Can you invest in property for both cash flow and appreciation? You can in these US real estate markets.
Finding the Best Cities for Real Estate Investment
If you’ve been in the real estate investing industry for a while now, this is no foreign topic. Investors are always going back and forth on what the best investment strategy is. Should real estate investors choose their markets based on positive cash flow or appreciation?
Cash Flow
Real estate investors who choose cash flow markets are looking for property investments that will start providing a return quickly. This real estate investment will generate a steady and reliable income stream throughout the holding period. Things to consider when searching for a strong cash flow market are key return metrics like cash on cash return and cap rate. When investing in residential real estate, average rental and occupancy rates for a location will also provide an idea of how strong this housing market is for a cash flow investment (rental property investment).
Real Estate Appreciation
The top real estate markets for appreciation are locations that experience annual healthy increases in property value. This projects a strong market, in which real estate investment will perform well long-term. When choosing a real estate market for appreciation, investors need to look at the location’s historic trends in house value and match that up with their strategy. A location with a sudden boost in real estate appreciation doesn’t necessarily mean this is a high-value market. Look at the factors driving this increase in property value. That will help you determine whether or not real estate appreciation in this housing market is an annual trend or just a fluke.
Choosing a real estate market also depends on the level of risk you’re looking to take on, or how long you’re planning on holding this investment property. Do you want to invest in a hot market with double-digit real estate appreciation rates? Or would you prefer a softer market with gradual home price appreciation? Real estate investors could be successful under both conditions.
Related: Cash Flow vs Appreciation: What Should Drive Your Real Estate Investment Decision?
What Kind of Return to Expect in a High-Appreciation Market
Investing for real estate appreciation means investing in a strong high-growth market, which holds stable investments. Rental property investments can be quite successful in these housing markets as vacancy rates are typically lower. This is because healthy markets project areas where residents have steady high paying jobs, so residents generally stay in a property for long periods of time. The stability of real estate investments in these markets also means they won’t be as sensitive to any minor fluctuations in interest rates and the like.
The main difference we see when comparing real estate appreciation markets and cash flow markets is the range of cap rates. While cash flow investors might not settle for markets with return rates below 6-8%, those investing for real estate appreciation will factor in the long-term return value and invest in markets with rates as low as 3.5%. Investing in high real estate appreciation markets, with slightly lower cap rates, will give real estate investors an overall positive performance.
Where to Invest for Real Estate Appreciation (and Cash Flow)
Real estate investors can find a balance between the two approaches and choose a real estate market with long-term growth as well as steady income generation. Looking at the US housing market as a whole, the average real estate appreciation rate is forecast to remain at +3.7%. The market is expected to maintain this residential real estate appreciation rate throughout the forecast period (through June 2020). While this does project an overall soft market across the nation, there are certain cities that are experiencing different trends according to a report from Veros Real Estate Solutions.
In addition to listing appreciation rates by city from the report, we’ll list data on rental property performance from Mashvisor so real estate investors know what kind of cash flow to expect from these markets. These are the 5 cities real estate investors should check out if they’re looking for high real estate appreciation markets.
1) Odessa, TX
- Real Estate Appreciation Rate: +9.7%
- Median Property Price: $343,020
- Price per Square Foot: $140
- Monthly Traditional Rental Income: $2,295
- Traditional Cash on Cash Return: 4.3%
2) Midland, TX
- Real Estate Appreciation Rate: +8.0%
- Median Property Price: $410,122
- Price per Square Foot: $148
- Monthly Traditional Rental Income: $2,475
- Traditional Cash on Cash Return: 3.2%
Although the Texas real estate market is experiencing softening price trends, these two cities are projecting very high increases in real estate appreciation. Residential real estate values are forecast to increase by an impressive 9.7 percent in the next year in Odessa. Midland is also forecast to outperform in terms of real estate appreciation with home values expected to increase by 8 percent in the next year. A rental property investment in these high-growth markets coupled with the good return rates is a great combo for strong performance.
Related: Texas Real Estate Market: Where to Buy Long-Term Rentals
3) Idaho Falls, ID
- Real Estate Appreciation Rate: +9.4%
- Median Property Price: $285,106
- Price per Square Foot: $118
- Monthly Traditional Rental Income: $1,304
- Traditional Cash on Cash Return: 2.3%
4) Pasco, WA
- Real Estate Appreciation Rate: +7.2%
- Median Property Price: $356,047
- Price per Square Foot: $174
- Monthly Traditional Rental Income: $1,609
- Traditional Cash on Cash Return: 2.0%
5) Yakima, WA
- Real Estate Appreciation Rate: +7.2%
- Median Property Price: $315,308
- Price per Square Foot: $151
- Monthly Traditional Rental Income: $1,291
- Traditional Cash on Cash Return: 1.8%
Idaho and Washington State are two of the strongest markets for real estate appreciation in 2020. Idaho had a 14.7 percent rise in home values, which is very good to hear on the state level. As you can see, the city of Idaho Falls is following the state’s positive trend and real estate value is expected to increase by 9.4 percent within the next year.
Pasco and Yakima are some of the hottest cities in Washington State for real estate appreciation. With property value in both cities projected to increase around 7 percent each within the next year, real estate investors can be confident that they’ll achieve strong returns with a long-term rental property investment here.
If you’re interested in investing in any of these real estate markets, let Mashvisor help you find the best investment properties. Start searching now.