Buying a rental propertyTiko Aramyan / Shutterstock.com

This story originally appeared on Construction Coverage.

While the COVID-19 pandemic has been detrimental to many American families, it has helped solidify the financial footing of others. As less money was spent on expenses such as traveling, commuting or eating out, household savings rates rose to a record level in 2020. For middle- and high-income workers whose jobs were not disrupted by the pandemic, direct federal and state payments. Other stimulus programs also meant more money in the bank. And at least a few months before most of the US is vaccinated and life returns to normal, many of these people have been looking for the best ways to manage that money while they have waited for the pandemic.

Many have turned to real estate and residential property sales have skyrocketed in 2020. Rental properties in particular are a product that is in constant demand, even in difficult economic times, and rental payments often cover most of the investor's costs over the term of the investment. Current mortgage rates are low, which means cheap financing is easier to come by. While the residential property market is currently very competitive to buyers due to the low housing stock, these conditions are also accelerating a nationwide appreciation of property values, which increases long-term returns for investors.

As is often the case with real estate, the potential rental investment opportunity looks different in different local markets. The most important metric to analyze is the gross rental return or the annualized price ratio of rent to home. In general, there is a strong correlation between property prices and rent, which makes sense since one of the main considerations for a landlord when setting rent is the cost of paying their home loan. However, real estate prices tend to vary more between markets than rents, so areas with more expensive houses do not generate as cheap returns as areas with cheaper houses but comparable rental levels.

To identify the states and metropolitan areas where rents are the best investment, Construction Coverage researchers created a composite score based on five key factors. Most importantly, the gross rental return, which is half of the composite index. higher scores are preferable. Other factors include recent and projected changes in property prices, which are indicative of the potential long-term returns. the real estate tax burdens, which can add to the cost of owners; and the unemployment rate, which is preferably lower, indicating that more potential tenants are working and having the ability to pay rent.

At the state level, that combination of factors has highlighted locations in the South and Midwest as the best places to buy a rental property. Alabama (88.3 out of 100 in the composite score), Oklahoma (85.5) and West Virginia (85.2) led all states. States in these regions tend to have lower median home values, which improves gross rental returns, and property owners also benefit from lower property tax levels.

At the subway level, the story is similar. Many of the best markets to buy a rental in are in states highlighted on our Composite Score, and for the most part for the same reason: lower home values, which make up the main constituent of the index, cheap gross rental returns.

Read on for the best major metropolitan areas (1 million residents or more) to buy a rental property.

15. Kansas City, MO-KS

Kansas City, MissouriScruggelgreen / Shutterstock.com

  • Compound score: 75.8
  • Gross Rental Return: 6.05%
  • Median home price: $ 220,301
  • Previous 1 year change in home price: 9.98%
  • Expected change in home price by 1 year: 10.40%
  • Average property tax burden: 1.17%
  • Unemployment rate 2019: 3.4%

14. Miami-Fort Lauderdale-Pompano Beach, FL

Miami, Floridalittleny / Shutterstock.com

  • Compound score: 76.3
  • Gross Rental Return: 6.69%
  • Median home price: $ 312,574
  • Previous 1 year change in home price: 6.98%
  • Expected change in home price by 1 year: 8.40%
  • Average property tax burden: 0.92%
  • Unemployment rate 2019: 4.3%

13. Virginia Beach-Norfolk-Newport News, VA-NC

Ritu Manoj Jethani / Shutterstock.com

  • Compound score: 76.3
  • Gross Rental Return: 6.55%
  • Median home price: $ 259,731
  • Previous 1 year change in home price: 7.78%
  • Expected change in home price by 1 year: 9.50%
  • Average property tax burden: 0.84%
  • Unemployment rate 2019: 5.1%

12. Orlando-Kissimmee-Sanford, FL

Orlando Floridasongquan-deng / Shutterstock.com

  • Compound score: 76.7
  • Gross Rental Return: 6.57%
  • Median home price: $ 268,806
  • Previous 1 year change in home price: 7.17%
  • Expected change in home price by 1 year: 8.80%
  • Average property tax burden: 0.86%
  • Unemployment rate 2019: 4.1%

11. Pittsburgh, PA

Pittsburgh esb-professional / Shutterstock.com

  • Compound score: 77.0
  • Gross Rental Return: 6.69%
  • Median home price: $ 174,771
  • Previous 1 year change in home price: 9.25%
  • Expected change in home price by 1 year: 10.10%
  • Average property tax burden: 1.48%
  • Unemployment rate 2019: 4.3%

10. Phoenix-Mesa-Chandler, AZ

John Wollwerth / Shutterstock.com

  • Compound score: 77.3
  • Gross Rental Return: 5.35%
  • Median home price: $ 315,045
  • Previous 1 year change in home price: 15.30%
  • Expected change in home price by 1 year: 14.70%
  • Average property tax burden: 0.57%
  • Unemployment rate 2019: 4.5%

9. New Orleans Metairie, LA

New Orleans, Louisiana at nightf11 Photography / Shutterstock.com

  • Compound score: 77.7
  • Gross Rental Return: 6.65%
  • Median home price: $ 217,016
  • Previous 1 year change in home price: 7.49%
  • Expected change in home price by 1 year: 8.00%
  • Average property tax burden: 0.65%
  • Unemployment rate 2019: 5.4%

