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These Are the Best Cities for Buying an Investment Property Right Now

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We ran the numbers. Here's what we found.

Have you been considering an investment property? They can be an ideal source of passive income, especially if you're moving into retirement.

Regardless of your reasons, we ran the numbers and figured out the top cities to invest in property right now.

When it comes to investing in the real estate market, location is everything. Some cities are better bets when it comes to buying an investment property thanks to more affordable mortgages or lower property taxes.

In order to find the best places to buy an investment property, SmartAsset looked at five factors. Specifically we looked at effective property tax rate, rent-to-home-value ratio, demand for housing, home value appreciation and rent costs. Check out the data and methodology below to see where we got the data and how we put it together.

Ready to invest? Make sure your financial situation can handle it first. One of the best ways to be certain is to speak with a financial advisor.

Key Findings

  • West is best - If you are looking to make your fortune in the real estate market, head west. Florida and Texas are the only non-western states to rank in the top 25. In fact, only seven states are represented across the top 25 cities.
  • Invest in California - The top 25 is dominated by Golden State cities. In total nine of the top 25 cities are in California. In general this state has not done a great job of building housing for all the new residents. This has led to growth in home values and rents which is a good sign for people invested in the California housing market.

1. Aurora, Colorado

Aurora, Colorado is the best city to buy an investment property. Anyone looking to invest in the real estate market here should have no trouble finding willing renters. According to our data, rent costs have increased by 34% from 2012 - 2016, a sign of strong demand for rental units.

Another sign for optimism in the Aurora real estate market is the rising home values. From 2012-2016, the value of the median home grew by over 43%. What may be driving the increase in prices is the growing population. The number of new people in Aurora outgrew the number of new homes by almost 6% during that same period.

2. Mesa, Arizona

There are three Arizona cities in this top 10, and up first is Mesa. This city has the 10th-lowest effective property tax rate in our study. That keep the long-term costs of homeownership low in Mesa.

Anyone who invested in the Mesa real estate market in the past few years will have likely already made a profit. The median home here was worth $129,400 in 2012 and $209,000 in 2016. That means the average homeowner would have made a profit of over 61% if they had bought the average home in 2012.

3. Orlando, Florida

Orlando has been booming in recent years. According to Census Bureau data, the population of Orlando grew by 11% from 2012-2016. Over the same time period the number of new homes also grew, but not by enough to meet all the new demand for housing. In total new residents outpaced new homes by nearly three percentage points.

Over that same time period median gross rent grew by over 19% and the median home grew in value by almost 63%.

4. Tampa, Florida

Just southwest of Orlando is Tampa, another great place to invest in real estate. Our data shows that few cities have seen the price of homes appreciate as fast as they have in Tampa. From 2012 - 2016, the median home increased in value by nearly 47%.

This is also a good city to invest in the real estate market with a focus on the long term. This city has a lower-than-average effective property tax rate and the average home is only worth about 203 months’ worth of the average gross rent.

5. (tie) Riverside, California

Riverside has not done a great job providing housing for all the new residents in the city. According to our data, the number of new residents outpaced new housing stock by nearly five percentage points.

That increase in demand for housing drove prices for homes and rental units up. Average gross rent in this city grew by nearly 19% from 2012 - 2016 and the median home saw its value increase by nearly 55% over the same time period.

5. (tie) Glendale, Arizona

Tied for with Riverside for fifth is Glendale, Arizona. What makes Glendale a great option for someone looking to invest in real estate are the low property taxes. According to our data, Glendale has the 24th-lowest effective property tax rate at 0.67%.

But judging by recent trends you won’t have to wait too long to see your investment accrue value. In the five years between 2012 and 2016, the median home in Glendale went from being worth $125,000 to being worth $201,000.

7. Phoenix, Arizona

The Phoenix metro area has three representatives in our top 10 and at number seven is Phoenix itself. Large numbers of people are moving to Phoenix. From 2012 to 2016, the population increased from 1.49 million to 1.62 million. Over that time, the number of new homes only grew by about 15,000. That means the population outgrew new housing stock by 6 percentage points.

The glut of new residents looking for homes to live in is a positive sign for anyone invested in the Phoenix real estate market. From 2012 to 2016, the median home value appreciated by nearly 52%.

8. (tie) Denver, Colorado

Looking to invest in the Denver housing market? You are probably not alone. This city has proven to be a profitable place to own a rental unit. From 2012 to 2016, the average gross rent increased by over 40% while the median home increased by nearly 44%.

The long-term cost of owning a home in Denver is also low. According to our data, the average effective property tax rate in Denver is only 0.47%.

8. (tie) Spring Valley, Nevada

Spring Valley, Nevada comes in tied for eighth. This Las Vegas suburb has seen a stunning population growth which has not been met with new homes. From 2012 - 2016, the number of new residents increased by over 16%, while new homes increased by only 7%.

That has left something of a housing shortage and home values have correspondingly shot up. From 2012-2016 the median home value shot up by 54.5%.

10. Oakland, California

The list ends in Oakland. As part of the Bay Area everyone knows this city is becoming expensive. Perhaps driven out by increasing rents in San Francisco, the population of Oakland has outgrown new homes by over 7%. From 2012 - 2016, median home values grew by 63% while the median rental increased in price by 22%.

The only score pulling Oakland down our ranks is the cost of buying a home. A modest investor who tries to pay off their mortgage by renting out the unit will struggle. According to our data, the median home in this city is worth the equivalent of 496 months of rent payments.

Avoid This Major Investing Mistake

Many first-time investors hear about where a real estate market is heating up and buy property as quickly as possible so they don't miss out. While you might end up with a piece of property, you could end up with a poor investment that ends up costing you more than it's worth. That could take a big toll on your finances.

We recommend speaking with a financial advisor before making any new investments. A money expert can help you take a look at your finances to see if investing in propery is a good move for you, or if there are other financial goals you should be working toward first.

To help make sure you get the specific information you need, we designed a tool to match you with a financial advisor in your area.

Here's how it works:

  1. Take this quick survey and answer a few questions about your current financial situation.
  2. Our SmartAdvisor tool matches you with up to three advisors who can provide expertise based on your profile and goals. You don’t have to spend hours interviewing dozens of people and firms.
  3. Check out the advisor’s profiles, interview them on the phone or in person and choose who to work with in the future.

Data and Methodology

In order to rank the best cities to buy an investment property, we looked at data on all cities with at least a population of 200,000. That left us with 117 cities. We compared them across the following five categories:

  • Average effective property tax rate. This is annual property taxes divided by median home value and is for 2016.
  • Ratio of rent to median home value. This shows the number of rent payments it would take to pay for the average home and is for 2016.
  • Housing demand. This is the difference between population and housing stock growth from 2012 to 2016.
  • 5-year home value appreciation. This is the percent change in median home value from 2012 to 2016.
  • 5-year rent cost change. This is the percent change in median gross rent from 2012-2016.

The average home increased in value from $194,500 in 2015 to $205,000 in 2016, according to U.S. Census Bureau data. That is an impressive return of nearly $11,000, or about 5%, for American homeowners. Relative to income that extra $11,000 is equivalent to the average American household receiving a raise of 19% on their annual income.

Data for all metrics comes from the Census Bureau’s 2016 and 2012 1-year American Community Survey.

Photo credit: iStock.com/SeanPavonePhoto