If you’re considering buying a rental property, familiarizing yourself with the best rental markets in the country could go a long way in preparing you to invest in your first buy-and-hold asset. Aside from being some of the best cities to invest in real estate, today’s best places to buy rental property can teach us a lot about how to invest in specific locations. The location you choose to invest in will ultimately determine the viability and success of any assets you acquire. After all, those who know how to read and interpret market indicators will know where the best rental markets reside. Keep reading to learn where the best places to invest in real estate long term are, and why investors should be excited.
Best Rental Markets In 2023
Rent growth in 2022 was attributed to supply and demand constraints in the housing sector. Historically low interest rates, pent-up demand, and years of government stimuli created a competitive market—the likes of which had never been seen before. At the same time, inventory was unable to keep up with the pace of buying activity; there simply weren’t enough homes to keep up with demand. As a result, even those who wanted to buy were relegated to the renter pool in 2022, causing rents to spike. In response to higher home prices and rental rates, many households used the work-from-home trends created by the pandemic to relocate to the Sunbelt.
As we get closer to turning the page on 2022, however, the best rental markets are starting to shift to the Midwest. Over the latter part of 2022, the Midwest has seen some of the fastest rental rate growth in the country, and 2023 doesn’t appear as if it will put an end to the momentum. The convergence of record rent increases and inflation is forcing more people to move back in with families or roommates, or even delay renting altogether.
The shift in sentiment has also changed the best places to buy a rental property in 2023. Instead of focusing on the Midwest, as investors have done throughout 2022, the best rental markets in 2023 are looking more and more like the following:
- Chicago, Illinois
- Cincinnati, Ohio
- Columbus, Ohio
- Grand Rapids, Michigan
- Louisville, Kentucky
- New York, New York
- Phoenix, Arizona
- Spokane, Washington
- Raleigh, North Carolina
- San Diego, California
Chicago, Illinois
The Chicago real estate market looks well positioned to be one of the best rental markets in 2023. If for no other reason, Chicago represents the third-largest metropolitan area in the United States. With more than 50.0% of the city’s population already locked into a rental agreement, buying a rental property in Chicago is just as much of a volume play as it is a smart decision. The number of potential renters in a city with relatively high private sector employment bodes well for investors looking to fill units. Additionally, Chicago could see its number of renters grow over the course of 2023. With a mere 16.8 weeks of supply in the housing sector, there aren’t nearly enough homes to keep up with buyers. Those who can’t buy will be forced to rent and drive up demand in a city that already has peak competition. Rents have already risen about 7.3% over the last 12 months. If interest rates continue to spike and home affordability continues to crumble, there’s no reason to think rents won’t march even higher in 2023.
Cincinnati, Ohio
Owning a rental property in the Cincinnati real estate market is growing more attractive with each passing day. With local rents growing about 6.0% in the last six months alone, Cincinnati has one of the fastest metro-level rent growth rates in the country. The rise in rental rates appears to be attributed to the city’s relative affordability. With that in mind, more people are looking to Cincinnati in an attempt to escape today’s high prices. With a median sales price somewhere in the neighborhood of $230,000, Cincinnati real estate is more affordable than the national average and, therefore, one of the last bastions of affordable housing. The added action, however, is straining the city’s 11.4 weeks of supply. Not unlike just about everywhere else, there aren’t enough homes to satiate buyers. As a result, local rents are expected to increase significantly as buyers are turned away from purchasing and towards renting.
Columbus, Ohio
One of the best places to buy a rental property in 2023 is shaping up to be the Columbus real estate marketin Ohio. Similar to Cincinnati, Columbus has seen a lot of extra attention over the course of 2022. At $246,515, the median home value in Columbus is well below the national average. Due to the city’s relative affordability, more people are looking to call it home. However, Columbus only has about 13.1 weeks of inventory; not nearly enough to keep up with demand. The imbalance between competition and inventory has created more demand for rentals, increasing rents as much as 6.0% over the last six months. Looking into 2023, demand for real estate in Columbus will increase as more people look to escape less affordable markets. When supply fails to keep up with demand, more renters will enable landlords to increase rental rates, making Columbus one of the best rental markets in 2023.
