Investing in long-term rentals is one of the tried and true ways of making money in real estate. Though it’s a surefire way to generate handsome returns and a good cash flow, you shouldn’t just invest blindly. There are a few factors all real estate investors should consider. One of the most crucial ones is location.
Why does location matter?
Location determines the kind of tenants you attract and the ideal rental strategy for your rentals. For example, your rentals can attract great long-term tenants if you’re located in a good school district. In this case, most of your tenants may be families who want their kids to go to schools within the neighborhood, or college students enrolling in local institutions.
Due to this, we created this comprehensive guide on long-term rental investment in 2022. Since we want you to succeed, we’ve also provided the top 5 markets for your long-term rental investment. As a smart real estate investor, you should take advantage of the demand in these markets to grow your real estate portfolio.
What Is a Long-Term Rental Strategy?
Long-term rental strategy means renting out your property for a long period of time, and perhaps indefinitely. Many real estate investors and experts also refer to this strategy as the buy and hold strategy since many will typically own the property for a long period, say five years or more.
Long-term rentals are the most common type of real estate investing. This is mainly because this strategy is suitable for both newbie and experienced investors. If you’re a beginner, this could be the best way to get started in real estate since it doesn’t require any prior experience. Seasoned investors also use this strategy to grow their investment portfolio and build their wealth.
Why You Should Invest in Long-Term Rentals in 2022
If the long-term rental strategy has piqued your interest, then you surely want to know why you should put your hard-earned money into this type of investment. Here are some major reasons for you to consider:
One main reason why many real estate investors invest in long-term rentals is due to positive cash flow. Long-term rentals assure you of a monthly rental income, and thus can be the way to go if you’re looking for a stable monthly income.
Once you purchase your rental property, you can also make income on the side from things like parking, laundry, and vending machines (if you have these services). This is a great way to create a stream of passive income.
Investing in real estate offers many tax benefits, and by owning long-term rentals, you can benefit from certain tax deductions. You can write off some expenses, such as mortgage interest and depreciation. These benefits help reduce your level of risk and also maximize your returns.
Compared to their short-term counterparts, long-term landlords and property managers have considerably lesser responsibilities and tasks on their shoulders. Short-term rental owners need to have a budget for rental maintenance and cleaning each time a guest checks out. They must schedule the maintenance tasks with their service providers. On top of that, short-term rentals need you to pay a lot of attention to marketing.
This is not the case with traditional rental properties. Since your tenants are staying for a longer time, they’re more likely to cooperate with you to ensure your property stays in great condition. Remember, your property is their home for as long as the length of the lease. They’ll also clean the house themselves.
In case there’s any major damage, you’ll sort it with the tenant before they move out. You also have the option of using the security deposit. This not only saves you money on maintenance fees but also takes a huge responsibility off your shoulders.
Assuming you opted for financing when buying your rental property, the rental income you make helps you offset your mortgage. In short, your tenant is paying off the loan for you. Your equity in the property increases with each month. In addition, you can use your rental income to pay off the interest, which is deductible after all.
To benefit from this, you need to pay attention to your tenant screening process so that you end up with tenants who pay their rent on time.
Leverage On Your Investment
Since you now own rental property, you can use it to expand your investment portfolio and build your wealth over time. Think about this: You can now use the property as security, take out another mortgage for a rental property, and use the rental income from both properties to pay off the loan within a shorter period. At the end of this process, you now own multiple rental properties outright. This is a perfect way to increase your cash flow.
Where To Invest in Long-Term Rentals in 2022
Now that we’ve seen what long-term rental investment is and how you stand to benefit from it, which are the best housing markets for this type of real estate strategy in 2022?
Note that the best cities to invest in long-term rentals usually have these three factors in common:
- Population growth
- Job growth
Cities with a combination of all three factors present the best environment for property appreciation and great cash flow. Luckily, several cities within the U.S. real estate market present these characteristics. You can buy high-potential rental properties in these cities while prices are low and enjoy the rental income while your equity grows.
That said, let’s look at some top markets for long-term rentals in 2022. We’ve ranked them by the expected average return on investment as indicated by market data analysis from Mashvisor, a real estate data analytics company.
#1: Baltimore, Maryland
Baltimore is the largest city in Maryland by both size and population. It has a great housing market due to the stable job market, growing population, and housing affordability. The metropolitan area consists of major industries in the health, finance, education, and insurance sectors.
Though the job market was affected by the COVID-19 pandemic, the city has steadily been adding thousands of jobs. You can expect an influx of jobs in Baltimore this year.
