Rents exceed housing payments in only four markets—are the days of cash flow over?

Detroit, Philadelphia, Cleveland and Houston. They are the only four remaining cities where it costs less to buy a typical home than to rent, according to a new reports From Redfin. The analysis compared March home values ​​and rental projections for the 50 most populous metro areas in the United States, assuming 5% downpayments and 6.5% mortgage rates. Back in January 2022, a Analysis Realtor.com found that buying a home was more affordable than renting in more than half of major metros. But mortgage rates have risen since then Rent prices have been flat at the national level.

Naturally, the question for investors is whether buying a home can generate cash flow now that housing payments (including Insurance And property taxes) is higher than fair market rent in most markets. Spoiler: The long-term rental strategy is still viable — but investors face more challenges.

Should You Be Investing In These Four Markets?

According to Redfin’s estimates, typical rent is higher than typical housing payments in only four metro areas. In Detroit, estimated rents exceed estimated housing payments in nearly 80% of properties, and it’s about 24% less expensive to buy than to rent.

None of these metros saw home values ​​skyrocket during the pandemic compared to the rest of the country. While metros like Phoenix and Miami experienced huge price jumps, those areas also saw a sharp drop in prices. By comparison, Detroit and Cleveland only realized a fraction of the appreciation — but the periods of falling prices were even less pronounced in these cities, according to Redfin.

Still, the 10-year appreciation rate miami (from March 2013 to March 2023) was about 26% higher than the ten year appreciation rate for Detroit, according to the S&P/Case-Shiller Home Price Index. And there are other advantages to buying a cyclical market—if you time your buying and selling to match the ups and downs of the market, you can make even more profits.

But investors looking for a stable, reliable investment may find these cities more attractive than other markets. Detroit may also offer some investors an opportunity to buy with cash as median home prices were lower for April $75,000, and the market is ideal for generating cash flow due to its high rent-to-value ratio. But of course, there are other factors to consider as well. For example, the violent crime index in Detroit is almost double Miami’s

Few opportunities for cash flow in pandemic boomtown

In addition to notoriously expensive metros like San Jose and San Francisco, where buying a home costs more than twice as much as renting on a monthly basis, post-pandemic boomtowns like Sacramento, Las Vegas, Phoenix and Austin each had a single-digit share Is. Properties for which the estimated rent payments exceed the estimated mortgage payments. These cities experienced an influx of new residents during the pandemic, causing prices to skyrocket, but now, home values ​​are on the decline.

It’s not just about the market – it’s about the asset

In the following markets, Redfin found less than 0.5% of properties to be advantageous to buy versus rent:

• San Jose, California
• San Francisco, California
• Oakland, California
• Anaheim, California
• Los Angeles, California
• San Diego, California
• Sacramento, California
• Seattle, Washington
• Denver, Colorado
• Portland, Oregon

In the remaining metros, at least a small portion of properties still have the opportunity to generate cash flow with today’s mortgage rates. This means that smart investors looking for viable properties can still find good investment opportunities. it comes down to crunching the numbers for each individual deal, and a Investor Friendly Real Estate Agent Might be able to point you in the right direction.

Should You Wait For Mortgage Rate Relief?

How much would mortgage rates need to drop for investors to collect more rent than the typical housing payment in most areas? Currently, the home ownership premium nationally is approximately 25%, the average monthly mortgage payment is estimated at $3,385 and the average rent payment is estimated at $2,715. If mortgage rates were to fall by 4%, it would reduce homeowner premiums by 1% and open up new markets where it is cheaper to buy. But at a mortgage rate of only 3% the estimated average rent payment would be higher than the typical housing payment nationwide.

the only time average 30 year fixed mortgage rate It had fallen so low in 2020 and 2021 in the last three decades. It is unlikely that rates will return to this historic low anytime soon. trading economics It is currently estimated that the federal funds rate will fall to 3.25% by 2025, while the Federal Open Market Committee has predicted a decline. 3.1% That same year. While this will impact mortgage rates significantly, it will not result in a cheaper average national housing payment when compared to the average national rent payment.

Whether or not you want to wait should be a personal decision. If you’re aiming for a market like Denver, where the homeownership premium is above 50%, and Redfin found only 0.1% of properties for which cash flow would be possible, it may be wise to wait, strengthen your cash position, and see. can be understood for where things go down Alternatively, you may want to consider long-range investing in other markets or change your investment strategy.

Desirable cities with a strong job market attract digital nomads and itinerant workers, so you may want to consider whether a medium-term rental strategy is viable. While short-term rentals may not be yielding the high occupancy rates that were common in 2021, there are still opportunities for investors to make significant returns in some mid-sized cities with relatively low home values ​​and lots of cultural and outdoor activities. To airDNA,

Can You Make It Work With Today’s Mortgage Rates?

For some investors, the long-term rental strategy is a natural fit for their lifestyle. And it’s still possible to collect more rent than you pay monthly to own and maintain the rental property. However, investors are facing more challenges. Finding the right property takes an extra dose of patience. The struggle is especially real for beginning investors, who may not have large cash down payments or a track record for obtaining alternative types of financing.

Depending on your financing options and the availability of cash flow assets in the markets that interest you, you may be able to find a great investment with today’s mortgage rates, or you may choose to wait for relief. In your research, you may want to consider these additional metro areas, where at least 30% of properties have an estimated rent payment higher than the mortgage payment. Be sure to take into account other factors that make it a good investment.

Note by BiggerPockets: These are the views expressed by the author and do not necessarily represent the views of BigPockets.