Grand Rapids, Michigan
While rents in the Grand Rapids real estate market haven’t increased at quite the same pace as the previously mentioned cities, 2023 is starting to look like a great year for passive income investors. For starters, landlords will see plenty of demand thanks to the city’s distinct lack of inventory. With 7.0 weeks of supply, inventory is nowhere near capable of keeping up with demand. Subsequently, Grand Rapids is expected to see a steady influx of net migration due to the city’s relative affordability. More households will be forced to rent, regardless of whether they can afford to buy. Discrepancies in supply and demand have already resulted in a 5.4% increase in rents over the last year, and there’s nothing to suggest the trend won’t continue. As a result, investors will see plenty of demand for their rental units, giving them the ability to increase asking prices accordingly.
Louisville, Kentucky
While not technically part of the Midwest, the Louisville real estate market is benefiting from the same migration trends as the rest of the best rental markets on this list. Most notably, renters are choosing to call Louisville home because it represents a more affordable real estate market. The median home value in Kentucky is about $125,000 less than the national average, serving as an affordable alternative for anyone who was granted work-from-home privileges over the course of the pandemic. The added attention on the Louisville market will pose a significant challenge for local inventory levels. With a little more than two months of inventory, demand greatly outweighs supply. The lack of inventory has already increased rents by 8.1% over the last 12 months. Therefore, it’s reasonable to assume that more people moving to Louisville in search of affordable living situations will ironically increase rental rates.
New York, New York
Few cities across the country have proven to be a better market to be a landlord in than New York. In the last six months, metro-level rent growth increased upwards of 5.0%, trailing behind only Columbus and Cincinnati. However, unlike its Ohio counterparts, New York hasn’t seen an influx of demand because of affordability. Instead, the New York real estate market is finally starting to get its legs underneath it. With what looks like the worst of the pandemic in the rearview mirror, New York is starting to fire on all cylinders. People are going back to the office, and landlords are seeing more demand for their units. New York landlords have already been able to increase rents at an attractive rate, and current trends suggest they will continue to be able to do so—at least for the foreseeable future.
Phoenix, Arizona
Only a handful of metropolitan areas have seen their rents increase as much as the Phoenix real estate market over the last three years. Since the beginning of the pandemic, in fact, rents in Phoenix have increased by about 32.0%. Only seven other cities with a population greater than one million saw rents increase at a faster rate than Phoenix since the first quarter of 2020. The increase was directly correlated to the market’s relative affordability and households’ inclination towards warmer weather during the pandemic. Rent increases have cooled off in recent months, but Phoenix remains a destination for both older generations on the brink of retirement and up-and-coming tech industry employees. Demand from several generations of buyers and renters will make Phoenix one of the best rental markets in 2023.
Spokane, Washington
While separated by an entire state, the Spokane real estate market is benefiting from its more expensive neighbors to the West: Seattle and Portland. Both Portland and Seattle have seen exorbitantly expensive home values lead to a mass exodus. In search of more affordable living arrangements, many households have set their sights on Spokane. With a population that barely eclipses 200,000 people, Spokane is a relatively small city receiving a lot of attention. Demand for housing has already increased home values 12.6% over the last year. Additionally, Spokane’s 11.9 week of supply can’t keep up with the net migration. As a result, the rental market has become the beneficiary of an influx of demand. Spokane real estate investors with units for rent will most likely be able to avoid vacancies with ease and increase rental rates in 2023, making it one of the best rental markets to invest in.
Raleigh, North Carolina
The Raleigh real estate market was a beneficiary of the new migration patterns created by the pandemic. Local home values have increased about 56.3% since COVID-19 was officially declared a global emergency. In that time, rents have increased a slightly more modest (but nonetheless impressive) 32.9%. As more people chose to call Raleigh home, landlords and sellers were able to increase their prices at a historic pace. That said, residents haven’t chosen to flee Raleigh as prices rise. If anything, more people are looking to call Raleigh home in 2023, which suggests it may be one of the best rental markets in 2023.
