There is more to choosing a city in which to invest than just cap rates or rules of thumb. Calculating cap rates was explored in detail in a previous article on this blog. It is a must-read if you are new to investing.
But in addition to cash flow, it is important to choose a city or location that is growing, not one that is losing population like San Francisco and New York City have been recently. Due to the pandemic, and the ability to work from home, people have been fleeing the overcrowded and high price big cities to move to places with more space. Some people are staying semi-close to their offices, waiting for final decisions on whether the ability to work from home will continue or not. Tenants have been leaving multifamily complexes to move to single family homes, if they can afford it, to have lower population density and lower risk of exposure to Covid. These trends may somewhat reverse when the pandemic ends. How much they reverse will depend on how many companies decide to bring people back into the office. Stodgy companies may not trust their employees to work hard without supervision. Some tech companies are happy to save on office space cost and can judge productivity without having to have an employee be physically present. Some companies may require one day a week on site. In the latter case, employees will stay near the company but may move to the ex-burbs, perhaps a one or even two hour commute away.
Cities that have had rapid increases in rent may be good cities in which to invest, unless the rents are just starting to catch up to prices. An increase in rent indicates an increase in demand for rental properties and can be a good indicator to investors.
According to BiggerPockets Insights, the top cities for rent growth in the year 2020 were:
- Houston, Texas
- Portland, Oregon
- Dallas, Texas
- Chicago, Illinois
- St. Petersburg, Florida
- Phoenix, Arizona
- Round Rock, Texas
- Oklahoma City, Oklahoma
- Scottsdale, Arizona
- Killeen, Texas
Rising rents aren’t the only thing to consider, though, of course. Houston, particularly, the parts closest to the gulf, can have some very high insurance costs, including insurance for windstorm and flood. Some insurers are leaving coastal areas such as Houston. Portland has had almost nightly rioting. This will surely induce some businesses and people to leave. Chicago has a fairly high murder rate. However, for its size, Chicago is relatively inexpensive. Round Rock is an Austin suburb. Austin and its surrounding suburbs (including counties surrounding Travis county) was one of the few places in Texas to have long and strict prohibitions on evictions. It is one of the few parts of Texas that does not put a high value on private property rights. Oklahoma City has prices that seem quite reasonable. The rents seem a bit low versus prices but perhaps they are catching up.