February 23, 2024

Detroit, Philadelphia, Cleveland, and Houston. Those are the only four remaining cities where it costs less to buy a typical home than to rent, according to a new report from Redfin. The analysis compared March home values and rental estimates assuming a 5% downpayment and a 6.5% mortgage rate for the 50 most populous metro areas in the United States. Back in January 2022, an analysis from Realtor.com showed that buying a home was more affordable than renting in more than half of the largest metros. But mortgage rates have increased since then while rent prices have flattened nationally. 

Naturally, the question for investors is whether buying a home can yield cash flow now that housing payments (including insurance and property taxes) exceed 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?

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

Market Median Monthly Mortgage Payment Median Monthly Rent Payment Premium (%) of Mortgage to Rent Cost Premium ($) of Mortgage to Rent Cost Share of Properties  Cheaper to Rent
Detroit, Michigan $1,296 $1,697 -23.6% -$401 79.9%
Philadelphia, Pennsylvania $1,869 $2,000 -6.6% -$131 59.3%
Cleveland, Ohio $1,730 $1,800 -3.9% -$71 56.8%
Houston, Texas $2,343 $2,371 -1.2% -$28 52.4%

None of these metros saw skyrocketing home values during the pandemic relative to the rest of the country. While metros like Phoenix and Miami experienced huge price booms, prices have also fallen more rapidly in those areas. Comparatively, Detroit and Cleveland only realized a fraction of the appreciation—but periods of falling prices were also less pronounced in these cities, according to Redfin. 

Still, the 10-year appreciation rate in 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 in a cyclical market—if you time your purchase and sale according to market fluctuations, you can realize even greater returns. 

But investors looking for a steady, reliable investment may find these cities to be more appealing than other markets. Detroit may even offer some investors the opportunity to buy in cash since the median home value for April was a lean $75,000, and the market is ideal for generating cash flow due to its rent-to-price ratio. But of course, there are other factors to consider as well. For example, Detroit has a violent crime index nearly double that of Miami’s.

Few Opportunities for Cash Flow in Pandemic Boomtowns

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, pandemic boomtowns like Sacramento, Las Vegas, Phoenix, and Austin each have a single-digit share of properties for which the estimated rent payment exceeds the estimated mortgage payment. These cities experienced an influx of new residents during the pandemic, which caused prices to skyrocket, but now, home values are falling. 

It’s Not Just About the Market—It’s About the Property

In the following markets, Redfin found fewer 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 share of properties still have the opportunity to generate cash flow with today’s mortgage rates. That means that smart investors who seek out viable properties may still find great investment opportunities. It comes down to crunching the numbers for each individual deal, and an investor-friendly real estate agent may be able to steer you in the right direction. 

Should You Wait for Mortgage Rate Relief?

How much would mortgage rates need to decline for investors to collect rent in excess of the typical housing payment in most areas? Currently, the homeownership premium is about 25% nationally, with the median monthly mortgage payment estimated at $3,385 and the median rent payment estimated at $2,715. If mortgage rates were to fall to 4%, that would shrink the homeownership premium to 1% and open up new markets where it’s cheaper to buy. But only at a mortgage rate of 3% would the estimated median rent payment nationwide exceed the typical housing payment.

The only time the average 30-year fixed mortgage rate dipped this low in the past three decades was in 2020 and 2021. It’s unlikely rates will return to this historical low anytime soon. Trading Economics currently forecasts that the federal funds rate will drop to 3.25% by 2025, while the Federal Open Market Committee predicts a decline to 3.1% the same year. While this would impact mortgage rates significantly, it likely wouldn’t result in a cheaper median national housing payment when compared to the median national rent payment.

Whether or not you wait needs to be an individual 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 could make sense to wait, bolster your cash position, and see where things land. Alternatively, you could consider long-distance investing in other markets or change your investment strategy. 

Desirable cities with a robust job market tend to attract digital nomads and traveling workers, so you might consider whether a medium-term rental strategy is viable. And while short-term rentals aren’t getting the high occupancy rates that were common in 2021, there are still opportunities for investors to get significant returns in some mid-size cities with relatively low home values and plenty of cultural and outdoor activities, according 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 in rent than you pay monthly to own and maintain a rental property. However, investors are facing more challenges. Finding the right property takes an extra dose of patience. The struggle is especially real for beginner investors, who may not have a large cash down payment or the track record to get alternative types of financing. 

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

Market Median Monthly Mortgage Payment Median Monthly Rent Payment Premium (%) of Mortgage to Rent Cost Premium ($) of Mortgage to Rent Cost Share of Properties Cheaper to Rent
Pittsburgh, Pennsylvania $1,648 $1,619 1.8% $29 47.6%
West Palm Beach, Florida $3,838 $3,771 1.8% $68 46.0%
Fort Lauderdale, Florida $3,321 $3,169 4.8% $152 38.5%
San Antonio, Texas $2,188 $2,086 4.9% $102 38.0%
Chicago, Illinois $2,436 $2,307 5.6% $129 39.4%
Fort Worth, Texas $2,542 $2,400 5.9% $142 32.0%
Cincinnati, Ohio $2,030 $1,910 6.2% $119 39.6%
Warren, Michigan $2,333 $2,177 7.2% $156 37.2%
St. Louis, Missouri $2,044 $1,880 8.7% $164 37.9%
Kansas City, Missouri $2,188 $1,996 9.6% $192 32.2%

Find an Agent in Minutes

Match with an investor-friendly agent who can help you find, analyze, and close your next deal.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

About Author