8. Atlanta-Sandy Springs-Alpharetta, GA

Atlanta, GeorgiaSean Pavone / Shutterstock.com

  • Compound score: 77.8
  • Gross Rental Return: 6.51%
  • Median home price: 255,109 USD
  • Previous 1 year change in home price: 8.93%
  • Expected change in home price by 1 year: 10.10%
  • Average property tax burden: 0.88%
  • Unemployment rate 2019: 4.3%

7. Detroit-Warren-Dearborn, MI

Detroit, MichiganSusanne Pommer / Shutterstock.com

  • Compound score: 78.1
  • Gross Rental Return: 6.72%
  • Median home price: $ 195,270
  • Previous 1 year change in home price: 9.78%
  • Expected change in home price by 1 year: 12.30%
  • Average property tax burden: 1.37%
  • Unemployment rate 2019: 5.3%

6. Indianapolis-Carmel-Anderson, IN

Indianapolis, IndianaAlexey Stiop / Shutterstock.com

  • Compound score: 78.2
  • Gross Rental Return: 6.34%
  • Median home price: $ 200,366
  • Previous 1 year change in home price: 10.59%
  • Expected change in home price by 1 year: 9.80%
  • Average property tax burden: 0.88%
  • Unemployment rate 2019: 4.2%

5. Rochester, NY

Rochester New YorkTarnPisessith / Shutterstock.com

  • Compound score: 78.3
  • Gross Rental Return: 7.20%
  • Median home price: $ 169,546
  • Previous 1 year change in home price: 9.87%
  • Expected change in home price by 1 year: 10.50%
  • Average property tax burden: 2.56%
  • Unemployment rate 2019: 4.1%

4. Oklahoma City, OK

Oklahoma City skylineNatalia Bratslavsky / Shutterstock.com

  • Compound score: 79.8
  • Gross Rental Return: 7.48%
  • Median home price: $ 171,213
  • Previous 1 year change in home price: 7.36%
  • Expected change in home price by 1 year: 7.30%
  • Average property tax burden: 0.93%
  • Unemployment rate 2019: 4.1%

3. Memphis, TN-MS-AR

Memphis, TennesseeSteven Frame / Shutterstock.com

  • Compound score: 81.7
  • Gross Rental Return: 7.69%
  • Median home price: $ 167,904
  • Previous 1 year change in home price: 10.57%
  • Expected change in home price by 1 year: 9.70%
  • Average property tax burden: 1.01%
  • Unemployment rate 2019: 6.0%

2. Tampa-St. Petersburg-Clearwater, FL

Tampa, Floridakevin-j-king / Shutterstock.com

  • Compound score: 81.8
  • Gross Rental Return: 6.76%
  • Median home price: 240,308 USD
  • Previous 1 year change in home price: 11.43%
  • Expected change in home price by 1 year: 12.30%
  • Average property tax burden: 0.90%
  • Unemployment rate 2019: 4.6%

1. Birmingham-Hoover, AL

Birmingham, AlabamaSean Pavone / Shutterstock.com

  • Compound score: 86.6
  • Gross Rental Return: 7.61%
  • Median home price: $ 184,012
  • Previous 1 year change in home price: 9.27%
  • Expected change in home price by 1 year: 9.10%
  • Average property tax burden: 0.49%
  • Unemployment rate 2019: 4.5%

Methodology and detailed results

House for rentAndy Dean Photography / Shutterstock.com

To identify the best cities and states to buy a rental property, the researchers created a composite score using the following metrics:

  • Gross Rental Return: The ratio of the annualized average rent to the Zillow Home Value Index
  • Previous 1 year change in home price: A smoothed, seasonally adjusted measurement of the typical home value and market changes in a particular region and type of apartment
  • Expected change in home price by 1 year: The one year forecast of the Zillow Home Values ​​Index
  • Average property tax burden: Aggregated annual property taxes paid as a percentage of the total home value
  • Unemployment rate 2019: Percentage of the unemployed population

For gross rental yield, the previous year change in property prices, and the projected year change in property prices, a higher number was associated with a better rental property purchase. In terms of the average property tax and unemployment rate, a lower number was associated with better rental property purchases. When calculating the composite rating, the metrics were weighted as follows: gross rental return (50%); previous 1 year change in home price (10%); forecast change in home price by 1 year (10%); average real estate tax burden (20%); Unemployment rate 2019 (10%).

Gross rental return data was derived from the Department of Housing and Urban Development (HUD), the 2019 US Census Bureau American Community Survey (ACS), and Zillow. The gross rental return was calculated as the ratio of the annualized average rent to the Zillow Home Value Index. The median rent was calculated as the weighted average rent for a studio, 1-bedroom, 2-bedroom, 3-bedroom, and 4-bedroom apartment. The number of tenant households per bedroom from the ACS was used as the weight. Home price data comes from the latest Zillow Home Index. The projected 1 year change in house prices for the states was calculated by taking the population-based weighted average of the subway composite values ​​in each state. Property tax data and unemployment rates come from the US Census Bureau's ACS 2019. The average property tax for each subway was calculated by dividing the total property taxes paid by the total value of the houses in each location.

Disclosure: The information you read here is always objective. However, sometimes we get compensation for clicking links in our stories.

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