The best places to Make Money in Real Estate in 2023

Location, Location, Location

As we are developing and begin executing our plans for 2023 we all see headlines like these:

So I began to wonder if the old adages about real estate investing that I have always applied on my path to financial freedom still apply.

I found?Dave Meyer?and his research and writings and got permission from him to share with you what he has found for cash-flow-minded investors like us:

The vast majority of real estate investors get into the industry to pursue passive?cash flow. Unfortunately, over the last several years, finding deals with strong cash flow has become a challenge. However, there are still plenty of markets in the U.S. that continue to offer cash flow potential.

Below, I provide what I believe to be the top 10 markets in the United States for cash flow.

Cashflow Trends

There’s been a lot of anecdotal chatter about how difficult cash flow is to find these days, so I looked at the data to see if this is true.

One of the most common metrics used to estimate cash flow potential, and the one I will use for the remainder of this article, is known as the?rent-to-price ratio (RTP). The higher the RTP, the better potential for cash flow.

RTP is a simple calculation — you divide the median monthly rent by median sales price. According to an analysis I did in 2020, there is a correlation of .85 (1 being the strongest correlation) between RTP and cash flow. It’s not perfect, but it’s pretty good for the broad analysis that we’re doing here.

As you can see, according to U.S. Census data, RTP has been on the decline since 2012. The chatter about cash flow becoming harder to find is accurate!

NOTE: U.S. Census data is not the most current, but it provides a consistent methodology over a long period and is therefore preferred for looking at historical data like this. For my analysis of what markets currently offer the best cash flow, I use BiggerPockets’ proprietary data, which is updated weekly.

This graph tells a very important story about the Great Recession’s impact and its subsequent fallout when housing prices dropped significantly more than rent prices.

Generally speaking, during recessions, rent values don’t fall very much. Demand from renters does not fluctuate much based on economic cycles. People will always need a place to live. In fact, home prices don’t usually dip too much during recessions either — with the Great Recession being a notable exception.

From 2008–2012, home prices declined more dramatically and for longer than rent.

You can see this very clearly if you look at the compounded growth rates for the years 2008–2012. Home values averaged a decline of nearly 5% per year for four years while rent was negative, but barely.

This created the ideal situation for the cash flow we saw in the aftermath of the Great Recession. Homes became cheaper, and expenses declined, but incomes stayed relatively flat. Since 2012, home values started growing faster than rent, and RTP started to decrease.

So, while it’s true that cash flow has been, on a national level, increasingly difficult to find, it’s important to remember that the Great Recession and its aftermath was a uniquely positive opportunity to find cash flow. It’s not the norm.

That said, there are still good opportunities to find cash flow! Certain markets still offer excellent cash flow prospects across the board, and most markets can still produce cash flow if you pursue value-add strategies, short-term rental, or other creative strategies.

For this analysis, I looked at which markets offer strong cashflow potential regardless of strategy, as measured by the rent-to-price ratio.

Top 10 Markets For Cashflow in 2023

Broadly speaking, the best cashflow opportunities in the United States are concentrated in the Midwest and Southeast. If you look at the map below, you can see none of the markets are west of Louisiana. Again, that doesn’t mean you can’t find cash flow in other cities. But generally speaking, the western half of the county has less cash flow opportunity than the eastern half.

Here’s the data for the top 10 cashflow markets:

As you can see, Detroit stands on its own in terms of cash flow, with an RTP nearly double the next highest city on our list. Regardless, all of the cities here offer strong cash flow potential.

You should note that I didn’t just pick the 10 cities with the highest RTP. I didn’t want to concentrate on all the interesting markets near each other, so I tried to create some geographic and economic diversity among the cities (I still couldn’t find anything in the west). I also only chose cities that have enough data for analysis and large enough economies to warrant investing consideration.

How To Interpret This Data

If you’re looking at this list or the spreadsheet thinking, “what is a good RTP?” That’s a great question! That is a personal choice for investors, but I’ll share my thoughts.

For many years a lot of investors subscribed to something known as the 1% rule. It basically stated that any deal you pursue should have an RTP above 1%. Furthermore, some people only want to invest in markets where the average RTP is 1%. Personally, I don’t subscribe to this rule for a few reasons.

1. It was developed over a decade ago during the cashflow outlier period I mentioned above. It was realistic back then to find plenty of deals with an RTP over 1%. Now, it’s no longer a useful rule of thumb. You need to adjust to current-day market conditions, and religiously following the 1% rule is going to prevent you from getting in on deals that are very strong by today’s standards. Some of my best deals, even my highest cash-flowing deals, didn’t meet the 1% rule at the time of purchase.
2. RTP is just a proxy for cash flow — not a precise measurement. You shouldn’t decide to pursue or abandon any deal until you’ve fully run the numbers. RTP alone should not be used to make investing decisions. You need to account for taxes, insurance, and other expenses. Additionally, you need to factor in rent growth. If rent grows in your market, the RTP will improve over time.
3. I love using RTP to screen markets for cashflow potential but remember the data above is just average.?That means, by rule, there are deals with better RTPs than the city’s average and deals with worse RTPs than the city’s average. For example, in Milwaukee, the average RTP is 0.79%, but I guarantee committed investors can find deals with a much higher RTP than 0.79%, and likely even above the 1% rule. Generally speaking, any market with an RTP above .6% has the potential for cashflow deals.

Dave’s Conclusion

Although cash flow potential, as measured by RTP, has declined over the last several years, many markets in the U.S. still offer strong cash flow potential across the board. As my analysis shows, they are largely concentrated in the Midwest and Southeast. But that being said, plenty of other markets offer cash flow potential.

And remember, this data is just averages! It doesn’t reflect the best possible deal in each city, it doesn’t factor in rent growth or value add either. These are broad metrics meant to help you narrow down cities for investment consideration. They are not meant to evaluate the potential of any individual deal or sub-market.

Axel’s Conclusion

I agree with Dave and like to add that we can’t or should not assume that a real estate investor is only someone who is just starting, missed the last three or four years of rapid value growth and now wants to enter this field. Yes, everybody is welcome and while the best time was maybe 20 years, the second-best time to start is now.

For anybody who started investing in residential real estate for cash flow generation, as I have, several years or even a decade ago, it is important to keep in mind that the value appreciation typically precedes the rent-increasing cycle.

With relatively high inflation rents are increasing and wages are increasing. Those increases are always lacking behind the actual price inflation in the cost of goods for life as well as prices for residential real estate.

I can now see them appear in my portfolio of properties. That means we can see and probably enjoy increases in cash flow that will allow us to accumulate funds for new investments, ideally in the markets Dave indicated above.

For our clients, I recommend favoring built-to-rent properties over renovated properties right now as the cost for repairs has also gone up a lot in the last few years and is more likely a factor compared to brand-new properties that normally have some warranty.

So, location is still a major factor for good deals, and running the numbers through cash flow calculators like the one on Bigger Pockets or Deal Check combined with rent level calculators like Rentometer remain very important to determine a good deal.

Final point: Yes, interest rates are high but as long as we can find deals that have positive cash flow, we can rest assured that demand will remain high for housing and that interest will eventually come back down, which is the point in time where we refi and get even more cash flow — which is the whole aim to the game.