Top Rental Markets with 15% Annual Returns

As I continue my search for the best rental investment markets in the U.S., I have divided my search into two types of properties. One set of properties will be purchased with all-cash. From this cheaper group of properties I hope to earn an attractive all-cash return (10%+). These markets are ideal for the investor looking to deploy a significant amount of cash quickly without the additional time and constraints that will come with most lenders.

In addition to the onerous documentation and process requirements that most lenders require there is often also a limit on the number of mortgages for each individual. Bottomline, if you are looking to invest a significant amount of cash, it is not efficient to waste the advantages of a mortgage on lower-priced properties. Instead you should focus on financing properties that are at least $75-100k. 

This brings us to the second set of properties, which I will look to finance with 75% debt. The advantages of a low-cost, tax-deductible mortgage will help boost the cash-on-cash returns of these higher priced properties from 6-8% or less(with an all-cash purchase) to something more like 15-20% (with only 25% equity and the rest financed with debt).

Are you looking for lower-priced properties? Check out the Top Markets under $75k

Today, I will outline several compelling cities for the financed portion of a real estate rental portfolio. For this analysis I focused on the 1,000 largest cities in the US. I based returns on the assumption that I would finance 75% of the purchase price at a 5% interest rate and assumed operating expenses would equal 50% of my annual gross rent. I am targeting a minimum of 15% financed returns excluding the potential benefits of long-term appreciation.

In addition to considering the median returns for each city I also focused on the median income-to-rent ratio (measure of affordability), the % of households living below the poverty line, % of people 25yrs+ that are unemployed, and the relative crime level. Below is an overview of each of the top markets based on my analysis. In the coming weeks, I will post more detailed evaluations of each city.

In the meantime, I would love to see comments from any experienced investors who are already working in these markets.

Dundalk, MD

Dundalk is located in the Baltimore metro area. The Baltimore area has been highlighted by many people as a strong market to consider for rental investors. After a high-level assessment, Dundalk seems to present one of the most attractive rental return opportunities in the area. With median returns above 20% and lower than average property taxes, I am excited to learn more about this market. The city of Baltimore also shows potential so I will be posting a follow-up article with a zip code by zip code evaluation of the full metro Baltimore area to further refine top target areas for investors.

• Median Price (typical range): $102k ($76-170k)
• Median Rent (typical range): $1,300/mo ($1,200-1,400)
• Median Returns: 20%
• 2014 Population: 64k (+2.1% since 2000)
• Median Annual Income: $47,617
• Income/Rent: 37x
• Population Below Poverty: 14.30%
• Unemployed %: 9.6%
• Crime Index: N/A
• Median Property Taxes: $1,750/yr (1.3 mo rent)

Click Here for a Full Breakdown of the Baltimore Area by Zip Code

Florissant, MO

Florissant is located near St. Louis, MO. This city presents unique opportunities for the buy-and-hold investor. With median returns at 20% it is one of the higher yielding markets yet still has modest taxes that fall below the normal 2x rent benchmark. In addition, rent affordability is high while crime, poverty and unemployment are all low. The only downside would seem to be the median home price, which aren’t quite low-enough to be an optimal cash-purchase investment, but falls short of my target $100k price for properties that I will finance. However, given all the positives highlighted above, this is perhaps a market where I should make an exception.

• Median Price (typical range): $79k ($50-100k)
• Median Rent (typical range): $1,000/mo ($900-1,100)
• Median Returns: 20%
• 2014 Population: 52k (-3.6% since 2000)
• Median Annual Income: $52,249
• Income/Rent: 52x
• Population Below Poverty: 11.00%
• Unemployed %: 4.3%
• Crime Index: 150.4
• Median Property Taxes: $1,794/yr (1.8 mo rent)

Click Here for a Full Breakdown of the St Louis Area by Zip Code

Parma, OH

Parma is a suburb of Cleveland. Similar to Florissant it is one of the stronger local economies on this list with a median household income of $50k and poverty, unemployment, and crime all below national averages. Plus there has to be some upside from LeBron signing a 3yr contract extension, right? The taxes are a bit higher than normal so that will pull down annual returns slightly once that is factored in, but investors can likely manage around that by adjusting their target purchase price based on the taxes of each property. I have started meeting with several local real estate professionals in the Cleveland area and believe there is enough local expertise to make this a compelling market for out-of-state investors looking for mostly passive investment opportunities.

• Median Price (typical range): $103k ($85-120k)
• Median Rent (typical range): $1,075/mo ($900-1,250)
• Median Returns: 15%
• 2014 Population: 80k (-6.6% since 2000)
• Median Annual Income: $50,205
• Income/Rent: 40x
• Population Below Poverty: 10.7%
• Unemployed %: 3.9%
• Crime Index: 115.7
• Median Property Taxes: $2,553/yr (2.4 mo rents)

Click Here for a Full Breakdown of the Cleveland Area by Zip Code

Other top investment markets

• Houston Metro Area

Information Sources & Assumptions

• Purchase price and Rent ranges based on homes with 3 or more bedrooms and a minimum of 1,000 square feet
• Purchase prices sourced from Zillow while Rent ranges are sourced from Craigslist and Zillow
• Returns assume 50% assumption for operating expenses and that 75% of the purchase price is financed at a 5% interest rate
• All other information is taken from City-data.com