Airbnb rentals have been exponentially growing in popularity in recent years with the advancement of new technologies and cheaper and more efficient transportation options. Single tourists, businesspeople travelers, and families on vacation are all looking for homey and reasonably priced accommodation. Nevertheless, despite the growth in Airbnb rentals, traditional rentals remain the most popular real estate investment strategy which is oftentimes significantly more profitable than Airbnb rentals. Regardless of the state of the economy, the current US housing market, and the specific location, people will always need places to live in and to call home. Thus, traditional rentals are definitely an investment strategy which no real estate investor should ever ignore.
However, this does not mean that having traditional rentals just anywhere is the smartest real estate investment decision. As a real estate investor, you should choose carefully the location for your investment properties – regardless of whether they are traditional rentals or Airbnb rentals – because location is the main driver of profitability in the real estate investing business. This blog is devoted to those real estate investors in favor of traditional rentals and aims to help them choose the best location for buying their next investment property. Here we present you the 10 most profitable locations for traditional rentals in the US housing market at the end of 2017.
But before we get into the specific most profitable locations for traditional rentals, we have to clarify a few things to make sure we are all on the same page.
What do we mean by most profitable locations for traditional rentals?
What is the purpose of any and every real estate investor? To make money through various real estate investment properties, right? In the traditional rentals real estate investment strategy, real estate investors make money by buying a rental property and renting it out to long-term tenants while managing all aspects of the rental property. In return for living in your rental property, your tenants pay you rent, which turns into a rental income from your point of view, the point of view of the real estate investor. However, that’s not all. As a real estate investor, you should never ever forget that you need to spend some money on your rental property in the form of property tax, insurance fees, maintenance, repairs, marketing, etc. So, the profit you make from a rental property is simply the difference between the money you make from this investment property (rental income) and the money you spend on it (expenses or costs). Obviously, the most profitable locations for traditional rentals in the US housing market at the moment would be those which allow you to spend as little as possible on your rental properties while receiving as much as possible from them in the form of rental income.
Related: What Is Location in Real Estate Investing?
How do we measure the profitability of traditional rentals?
In the real estate investing business there are numerous ways to measure profitability. When it comes to rental properties, the two most important measures of profitability, or return on investment, are the cash on cash return and the cap rate. Real estate experts agree that cash on cash return is the better metric to measure the return on investment of a rental property because it allows to differentiate between buying a rental property in cash or with a mortgage. So, for the purposes of this blog, we consider the most profitable locations for traditional rentals in the US housing market at the moment to be those locations which offer the highest cash on cash return in case of the traditional rental strategy to real estate investors.
What is cash on cash return and how do we measure it?
Now we’ve come to an important question, the answer of which every real estate investor must know if he/she wants to make money rather than lose money from his/her real estate investments. The cash on cash return of a rental property is the net operating income (NOI) of this property divided by the total cash investment.
Cash on cash return formula:
Cash on Cash Return = Net Operating Income (NOI)/Total Cash Investment
The net operating income (NOI) is the difference between the total annual rental income (the monthly rental income multiplied by 12) and the operating expenses of the rental property. Meanwhile, the total cash investment is all the money you pay in cash in order to buy an investment property and make it operational as a rental property, i.e., ready for renting out. This includes the cash you paid towards the property price, the loan fees, the real estate agents’ fees, the closing fees, and the repair costs.
Related: Real Estate Investing for Beginners: The Basics
Is there an easy way to calculate cash on cash return for traditional rentals?
The formulate to calculate cash on cash return looks rather simply. However, this is not the case if you actually try to gather all the metrics needed to come up with the expected cash on cash return of a specific investment property you are considering buying. You will have to go around, collect tons of data, conduct real estate market analysis, put all numbers into spreadsheets, make numerous calculations, get real estate comps, do investment property analysis, and see how your desired property compares to others in the location. This doesn’t sound like a lot of fun, does it?
