In the below analysis, we break down acquisition price, aggregate yearly rent, operating costs, and the NOI involved in our index calculations. To research capitalization rates and other statistics for specific properties, refer to RealtyHop’s comprehensive for-sale listing search for every city across the country.
Residential Cap Rates by U.S. City
The below table details capitalization rates across the 20 largest markets by population.
May Real Estate Market Trends
Averages and Statistics
This May, the average capitalization rate across the 100 cities in our index was 3.35%, a sizable drop from the 4.04% average from our last report in February. Detroit saw the highest cap rate at 15.41%, while San Francisco saw the lowest at 1.61%. The average property tax rate of all cities was 1.14%.
The strong drop in capitalization rates across most cities makes sense within the context of how rates are calculated. Capitalization rates are equal to the risk-free rates plus a risk premium. For most investors, the risk-free rate is the rate on U.S. Treasuries, while the risk premium is a more complicated statistic dictated by local supply, demand, and other risk factors in each market.
As the COVID-19 crisis has raged on, the Federal Reserve has cut interest rates to near zero.
Assuming risk premiums stay constant, given that this risk free rate has been slashed, all capitalization rates will drop.
1. Detroit, Michigan – 15.41%
Detroit had the highest capitalization rate of any city in the U.S at 15.41%. The city commanded rental rates of $783 per month, a slight drop compared to $800 last quarter. Though rental rates declined slightly, the average for-sale home price decreased from $52,500 to $50,000.
2. Cleveland, Ohio – 8.48%
Cleveland had the second highest capitalization rate of any city at 8.48%. Home prices in Cleveland remained stable over the past quarter, at a median asking price of $79,999. Rent prices decreased to an average of $742 per month, compared with $831 per month in February. Despite this, the city remains a great investment option with a high cap rate.
3. Cincinnati, Ohio – 8.20%
Similar to many other cities, rent prices decreased in Cincinnati over the past few months, to a current median of $1,375. This compares to an average rent of $1,450 in our last report in February. Home prices remained relatively unchanged at a median of $152,000.
4. Baltimore, Maryland – 6.12%
Baltimore saw its capitalization rate decrease over the quarter from 6.61% to 6.12%. Median rent prices also dipped to $1,260 per month, down 5.4% during this period. Baltimore however did increase one spot to the fourth best investor market this month, as other cities saw higher percentage drops in cap rate.
5. New Orleans, Louisiana – 5.76%
New Orleans placed as the fifth highest capitalization rate at 5.76%. The city continued to be a solid investment option with low property taxes at 0.80%, as well as median rents at $1,253 per month.
1. San Francisco, CA – 1.61%
San Francisco saw the lowest capitalization rates of any city in the country this quarter at 1.61%. Median rent prices over the trailing twelve months came in at $3,833 per month, a dip from February’s statistic. Real estate prices remained stable, however, at $1.43 million.
2. Austin, TX – 1.68%
Tied for second with Los Angeles, Austin rent prices decreased to $1,500 per month compared to $1,619 last quarter. Given median home prices of $415,000, as well as property taxes of 1.66%, the city saw a very low capitalization rate of 1.68%.
2. Los Angeles, CA – 1.68%
Los Angeles saw a 1.68% capitalization rate, down from 2.63% in our prior quarter report. This was driven by lower rent prices at a median of $2,557 per month over the trailing 12 months.
4. Jersey City, NJ – 1.70%
Despite seeing its already low capitalization rate decrease from 1.85% to 1.70% over the quarter, Jersey City came in fourth place. Both median home prices and rent prices in Jersey City dropped over the quarter. Rent over the trailing twelve months from this report was $2,345 per month, down from $2,500 in February.
5. Lincoln, NE – 1.71%
Lincoln rounds out the top five lowest capitalization rate cities at 1.71%. A number of factors contributed to this including relatively high property tax rates, as well as low rent prices at $763 per month.
Methodology
To compile the RealtyHop Property Investment Index, the following statistics were used:
1) Median Household Income: Taken from the U.S. Census ACS
2) Population: By city, taken from the U.S. Census ACS
3) Median Home Price: Drawn from RealtyHop’s database of over 300,000 properties for sale in the month prior to publication
4) Median Yearly Rent: Yearly rental income for the trailing 12 months, drawn from RentHop proprietary data (a RealtyHop affiliated company).
5) Maintenance Costs: Annual maintenance costs for a rental property, equal to 1 percent of the total property price per year
6) Tax Rate/Yearly Taxes: Effective tax rate via U.S. Census data
7) Net Operating Income (NOI): Annual net operating income. Calculated by: Aggregate Yearly Rent – Taxes – Maintenance Costs
8) Capitalization Rate: NOI over Median Home Price
Full Dataset
Limitations
While comprehensive, the RealtyHop Property Investment Index does not take into account occupancy rates and time on market statistics. In theory, markets that suffer from net negative migration, and consequently lower rental demand, may see capitalization rates skew higher.
For example, while Detroit has the highest capitalization rate of any city by a large margin, investors there may potentially see lower occupancy rates and longer times on market, thus lowering aggregate yearly rent and NOI. Conversely, popular cities with lower cap rates such as San Francisco, Los Angeles, and Austin are likely to see high rental demand, and therefore stronger occupancy statistics.
Financial Disclaimer: The statistics provided in the RealtyHop Property Investment Index should be used for informational purposes only. Before making any investment decision, speak with a professional advisor, property manager, or local real estate company to verify the information listed in this report.
