considered sociodemographics and jobs and the economy. BiggerPockets then included the price/rent ratio—which we covered above—to come out with three lists: large cities (more than 300,000 population), mid-size cities (100,000-300,000 population), and small cities (under 100,000 population).

Its findings:

Best Large Cities:

Austin, Texas

Charlotte, North Carolina

Denver, Colorado

Seattle, Washington

Nashville, Tennessee

Mid-Sized Cities

Frisco, Texas

Kent, Washington

Lehigh Acres, Florida

Midland, Texas

Small Cities

Meridian, Idaho

Fort Myers, Florida

Bend, Oregon

Pleasanton, California

However, BiggerPockets did find some anomalies—for instance, cities with large growth that nevertheless had fairly high price-rent ratios. So, despite the raw numbers, some cities really weren’t especially good investments. That included the cities in California.

BiggerPockets, using the WalletHub data, also identified cities to avoid. These were cities with low sociodemographic rankings and low job/economy rankings. They included:

Shreveport, Louisiana

Jacksonville, North Carolina

Fayetteville, North Carolina

Decatur, Illinois

Montgomery, Alabama

Baton Rouge, Louisiana

Davenport, Iowa

Note: I’m not sure I agree with some of those, but I’m including them because BiggerPockets felt they merited a mention!

And here’s a mention of a final listing, this one from Zilculator. See https://www.zilculator.com/blog/price-to-rent-ratio-in-the-70-largest-u-s-cities-2021-update/

Its basis was our familiar price-to-rent ratio, though it divided the market up into high priced properties, moderate priced properties, and low priced properties. They included the full list of 70 cities in a sortable Airtable, which is nice. Check it out for further details.

Do not depend solely on the Price-to-rent ratio, the decision to invest depends on more than a single number or ratio. Further, look into how the number was calculated. For a number of years, I did a report on the best places for physical therapists to locate. I looked at income in the area, cost of living, population, demographics of the population, quality of schools, presence of technology, and more—in all, about 50 different variables. Some were weighted more than others. And the numbers were constantly fine-tuned and then subjected to a “common sense” test. Regardless of what the numbers showed, did the ratings seem to make sense?

That brings us to the more general “best places to live” listings, and there are plenty of those. While “best place to live” doesn’t necessarily equate to the best rental markets, many of the variables are similar; Bankrate considers affordability, culture, net migration (growth or shrinkage)—with many sub-factors under each. See https://www.bankrate.com/real-estate/best-places-to-live/us/

Further, the question specified “If you had the ability to move anywhere in the US to invest in real estate.” I would choose to move somewhere that’s considered a good place to live, not just a place where a property is going to produce a good cash flow.

Bankrate’s “Top 10”

Austin, Texas

Portland, Oregon

Minneapolis, Minnesota

Raleigh, North Carolina

Cincinnati, Ohio

Denver, Colorado

Nashville, Tennessee

Louisville, Kentucky

Kansas City, Missouri

New Orleans, Louisiana

U.S. News has a ranking of the 125 most populous metro areas—“125 Best Places to Live in the U.S.”—based on good value, a desirable place to live, a strong job market, and a high quality of life. See https://realestate.usnews.com/places/rankings/best-places-to-live.

125 Best Places to Live (U.S. News)

Austin, Texas

Denver, Colorado

Colorado Springs, Colorado

Fayetteville, Arkansas

Des Moines, Iowa

Minneapolis-St. Paul, Minnesota

San Francisco, California

Portland, Oregon

Seattle, Washington

Raleigh & Durham, North Carolina

Clearly, some of these (such as San Francisco) are great to live in but aren’t good rental areas. Others (such as Des Moines, Raleigh Durham, Fayetteville), however, are.

Finally, let’s consider rapidly-growing cities. Quicken Loans analyzed U.S. Census Bureau data. See https://www.quickenloans.com/learn/fastest-growing-cities-in-us It found that “most of the fastest-growing cities in the country are in the South and West.” It came up with this list of the most rapidly growing cities in the United States:

Quicken Loans

Buckeye City Arizona (a suburb of Phoenix)

New Braunfels, Texas (15 miles northeast of San Antonio)

Apex, North Carolina (10 miles west of Raleigh)

Frisco, Texas (a northern suburb of Dallas)

Meridian, Idaho

McKinney, Texas (a northern suburb of Dallas)

Georgetown, Texas (About 30 miles north of Austin)

Rowlett, Texas (a suburb of Dallas)

St. Cloud, Florida (26 miles from Orlando)

Ankeny, Iowa (near Des Moines)

So: Let’s look at overlaps and similarities in the lists.

Dallas area

Quicken: Fastest Growing (Frisco, McKinney, Rowlett)

Bigger Pockets (Frisco)

Raleigh North Carolina area

Quicken: Fastest Growing

U.S. News: Best Places to Live

Charlotte, North Carolnia

Bigger Pockets

San Antonio area

Quicken: Fastest Growing

Smart Asset

Austin area

Quicken: Fastest Growing

U.S. News: Best Places to Live

Bigger Pockets

BankRate Top 10

Minneapolis

U.S. News: Best Places to Live

BankRate Top 10

Des Moines area

Quicken: Fastest Growing

U.S. News: Best Places to Live

Portland, Oregon

BankRate Top 10

U.S. News

Nashville, Tennessee

BankRate Top 10

Bigger Pockets

Louisville, Kentucky

BankRate Top 10

These area fall into certain categories, and an investor might be wise to look not just at the cities in this list (or any list), but also at other cities that are similar in size, price-to-rent ratio, quality of life, and similar:

• Texas: Lots of growth and affordable
• Quality East Coast Cities (Charlotte, Raleigh)
• Midwest Affordable (Des Moines. I didn’t include lists that contained Kansas City, Tulsa, and a few other Midwestern cities, but they should at least be considered.)
• Quality Cities Elsewhere (Portland, Minneapolis)
• Growing Affordable Cities (Nashville, Louisville)

This obviously isn’t an all-inclusive list, but it does contain some cities that show definite promise for rentals. As always, though, any investor should do due diligence before investing.