You don’t need me to remind you that we live in challenging times. REIs are still feeling the ramifications of the crisis that started back in February of 2020. But this doesn’t mean that you won’t benefit from taking a look at the best real estate markets for investors, as the wheel may start spinning with full force again, and it might happen earlier than you think.
We’ll take a look at real estate markets that are active, dynamic, and offer great opportunities for investors. Before we delve into that, we will examine some of the criteria used to rank real estate investing throughout the US. If you’re a seasoned REI, you may as well skip the next section and go straight to the list.
Investments (of all sorts) follow one simple rule – the lower the number of investors, the higher the returns. If there is a consensus that a certain asset brings high returns, there will be many investors who want to enter that specific market and this can decrease potential returns per REI because the ROI is shared. Everybody wants a piece of the pie.
Fortunately, opinions about the prospects of real estate markets vary, so there is a real possibility that you as an REI can enter a market where the returns align with your investing goals.
The short answer is: it depends. If you are a real estate investor who is after passive rental income, then you should look at figures like employment rate (includes job growth in the future), cost of living, rental market demand, rental occupancy rates, and fluctuations of the average rent. Still, a lot of other factors come into play.
For example, if you are an REI that is into flipping houses, then the best real estate market for you is determined by the sales and profit margins in a given ZIP area. And sometimes, a single point of data doesn’t mean much, because some REIs are after long-term returns from the potential appreciation of property.
Assessments about the future increase in value of a given property are complex. This is typical, but not exclusive for high-demand markets (the metropolitan coastal areas) where the value of real estate is expected to increase over time. So, they rent out the property in the meantime, but the real goal is to hold it long enough to profit from appreciation.
On the other hand, if you are an REI looking to get a sustainable cash flow, then you usually look for markets in the Midwest or South. But these investments don’t come on a platter either, you still have to look at data like price-to-rent ratio, property taxes, tenant laws, and even state income tax before you jump into the market.
Another useful indicator is the percentage of properties that get sold on the market within weeks of being listed. When you contrast this percentage with the fluctuation in the number of homes available for sale, you can get a clearer picture of what the activity in the real estate market is like.
Some of the main criteria we used to select the cities on the list that follows include:
The idea is that great employment opportunities (for eg. in the tech industry) drive migration. Once an influx of people saturates the available housing, rents go up, and high rents increase the value of owning property. That makes demand in these markets high.
You know that increase in demand for housing is not good news in REI circles, because then, real estate becomes a seller’s market. Real estate investors make most of their profit when they buy the property, not when they sell it. However, the trend of shortages in the inventory might soon get reversed (we will examine this in greater detail below).
The economy in Austin did well throughout the crisis, in part due to the fact that most of the local business activity is centered around natural resources, high-tech companies, finances, and pharmaceuticals (biotech). Welcoming tax policies attracted companies like Tesla and Apple to set up large bases of operations there. It’s one of the fastest-growing US cities in the past decade and boasts a low unemployment rate (under 5%). Also, the cost of living is reasonably low and the demand for real estate is up.
Speaking of high-tech companies and startups, the Research Triangle of Raleigh/Durham in North Carolina has been experiencing a boom in job opportunities. It’s a fast-growing metropolitan area and a lot of its research institutions and high-tech businesses need a skilled workforce.
Rents in Raleigh have been increasing steadily over the last few years, while the cost of living is not high (at least for now). The projections for future land development make it one of the most promising housing markets.
Real estate appreciation in Scottsdale, Arizona is going above the US average. The inventory is low, but there are many reasons to invest in properties within Maricopa County – the family-friendly environment, the warm weather, and the plentiful recreation areas, to name but a few. It’s fairly close to the coastal region, but residents there still enjoy a low cost of living, especially when compared to California. Retirees choose Scottsdale to spend their golden years, and the unemployment rate is low.
It may not be one of the usual suspects, but if you look at the numbers, Boise, Idaho is a real estate market that you should follow. As reported by the Federal Housing Finance Agency, it tops the national list for year-over-year housing appreciation for 2020 (16.38% compared to 2019, and 391.07% compared to 1991). The housing inventory is growing thin quickly due to high market activity. Boise, Idaho feels like a small city, but it offers big-city perks. Migration to Boise was and remains steady, as many leave places like San Francisco and Los Angeles.
