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Analyzing Rental Income and Capital Gains Growth Across U.S.

In terms of real estate investment, understanding the dynamics of rental income and capital gains is crucial. Rental income refers to the earnings from leasing out a property, offering a steady stream of cash flow to the owner. Capital gains, on the other hand, represent the profit realized from the sale of real estate that has increased in value over the purchase price. These two forms of income are fundamental to assessing the profitability and potential of real estate investments.

This article utilizes Zillow data to analyze the intricacies of the U.S. real estate market from 2021 to 2023. The analysis focuses on the housing price CAGR and the Rent-to-Price (R/P) ratio across 130 major MSAs as identified by Market Stadium. The housing price CAGR during this period shows the median housing price change, serving as a proxy for capital gains. Meanwhile, the R/P ratio provides an index reflecting the percentage of the median annual rent to the median housing price, offering insights into rental income. A higher R/P ratio indicates higher rental income relative to the price.

The figure above shows the housing price CAGR between 2021 and 2023 and rent to price ratio in 2023 of 130 MSAs. It generally reveals that MSAs with higher housing prices tend to have lower R/P ratios, while those with lower housing prices display higher R/P ratios. Conversely, there is no strong correlation observed between housing prices and their growth. MSAs positioned in the upper right quadrant, indicating strong growth in housing prices coupled with high rental income, signal robust investment opportunities. MSAs like Miami, FL, Fort Myers, FL, and Atlanta, GA fall into this category. In contrast, the highest-priced MSAs, such as San Jose, San Francisco, and Los Angeles, CA, show lower-than-average values in housing price change and R/P ratio. However, exceptions like Riverside, CA, and Naples, FL exhibit a near-average R/P ratio with relatively high housing price changes (See Figure below).

The analysis provides a comprehensive view of the U.S. housing market landscape, highlighting the varying investment potential across different MSAs. By leveraging detailed housing market data, investors can make informed decisions, tailoring their strategies to fit the unique characteristics and opportunities of each market segment.

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