Here are the housing statistics for Baltimore:
- Average Cash on Cash Return: 3.33%
- Average Cap Rate: 3.44%
- Monthly Rental Income: $1,981
- Median Property Price: $421,211
- Average Price per Square Foot: $247
- Price to Rent Ratio: 18
- Number of Listings for Sale: 1,051
- Number of Rental Listings: 5,545
#2: Dayton, Ohio
Dayton is a great market for long-term rental cash flow since it’s extremely affordable. This city is also experiencing a lot of growth due to the high demand for housing and commercial developments across Greene County. Since it’s smaller than other cities in Ohio State, the properties here are relatively affordable.
Many Dayton residents rent their homes. The city attracts a majority of young people due to the diversity and the nightlife.
Here are Dayton housing market statistics:
- Average Cash on Cash Return: 2.58%
- Average Cap Rate: 2.74%
- Monthly Rental Income: $944
- Median Property Price: $200,338
- Average Price per Square Foot: $118
- Price to Rent Ratio: 18
- Number of Listings for Sale: 66
- Number of Rental Listings: 153
#3: Orlando, Florida
Orlando has been ranked as the best place to buy a house by Forbes for three consecutive years. The job market here has experienced a lot of growth and stability while population growth remains on an upward trajectory.
Another interesting fact about this housing market is that, despite the low housing prices, many residents choose to rent rather than buy. This is a huge advantage for real estate investors. Renters in Orlando mainly prefer single-family homes.
Here are Orlando real estate market statistics:
- Average Cash on Cash Return: 2.41%
- Average Cap Rate: 2.49%
- Monthly Rental Income: $1,906
- Median Property Price: $499,170
- Average Price per Square Foot: $273
- Price to Rent Ratio: 22
- Number of Listings for Sale: 658
- Number of Rental Listings: 2,553
#4: Detroit, Michigan
Detroit is one of the best rental housing markets to invest in 2022 due to its affordability. Many neighborhoods within the city also have a strong price to rent ratio. Although population growth here is a bit slower compared to the national average, many people are moving to this city, which is a great sign for real estate investors.
While the Detroit job market was more affected than many other cities in the U.S. by the COVID-19 pandemic, jobs have started to come back and are expected to match pre-pandemic levels in 2022.
What are Detroit’s market statistics?
- Average Cash on Cash Return: 2.37%
- Average Cap Rate: 2.50%
- Monthly Rental Income: $1,579
- Median Property Price: $344,317
- Average Price per Square Foot: $248
- Price to Rent Ratio: 18
- Number of Listings for Sale: 413
- Number of Rental Listings: 1,903
#5: Dallas, Texas
Dallas presents a great opportunity for long-term rental investment in 2022 due to the availability of rental property inventory. Besides, the rental rates are high considering the property prices. It’s also an accessible market.
This housing market has the lowest homeownership rate in the U.S. Most people prefer renting over buying because it’s more affordable, and the demand for rental properties has risen by 14% compared to last year. This shows that Dallas is a perfect market for long-term rental investors.
Let’s look at some Dallas housing market statistics:
- Average Cash on Cash Return: 1.51%
- Average Cap Rate: 1.55%
- Monthly Rental Income: $2,267
- Median Property Price: $595,505
- Average Price per Square Foot: $301
- Price to Rent Ratio: 22
- Number of Listings for Sale: 1,411
- Number of Rental Listings: 6,859
Cash on cash return is a return on investment (ROI) metric used to determine the amount of money an investor can make from their rental property in relation to the initial amount of cash they’ve invested. It’s the ratio of yearly pre-tax cash flow to the total cash investment made to purchase the rental property.
Note that cash on cash return uses the amount of cash invested into the rental property, and not the total price paid for the property.
Many investors get confused when it comes to cash on cash return and cap rate. While both are return on investment metrics, the cap rate mainly focuses on the total value of the property, which is essential when determining profitability and long-term gains. On the other hand, the cash on cash return gives you an insight into the amount of income you’re getting from the money you’ve invested.
There are many factors that drive real estate investors to go for long-term rentals. Whether you want to set up a stream of income for your retirement or have a hedge against inflation, you want to lower the level of risk involved while finding the highest return possible. One of the best ways to do this is by investing in the right location.
While nailing down your perfect investment location may seem like an uphill task, there are several indicators that can help you. These factors include population growth, affordability, and the state of the local job market. Pay attention to these factors and let them guide your search for the most ideal location for long-term rental investment in 2022.
Not sure where to look for the most profitable long-term rental properties across the U.S. market? Check out Mashvisor! Mashvisor is the leading source of residential real estate data and analytics nationwide, distilling 3 months of research and analysis into 15 minutes.