Dallas is one of the highest job-growth areas in the nation due to tax-friendly policies and minimal business regulations. On the other hand, home-ownership rates in Dallas, Texas have been low traditionally, though it seems that the pandemic is changing this. Still, a large portion of the population rents their housing, and the projections for expected growth of population make it one of those real estate markets that have the potential for favorable appreciation in the long term.
Though it’s generally known as a center for the entertainment industry because of its music scene, Nashville, Tennessee also has high prospects of becoming a business hub. There is no income tax and the business climate is improving, even though COVID has hit its tourism sector.
It’s a real estate market for those who are in it for the long haul, as visitors are expected to increase once a critical airport expansion is scheduled to complete in 2023. The cost of living is low and almost half of the housing is occupied by renters.
Similar to other entries in this list, Charlotte, North Carolina offers a business-friendly environment that attracted nine Fortune 500 companies to base their headquarters there. Also, the finance sector (Charlotte’s banks rank second in the US by total assets) fuels both population and job growth. Demand for real estate, especially multifamily housing, is expected to rise as the trend of steady growth continues. The cost of living is affordable, and forecasts on land development predict expansion in the decades to come.
The fastest real estate market nationwide is in Tacoma, Washington. Half of the houses in Tacoma are sold within 23 days and 34.2% of the properties are sold above the listed price. It’s fairly straightforward: this development is a result of the growing number of people that migrate from California, and then there are those who escape the high prices in King County. Therefore, it’s anyone’s guess how long this market can keep up the heavy activity.
One thing’s for sure though: housing appreciation has been increasing in the last couple of years, and Amazon, Microsoft, and Starbucks have placed their HQ in Seattle and Tacoma, WA.
This is, more or less, a traditional entry on the list. The Sunbelt state of Florida offers other attractive real estate markets as well: Miami, Jacksonville, Fort Lauderdale, Orlando, and Tampa are among them, but St. Petersburg, Florida is particularly attractive. There is no income tax, the cost of living is affordable, the business climate is good, and the real estate market is active. Housing inventory is low and rents are high – all of these indicators make it a good market for investing, especially given the steady influx of retirees.
This is another ZIP area that’s usually looked into when discussing the best real estate markets for investors in commercial property. However, Las Vegas, Nevada has gone to great lengths to diversify its economy, including high-tech and health-related businesses. So, it’s not all nightlife and entertainment, at least not as it used to be, thanks to the steady migration from California. The trend of population growth is expected to continue, tax policies are attracting businesses to relocate to or expand operations in Las Vegas, Nevada, and the rents are going up.
REIs don’t operate in a vacuum and everything that happens to the economy has a significant effect on their performance. The government’s response to COVID contributed to a downturn in the economy. Industries like technology and finance, and sectors like the military, government, and natural resources weren’t affected as much (no one was laid off). On the other hand, other segments of the economy, like tourism (the hospitality industry in general), entertainment, high street shops, and small businesses in particular were hit quite hard.
Given the financial uncertainty, people decided to hold on to their cash, and, coupled with historically low mortgage interest rates, this created a climate in which real estate investors could hardly operate. The demand was high, the inventories low and, in essence, REIs have found themselves in a seller’s market.
We are yet to see the real effects of some COVID-related policies, i.e Economic Impact Payment (or stimulus checks) and mortgage forbearance. Employment rates dropped as people were furloughed from their jobs (or had pay cuts, or went on unpaid leave), but as the economy recovers, we might see some changes. Once benefits under the COVID-19 Relief Bill stop flowing and mortgage forbearance is lifted, a large number of homeowners are expected to struggle to make regular mortgage payments. Obviously, we wish all American workers the best, but this is what the data implies.
As house-owners try to avoid foreclosure on their property, we are likely to see a surge in inventory that will bring the demand down, effectively increasing the number of motivated sellers and transforming the real estate market into a buyer’s market. We did a special report on this topic, and it remains to be seen whether what we’re currently experiencing is the calm before the storm.
The outlook is not totally grim, though, as the bout of lockdowns and measures to limit the spread of the virus allowed for a change in attitude. People remained in their homes, and this proved that the virtual wholesaling of real estate is possible.
So, if you are asking “what’s the best real estate market for investors in 2021 and beyond?”, the answer may well be “every single one you can get in.” Since no conditions were required to qualify for stimulus checks, we are yet to witness the actual distribution of motivated sellers across real estate markets. Hopefully, the hike in virtual wholesaling will continue as the economy recovers, and real estate investors can cover the losses made in the past two years.
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