Don’t worry. As a real estate investor in the 21st century, you don’t have to go through all these tedious steps to calculate the cash on cash return of your investment property. Instead, you can get an investment property calculator which will do all the calculations for you and provide you with ready answers.
If you want a particularly good investment property calculator, get Mashvisor’s. Mashvisor’s investment property calculator relies on traditional and predictive analytics to provide you with all the numbers you need (property price, rental income, cash on cash return, cap rate, occcupancy rate, etc.) to decide whether a certain housing market (city or neighborhood) and a specific property is the right real estate investment decision for you. Regardless of whether you are a new or an experienced real estate investor, Mashvsior’s investment property calculator will turn into your best investment friend in no time.
Related: Mashvisor’s Investment Property Calculator: Real Estate Investing Made Easier
What is good cash on cash return for traditional rentals?
Most real estate experts agree that good cash on cash return constitutes anything between 8% and 12%; anything above 12% is simply amazing. However, this is not the reality of the real estate investing business. In reality, real estate investors are and should be happy every time they get a rental property with cash on cash return above 4-5%. Of course, the more the better, but finding anything above 7-8% is not always possible.
Related: What is Good Cash on Cash Return?
What are the 10 most profitable locations for traditional rentals in the US housing market at the end of 2017?
Now we come to the focus of this blog: the 10 most profitable locations for traditional rentals in the US housing market at the moment. As a real estate investor, you must be wondering how we’ve determined these most profitable locations. These are simply the 10 cities in the US housing market which currently yield the highest cash on cash return for investment properties rented out through the traditional rental strategy according to Mashvisor’s investment property calculator. You should note that the traditional cash on cash return and the traditional cap rate are the same number because Mashvisor’s investment property calculator assumes that all properties are bought fully in cash.
Related: How Does the US Housing Market Forecast Look for the Second Half of 2017?
So, let’s have a look at the 10 most profitable locations for traditional rentals in the US housing market:
1. Riverhead, NY
- Median Property Price: $330,000
- Monthly Traditional Rental Income: $6,210
- Traditional Cash on Cash Return: 18.7%
- Traditional Cap Rate: 18.7%
Maybe it is hard to believe, but Riverhead, NY in the Suffolk County heads the list of the most profitable locations for traditional rentals in the US housing market at the end of 2017. There isn’t really much more to say about this town with a population of 33,500 inhabitants, but the fact that Riverhead, NY is the best location for traditional rentals based on cash on cash return is all that residential real estate investors need to know. The traditional cash on cash return of nearly 19% is more than excellent, so all real estate investors looking for high return on investment should think about Riverhead, NY as the location for their next rental property purchase.
2. Fremont, CA
- Median Property Price: $180,000
- Monthly Traditional Rental Income: $2,750
- Traditional Cash on Cash Return: 13.8%
- Traditional Cap Rate: 13.8%
Mashvisor’s investment property calculator has ranked Fremont, CA as the second among the most profitable locations for traditional rentals in the US housing market for cash on cash return. Fremont, CA is significantly larger with a population of 230,000 inhabitants. Being a top location for traditional rentals makes perfect sense for this city due to its geographical proximity to San Francisco, which attracts a lot of commuters.
3. Naples, FL
- Median Property Price: $437,000
- Monthly Traditional Rental Income: $3,950
- Traditional Cash on Cash Return: 8.8%
- Traditional Cap Rate: 8.8%
The tiny town of Naples, FL with a population of 20,600 inhabitants is the third among the most profitable locations for traditional rentals in the US housing market. As you can see, the median property price here is much higher than in the previous two locations. Actually, real estate properties here can be some of the most expensive ones across the nation as property prices reach up to $40 million. However, the monthly traditional rental income is also very high at nearly $4,000, which brings about excellent traditional cash on cash return.
