10 Best Cashflow Markets in Light of COVID-19 | Think Realty | A Real Estate of Mind
Markets and Trends

10 Best Cashflow Markets in Light of COVID-19

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The coronavirus pandemic has changed the game in many industries and real estate is no exception. With the stock market underperforming and the economy reeling from shelter-in-place orders, investors may be wondering where to put their cash. Historically, residential real estate has proven relatively stable amidst other failing economic factors — most likely because people always need a place to live. But which markets will perform best in the post-COVID era?

In order to determine the best markets in which to invest moving forward, we’ll use recent data  and insights from 2020 BPInsights Market Study.

Cash-on-cash return

Specifically, we will use cash-on-cash return (CoCR) numbers to measure the best cash flow markets in the U.S. CoCR is calculated by subtracting the annual expenses from annual rent income and dividing by the amount of cash invested initially (this may include the down payment, closing costs, and immediate repairs). Essentially, this measures how your investment compares to other ways you may invest — like in the stock market or other ventures.

As you may know, the formula for CoCR looks like this:

(annual rent income – annual expenses)/initial investment

CoCR is an important metric during and immediately following the pandemic, as it shows whether your investment can keep you afloat, as well as the ROI of your investment. Now is not the time to overleverage or bank on your properties increasing in value — the future and consumer behavior is a huge question mark in these unorthodox times.

Compound annual growth rate

Before we get into cash flowing markets, it’s important to consider the other major way investor profit from real estate: appreciation.

You can’t only think about cash flow. You also need to remember that you’re building equity when you invest in real estate. We will use compound annual growth rate (CAGR) to evaluate a property’s appreciation over time.

To find the rate, we’ll divide the ending value of the property (what it’s worth now) by the starting value (when you bought it). Then raise this to the power of 1 divided by the number of years you’ve owned the property and subtract one from this number.

As a formula, CAGR looks like this:

[(starting value/ending value)^(1/years owned)]-1.

Price-to-rent ratio

Price-to-rent ratio is another good metric to track, as it tells whether it is cheaper to rent or own property in a given area. The higher the ratio, the more sense it makes for renters to keep renting instead of purchasing their own home — thus, the better the market for investing in residential real estate in the area.

10 best cash flow markets

Here are the 10 best cash flow markets in which to invest currently, either for long-term rental or a short-term vacation home rental. While we’ve ranked this in order of best cash flow, we’ve provided other important metrics to help you make the best decision for your own portfolio and we’re not in the business of speculation, so these numbers aren’t guaranteed to be predictive of how things will play out.

Flint, Michigan

  • Home value 2018: $28,700
  • Home value 2010: $65,900
  • Home value CAGR: -9%
  • Median rent 2018: $714
  • Rent/price ratio:49%
  • CoCR:08%

Detroit, Michigan

  • Home value 2018: $45,700
  • Home value 2010: $87,600
  • Home value CAGR: -7%
  • Median rent 2018: $798
  • Rent/price ratio: 75%
  • CoCR:06%

Youngstown, Ohio

  • Home value 2018: $44,500
  • Home value 2010: $57,900
  • Home value CAGR: -3%
  • Median rent 2018: $657
  • Rent/price ratio: 48%
  • CoCR:69%

Gary, Indiana

  • Home value 2018: $67,400
  • Home value 2010: $76,700
  • Home value CAGR: -1%
  • Median rent 2018: $766
  • Rent/price ratio:14%
  • CoCR:68%

Muncie, Indiana

  • Home value 2018: $70,800
  • Home value 2010: $76,800
  • Home value CAGR: -1%
  • Median rent 2018: $716
  • Rent/price ratio:01%
  • CoCR:28%

Hammond, Indiana

  • Home value 2018: $89,300
  • Home value 2010: $100,600
  • Home value CAGR: -1%
  • Median rent 2018: $875
  • Rent/price ratio:98%
  • CoCR:18%

Reading, Pennsylvania

  • Home value 2018: $70,800
  • Home value 2010: $70,900
  • Home value CAGR: 0%
  • Median rent 2018: $797
  • Rent/price ratio:13%
  • CoCR:07%

Buffalo, New York

  • Home value 2018: $82,900
  • Home value 2010: $72,100
  • Home value CAGR: 2%
  • Median rent 2018: $757
  • Rent/price ratio:91%
  • CoCR:90%

Canton, Ohio

  • Home value 2018: $70,000
  • Home value 2010: $83,500
  • Home value CAGR: -2%
  • Median rent 2018: $652
  • Rent/price ratio:93%
  • CoCR:86%

Cleveland, Ohio

  • Home value 2018: $68,500
  • Home value 2010: $90,300
  • Home value CAGR: -3%
  • Median rent 2018: $700
  • Rent/price ratio:02%
  • CoCR:80%

 

Note that while these markets provide amazing CoCR, they won’t necessarily yield amazing appreciation. In other words, cash flow isn’t the only metric you should consider, especially in light of the pandemic. Investing in cash flow markets where tenants can’t pay the rent due to COVID-19 is certainly a risky investment.

If you do invest now, make sure you’re proactive in finding creative solutions to social distancing like electronic signatures when signing closing documents or virtual apartment tours when you go looking for new tenants. You may also be on the look-out for ways to save — either by finding distressed properties, using a discount real estate brokerage, or finding owners looking for a way out of their mortgage.

A good rule of thumb when searching through loads of properties is the 1% rule — your monthly rent divided by purchase price should be at least 1%. Some people use this rule but adjust it to 2% for less risk. Both are great rules of thumb, but for any property you’re seriously considering buying, it’s best to actually crunch the numbers using real figures specific to the property and the area. By keeping costs low, you’ll keep your returns high, which is especially important now when the future is uncertain.