“Location location location – the three most important factors when buying an investment property.” How many times have you heard this expression? If you are in any way related to the real estate investing business, we guess the answer is, “One too many!”
Regardless of the fact that this has become a cliché in the industry, no one in their right mind can reject the importance of location for the profitability of a rental property. This is because the place where your real estate property is located will determine so many things such as the property price, the property tax, the property management fees, the other rental expenses, the rental rate, the occupancy/vacancy rate, the legal restrictions, etc.
So, when buying your first – or next – rental property, you should choose its location very carefully. To help you in your journey of becoming a successful real estate investor, we provide you with the best markets to buy an investment property to rent out in 2018.
What Criteria Do We Use to Select the Best Markets for Rental Properties?
Real estate investors are in the business in order to make money. While rental income is important as it determines how much money you will have left in your pocket (or bank account) after covering all expenses related to buying, owning, managing, and renting out your property, it is not the best metric to decide where to invest in real estate. Capitalization rate, or cap rate for short, is instead a return on investment measure which many property investors choose to check the profitability of their real estate. One of the great things about cap rate is that it is easy to calculate and it gives you the opportunity to compare markets as well as individual properties to select the most profitable one.
What Is Cap Rate and How to Calculate It?
For the benefit of first-time real estate investors, we will make a quick digression to explain what cap rate is. The cap rate is the ratio of the net operating income (NOI) of the property over its current market value (CMV).
Cap Rate Formula:
Cap Rate = Net Operating Income (NOI)/Current Market Value (CMV)
What Are the Best Markets to Invest in a Rental Property in 2018?
The best markets to buy a real estate property to rent out are those with the highest cap rate. Here we use data from Mashvisor, an advanced real estate data analytics tool, to show you the U.S. cities with the highest capitalization rate for traditional – or long-term – rentals.
1. Camden, NJ
· Cap Rate: 5.7%
Camden, NJ heads our ranking of the top places to invest in rental properties for the high cap rate which it offers to investors. Actually, this is a great entry point for new investors because of affordability: the median property price is $101,900, or only $80 per square foot.
While you might be hesitant to buy real estate to rent out in Camden because of the high crime rate, the good news is that police reform has yielded positive results and brought down crimes significantly.
2. Taos, NM
· Cap Rate: 5.1%
Taos, NM is the second U.S. housing market on our list of the best places to buy a rental property in 2018. The median property price is much higher than in Camden at $463,900, but so is the rental income too at $3,960.
3. Trenton, NJ
· Cap Rate: 4.2%
The capital of New Jersey is another top location to invest in a rental property based on the average cap rate. Properties in Trenton are affordable with a median price of $145,800. This adds up to a price of $107 per square foot.
4. Key West, FL
· Cap Rate: 4.0%
The next location on our list is a top tourist attraction which has two major repercussions for real estate investors. On the one hand, properties in Key West, FL are extremely expensive with a median price close to a million dollars, $943,700 to be exact. On the other hand, though, renting out on short-term basis there is very profitable with a cap rate for vacation rentals of 7.2%. This means that when buying a property in Key West, investors have the option to switch their rental strategy whenever they decide to. This is an important feature of a top real estate market for investing.
5. Riverhead, NY
· Cap Rate: 4.0%
The last on our list of the best markets to buy a rental property in 2018 is Riverhead, NY, where the median property price is $457,700, and the average rental income for traditional rentals is $3,480.
In sum, these are some of the top markets to invest in rental properties this year based on the return on investment measured as cap rate. While experts argue that a good cap rate is above 8%, you should keep in mind that these numbers are city averages, and you will find individual properties with significantly higher capitalization rates in each of them. Just remember to always perform careful real estate market analysis and investment property analysis when buying an investment property.
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’s usually 3 months now can take 15 minutes. We provide all the real estate information in easy to understand visualizations.