4. Rio Rancho, NM
- Median Property Price: $183,000
- Monthly Traditional Rental Income: $1,800
- Traditional Cash on Cash Return: 8.5%
- Traditional Cap Rate: 8.5%
With a population of 93,800 inhabitants, Rio Rancho, NM is ranked #4 among the most profitable locations for traditional rentals in the US housing market. If you are a real estate investor with limited cash, you should give this location a serious consideration as it yields almost the same traditional cash on cash return as Naples, FL for nearly a third of the median property price.
5. Visalia, CA
- Median Property Price: $244,000
- Monthly Traditional Rental Income: $2,080
- Traditional Cash on Cash Return: 7.1%
- Traditional Cap Rate: 7.1%
The next of the most profitable locations for traditional rentals is Visalia, CA, with a population of 130,000 inhabitants, being a center of productive agricultural activities. According to Mashvisor’s investment property calculator, the traditional cash on cash return here is 7.1%, which is great.
6. Schenectady, NY
- Median Property Price: $159,000
- Monthly Traditional Rental Income: $1,380
- Traditional Cash on Cash Return: 6.6%
- Traditional Cap Rate: 6.6%
Schenectady, NY is the second one in the State of New York and the 6th in the entire US housing market among the most profitable locations for traditional rentals based on cash on cash return, according to estimates from Mashvisor’s investment property calculator. It is also the most affordable one in this list with a median property price of below $160,000.
7. Pawtucket, RI
- Median Property Price: $227,000
- Monthly Traditional Rental Income: $1,980
- Traditional Cash on Cash Return: 6.5%
- Traditional Cap Rate: 6.5%
If you are a real estate investor from the State of Rhode Island or one in favor of out-of-state real estate investing, you could investigate Pawtucket, RI as the place for your next investment property purchase. Another small city with a population of 71,000 inhabitants, Pawtucket, RI yields very good cash on cash return of 6.5% according to Mashvisor’s investment property calculator.
8. Santa Fe, NM
- Median Property Price: $365,000
- Monthly Traditional Rental Income: $2,340
- Traditional Cash on Cash Return: 6.3%
- Traditional Cap Rate: 6.3%
If you are looking for a tourist destination as the place for your next investment property purchase because you might want to try out Airbnb rentals in the future as well, then Santa Fe, NM is the right place for you. With traditional cash on cash return of 6.3% according to Mashvisor’s investment property calculator, it is the 8th among the most profitable locations for traditional rentals in the US housing market.
9. Burien, WA
- Median Property Price: $389,000
- Monthly Traditional Rental Income: $2,500
- Traditional Cash on Cash Return: 5.6%
- Traditional Cap Rate: 5.6%
The proximity to Seattle is the main factor which makes the small town of Burien, WA (with a population of 50,000 inhabitants) one of the most profitable locations for traditional rentals in the US housing market. The traditional cash on cash return of 5.6% is very good, realistically speaking.
10. Venice, FL
- Median Property Price: $283,000
- Monthly Traditional Rental Income: $2,170
- Traditional Cash on Cash Return: 5.5%
- Traditional Cap Rate: 5.5%
If you still have not found the place for your next investment property purchase, you could give Venice, FL a thought. That’s the second Florida city among the most profitable locations for traditional rentals in the US housing market for cash on cash return according to Mashvisor’s investment property calculator. This comes as no surprise considering the lively real estate market in the State of Florida.
Related: How to Buy a Rental Property Using Mashvisor?
In conclusion, we would like to say a few general words about the most profitable locations for traditional rentals in the US housing market based on cash on cash return. All these cities are rather small and are definitely not the first real estate markets which come to the mind of investors. Overall they are affordable with a median property price well beyond other top housing markets, while they yield high monthly traditional rental income, which is why they are such an excellent choice for buying and owning traditional rental properties. Generally speaking, the most profitable locations for traditional rentals are concentrated in the south with two in California, two in Florida, and two in New Mexico.
If you are ready for buying your next investment property, check out Mashvisor’s property search engine and investment property calculator to choose the best rental property in the US.