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You can make good or bad investments in any market because each property is different. Even good analysis can't guarantee success - the math may be right or wrong, luck may be for you or against you, and there's also lots of lying in real estate.
But good analysis can increase your odds of making a good investment.
Our Top 20 is a list of local markets where the odds of making a good investment in rental property are in your favor right now - and, equally important, where the odds of making a bad investment are low - because the number of renters is growing fast. So fast that brokers and builders aren't yet aware of how much future demand there will be.
We winnowed our Top 20 list down from 320 real estate markets, first throwing out those where the local economy is in poor shape, then looking at the increase of lower-paying jobs in the past two years. For several decades now, the U.S. has been changing into more and more of a service economy - that is, one with more lower-paying jobs - as foreign outsourcing and computerization eliminate better-paying manufacturing and middle-management jobs. This is a major trend that will continue unabated in the near future, creating political problems and producing permanent changes in how Americans live, and particularly in the kind of housing they can afford.
The last few years saw a lot of speculation in foreclosed homes. Buyers who got them cheaply quickly resold them, often as rentals. Our list is NOT a list of such bargains. The good returns we foresee in our markets are due to strong fundamental demand over the course of future years, not quick flips. That doesn't mean you can't sell for a nice profit in a couple of years, just that you don't have to.
In some of these markets, you'll do fine just buying a property and renting it out as is, with a little bit of fixing up. In others, the cost of buying is so high that you won't be able to get the rent you need for a good return - in these markets you should buy a property and split it into multiple rental units; or you should consider buying an apartment building. Splitting a property into rentals is a more complex investment but can produce a better return.
Because this is not a list of bargains, you don't need to rush your investment. Even a year from now you'll still be in a favorable situation. The trends (and the Force) are with you. Happy hunting!
Data Details.
We counted local jobs in retail, business services, healthcare, and hotels and restaurants. Together, these make up half of all jobs in the U.S.
We also looked at the proportion of local housing that is rentals. The more rentals, the greater the barriers to ownership - which means that most of the new lower-paying jobs will turn directly into rentals.
We looked at recent population growth (must be above-average), recent over-all job growth (must be above-average), average income (not too low), average home prices (not too high or low), recent increases in home prices (above average but not too high), the "income" home price (no over-priced markets), average rents (not too low), and retirees (not too many).
All of these stats had to be favorable for a market to make our list. We also excluded small markets - they may have good opportunities but are too illiquid if you want to get in or out, and they often rely heavily on just a few employers.
