The Best Markets For Real Estate Investment In 2022
In normal times, real estate investors don’t worry too much about where to invest. Every local market has opportunities, everyone has rental properties to buy, everyone has homes that you can develop for income. Growth markets offer the opportunity for higher returns, but even stagnant markets need homes that offer better returns than stocks or bonds.
(Photo by Blake Nissen for The Boston Globe via Getty Images)
Boston Globe via Getty Images
At the moment we are not in ordinary times. The Covid pandemic still threatens economic recovery, work and living habits can change permanently, and an increase in home prices has disrupted our ideas about what a home could be worth or what an investment property should cost.
Despite these difficulties – or rather because of them – here is our guide using data from Local Market Monitor, Inc. to show where and how investors can get the best returns with the least risk in the year ahead. We’ll identify markets where the demand for rental housing should be strong, but also – since most investors want to stay local – show how you can maximize your returns in each local market.
Let’s start with the basics, will there be more or less demand for rentals in the next few years and what types of rentals? The pandemic has kept many people from living in apartments in crowded cities, the recent rise in prices means many of them are trying to buy a home. On the other hand, there are still fewer jobs than before the pandemic and fewer people who can afford a home. In the past year household incomes fell in all income brackets, but most of all for those with modest incomes.
The professional situation tells a similar story. Most of the jobs lost during the pandemic were in low-wage sectors such as retail, hospitality, tourism, nursing homes and temporary work. Many of these jobs will never return, but the people who had them still have to live somewhere, and many of the newly created jobs (in Amazon warehouses, for example) are paid similarly low.
These developments point to an increase in rents in the next few years, especially in the case of cheaper rents such as apartments. In some places, single family homes are cheap enough to be part of this rental level, but in many markets you need to break up homes into rental units.
Each local market has a rental profile – how many people are paying how much rent – and a “best” rental range where you can find the highest tenant density. In this time of stronger demand, investors should aim for rents in the “best” rental area, usually apartments or townhouses.
While these guidelines apply to any market, they are even more important in markets where home prices have risen sharply recently; You can’t just raise rents to match house prices.
24 markets where home prices have risen dramatically
Local Market Monitor Inc.
The “Big Price Rise” table shows 24 markets in which home prices rose sharply in the past year, as well as the average home price, the average monthly rent and the ratio of home price to annual rent.
Aside from the strong likelihood that some of these markets will find themselves in a price bubble that will burst in the next few years, the house price / annual rent ratio suggests the best way to invest in these markets.
Where the ratio is 22 or less, like Las Vegas, Fort Worth, Camden, and Atlanta, even with the recent surge in home prices, it is possible to buy a home and rent it as it is. (This often happens in low home price markets, but not always; Knoxville and Fayetteville have the lowest home prices on the list, but even lower rents.)
Once you’ve hit ratios close to 30, as in Boise, Austin, Spokane, Salt Lake City, and Portland, it’s nearly impossible to find renters who can afford to rent an entire home. You might find a tenant right now in the midst of the housing shortage boom, but two years from now, when the average tenant moves on, it will be a lot harder.
In high-odds markets, it’s best to stick with apartments or buy a home that can be broken down into rental units.
For markets with an intermediate ratio, it may be possible to buy a rent-only, but you need to pay close attention to the local rental profile, which is usually different in different zip codes. With higher investment property prices you might be tempted to aim for just a richer tenant, but if the rent you want is much higher than the “best” rental range you will have great difficulty finding one. Remember that this will be a problem every two years, not just now, and especially as more tenants move down rather than up in the rental profile.
The sharp rise in prices isn’t the only problem for investors in 2022, the pandemic still persists. It’s still there, it’s still dampening growth, and having different effects on local markets. We don’t yet know if the job losses in some markets will be permanent or when they might return. In this situation of uncertainty, the lowest risk investment is a single family home that can be rented out with a minimal upgrade; If your returns are not working as planned, you can just resell, maybe even for a profit.
24 markets in which the “house price / annual rent” ratio is low enough to allow pure single-family homes … [+]
Local Market Monitor, Inc.
The table “single-family houses” shows 24 markets in which the “house price / annual rent” ratio is low enough to allow pure single-family houses. All had double-digit price hikes in 2021, but the price-to-rent ratio is still cheap. We also show the current job status compared to the status before the pandemic.
Some markets like Des Moines and Kansas City have increased the number of jobs, a strong sign of better growth as the recession subsides, while others like Greensboro and Virginia Beach are still three percent lower. The difference is significant as job lagging markets may have been on a slow growth path for years; We just don’t know if and when the latecomers will ever catch up, and that means that future housing demand in these markets is much more uncertain.
Any of these markets are good candidates for single family homes, but in countries where job losses are still around 3 percent, you need to be more careful with the price and rents you pay. Investments with rents in the middle “best” rental range are easiest to resell if it turns out in a few years that economic growth has not returned. The middle of the field is always a good strategy, but especially in 2022, when the future economic development is still uncertain.