San Diego, California
Many of the hottest real estate markets in 2022 were located in the Sun Belt. As more people were granted permission to work from home during the pandemic, many households chose to relocate to warmer locations. The San Diego real estate market, in particular, saw an incredible influx of demand when buyers and renters prioritized cities with warmer weather. The resulting demand increased rents and home values almost exponentially over the last three years. Landlords have been able to increase rents as much as 5.0% in the last six months alone. That said, higher home values and rents haven’t scared away potential buyers and renters; if anything, demand remains largely intact. As a result, local landlords will find that they can simultaneously lower the risk of vacancies and increase rents in 2023.
Top Factors That Affect A Rental Property Investment
There are countless factors that play into a location’s rental viability. The sheer number of variables that have even the slightest impact on an area’s rental property performance is staggering. That said, not all indicators are created equal; there are some factors that affect a rental property investment inherently more than others, not the least of which include:
- Location
- Economy
- Vacancies & Listings
- Future Development
Location
First and foremost, the golden rule of real estate investing is still alive and well: location, location, location. Investing in a rental property with at least some success is always contingent on the area in which it is located. The location of the respective property will determine everything else I’ll discuss henceforth.
Before considering a subject property, you need to pick a location that facilitates a healthy rental market. Specifically, pay special consideration to the economy’s health, demand, job opportunities, new home construction, unemployment rates, household income, affordability, and anything else that could potentially influence a renter’s decision to live in the area. Even the best rental property in a poor location doesn’t stand a chance when all is said and done. You need to invest in an area that people want to call home and where demand will persist for the foreseeable future.
Economy
The local economy will play an integral role in determining the best places to buy rental property. Here’s a list of some of the most important economic factors you’ll need to consider when looking at the location in which a rental property is situated:
- The number of sales of existing homes
- The prices of existing homes
- The volume of new construction
- The local economy
- Population trends
- Unemployment rates
- Job growth
- Median household incomes
- Affordability
While this list is not exhaustive, each of these indicators will play an essential part in determining whether or not an area is worth investing in. Positive trends in each would likely suggest the location is ready to be invested in, but economic indicators are not mutually exclusive. Darren Nix, Founder of Steadily Landlord Insurance, adds that “investors should watch for new home costs. When the costs start to decrease, there will be less demand for existing homes and rentals”. While it’s better to have everything working in an area’s favor, a rental market can thrive with just a few of these factors on its side.
Vacancies & Listings
Mind due diligence and pay close attention to the ratio of vacancies relative to the number of listings in a particular area. An unusually high number of listings, for example, could represent one of two scenarios: either the neighborhood is currently in the middle of a seasonal cycle, or it is trending downwards. It is in your best interest to discern what the listing ratio in a particular area means for an impending investment.
Take note of the area’s vacancy rate, too. At the very least, vacancy rates will give you an idea of what sort of demand to expect. Low vacancy rates could be a good sign, as demand appears intact and active. High vacancy rates, however, could suggest poor conditions. Additionally, lower demand could force landlords to lower rates to attract tenants, not unlike yourself.
Future Development
Areas with future development projects in the pipeline are typically representative of a healthy market. Most likely, projects have broken ground because the area has shown promise, which bodes well for rental property investors. Conversely, a distinct lack of development suggests there is reason to avoid the area. Therefore, you’ll want to contact the local municipal planning department to gather information on all the new projects currently underway or will be sometime soon.
Summary
Finding the best places to buy rental property, or at the very least the best market near you, is essential whether you are purchasing your first or your fourth buy and hold property. Luckily, several indicators can help you choose an optimal location. These factors range from local economic markers to average vacancy rates and population trends. A great place to start is always looking at the year’s best rental markets. Although, these cities are just the beginning. Pay attention to the factors defining these emerging real estate markets and allow them to guide your search for the best location for your investment.
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