The real estate market is a dynamic one, with constant changes in property prices, rent rates, and return on investment metrics. So far in 2018, we can conclude that property prices in the US real estate market are expected to continue increasing, and the same holds true for rents. Rental demand is high, and the two demographic groups driving it are millennials and baby boomers.
What does that mean for those of you thinking about starting a real estate investing career?
Becoming a real estate investor is always an exciting journey with many opportunities to make money in the short and long term, and if you are wondering when to begin buying investment properties and renting them out, 2018 is just about the right time. You want to take advantage of the property prices before they get too high while capturing the growing demand for rentals.
As an aspiring real estate investor, you must already know that location, location, location are the three most important factors for the success of your business. Since the US housing market is so large, it is hard – and honestly useless – to try to draw general conclusions about the nationwide state of real estate investing in 2018. Instead, here we take a look at five major real estate markets across the country and provide you with data on them. These housing markets include: Atlanta, GA; Memphis, TN; Charlotte, NC; Dallas, TX; and Fort Worth, TX.
Property Prices in 2018
If you are about to buy an investment property, one of the first factors which you should consider is the price of the property. Every real estate investor faces a budget, and you should always make sure to stick to your budget to lower the risk of defaulting on your mortgage payments or ending up with a negative cash flow property – that’s something no property investor ever wants.
A common feature among the five markets under consideration here is that in 2018 they are relatively affordable, especially when compared to other major cities in the US. Following is data on the average property price in these markets.
Please note that all data in this article is provided by
Mashvisor, an advanced real estate analytics tool. Atlanta: $455,800 Memphis: $244,000 Charlotte: $385,700 Dallas: $469,400 Fort Worth: $326,500
While an average real estate property sells for under the $500,000 threshold in each of these markets, Memphis is definitely the most affordable for beginner real estate investors and other investors on a tight budget. Indeed, in the neighborhoods of Cordova and Raleigh the average property price is as low as $84,700 and $88,300, respectively.
Rental Income in 2018
The next indicator which you should look at when making the decision where to invest in real estate is the rental rates – or from the perspective of a landlord, the rental income. The difference between the property price and the other expenses associated with owning and renting out a property, on the one hand, and the rental income, on the other hand, is your cash flow and your return on investment.
There are two major strategies to rent out your property: on short-term and long-term basis. Long-term rentals are the traditional type of rental properties, which are rented out on monthly or even annual basis. Short-term rentals, frequently referred to as Airbnb rentals, are rented out on a nightly basis. This type of investment properties is gaining more and more popularity in real estate investing in 2018, particularly in popular tourist destinations and business hubs.
So, let’s have a look at the traditional and short-term rental income which investors can expect in our five cities. The values below are city-level averages and can vary from one neighborhood to another.
Long-Term Rental Income: Atlanta: $1,780 Memphis: $860 Charlotte: $1,420 Dallas: $1,910 Fort Worth: $1,530 Short-Term Rental Income: Atlanta: $2,400 Memphis: $1,470 Charlotte: $2,140 Dallas: $2,690 Fort Worth: $2,770 Price-to-Rent Ratios in 2018
Another important metric in the real estate business is the price-to-rent ratio, which is the average property price in a location divided by the annual rent (for traditional rentals). The price-to-rent ratio is usually associated with renters and homebuyers as it helps them decide whether it’s better to buy a home or rent a property in a specific market. However, it can be of great value to real estate investors too as it points out the markets with the lowest and highest demand for rental properties. Basically, locations with a price-to-rent ratio of 21 and above are excellent for buying an investment property as common people find them too expensive to buy their own home and prefer to rent. Meanwhile, places with a price-to-rent ratio of 15 and below are not good for investing in real estate as people tend to buy homes there. For those between 16 and 20, they are usually good locations for buying a rental property.
Here are the price-to-rent ratios for the five real estate markets we are analyzing in 2018:
Atlanta: 21 Memphis: 23 Charlotte: 23 Dallas: 20 Fort Worth: 18
As you can see from the data provided by Mashvisor, Atlanta, Memphis, and Charlotte enjoy a high rental demand which is great news for real estate investors choosing a location for their first or next rental property. Dallas also has a strong investment potential. Even in Fort Worth the price-to-rent ratio is not low enough to discourage investors. They just have to conduct careful
real estate market analysis to find the best investment property in the right neighborhood. Return on Investment in 2018
Finally, we arrive at the heart of real estate analysis: return on investment. Here we show you the capitalization rate, or cap rate for short, in the five housing market whose performance in 2018 we are analyzing. The data is broken down for traditional and Airbnb rentals.
Long-Term Cap Rate: Atlanta: 1.9% Memphis: 0.8% Charlotte: 1.1% Dallas: 0.4% Fort Worth: 0.5% Short-Term Cap Rate: Atlanta: 3.2% Memphis: 1.2% Charlotte: 1.8% Dallas: 1.1% Fort Worth: 2.5%
Generally speaking, Mashvisor’s data above shows that short-term rentals in these five markets yield a higher return on investment in terms of cap rate than long-term rental properties. This is the case in many markets across the country in 2018, so more and more investors are switching to the short-term rental strategy. However, before you decide to rent out your property on Airbnb or similar vacation home platforms, make sure that short-term rentals are legal in your location of choice.
We want to bring your attention to one more aspect of the cap rate levels above. You might have heard from experts that a good cap rate is usually considered above 8%. However, you should keep in mind that real estate investing has become a very competitive business in recent years, and it is really hard – if not impossible – to find markets with city-level averages of 4% or more. Remember that these are just city levels, and you should conduct careful investment property analysis to identify neighborhoods and properties with significantly higher cap rates in each of these cities – they do exist!
Daniela Andreevska is Content Marketing Director at Mashvisor, a real estate analytics tool which helps real estate investors quickly find traditional and Airbnb investment properties. A research process that usually takes 3 months can now take 15 minutes. We provide all the real estate information in easy to understand visualizations.