Which markets have the highest return on investment?

Given the economic climate in which we find ourselves – what with inflation, higher interest rates, tightened credit and the attendant skittishness in both lending and buying as a result of such dynamics – return on investment in commercial real estate is paramount. And yet where a broker can secure the highest ROI is something of a gamble.

Real estate experts at Agent Advice analyzed home value and typical rent prices across US cities to establish where investors can currently expect the highest ROI. To that end, the Zillow Housing Value Index indicates the typical housing value in a given geography, and Zillow Observed Rent Index (ZORI) measures asking rent prices. This study uses these measures to establish places with the highest rental values, compared proportionally to the cost of a property.

The top 10 markets with best ROI are…

According to that research, the US markets with the highest ROI are: Houma, La.; Dothan, Ala.; Johnstown, Penn.; Beckley, W. Va.; Decatur, Ill.; Shreveport, La.; Peoria, Ill.; Sumter, S.C.; Texarkana, Texas; and Jackson, Tenn.

Researchers touted the dynamics of top-ranked Houma for commercial space investment, noting its housing value index of $149,871 in average property value, with an observed rent index putting the average cost of rent at $1,441. Rent equates to 0.96% of property value, meaning the payback period on a typical investment property down payment (20%) could be as short as 20.8 months, according to the survey, which is almost half the national average payback period of 39.6 months.

Researchers also extolled the virtues of second-ranked Dothan in southern Alabama with its typical property value of $166,459. An average monthly rental price of $1,553 means that rent equates to 0.93% of property value, researchers noted, with the potential payback period for the down payment on an investment property at 21.43 months.

“ROI is always important,” Chris Heller, co-founder of Agent Advice, told Mortgage Professional America. “However, its importance is currently heightened with elevated interest rates presenting affordability challenges for many buyers. Put simply, the stakes are higher for the vast majority of investors as, chances are, the investment will make up a larger proportion of expendable budget. This of course increases the importance of securing a reasonable ROI and avoiding the acquisition of a bad asset.”

Asked if any of the findings came as a surprise, Heller noted the disparity between eastern cities and western ones. West Coast property, he added, is generally accepted to be priced higher for a variety of reasons – including building costs often justified by earthquake risks and sheer demand.

“This of course affects ultimate property ROI,” he said. “However, the definitive nature of data was perhaps surprising as there were essentially no exceptions. The top 10 highest ROI cities are all located in the east/mid-eastern states, while the lowest are all either west coast (inc. Hawaii), or mountainous western states.”

But it really depends on who you ask

Here’s where it gets iffy. Asked for his insight on the top ROI markets, Moe Ashor (pictured) mortgage broker at Edge Home Finance Corp., assessed the list at MPA’s request before indicating none of those markets were in his bailiwick.

“Man, I gotta be honest,” he began. “You struck out completely with those.”

Seller-financed deals are where it’s at

Rather than a linear approach in finding markets with the highest ROIs, he focuses on spots where seller-financed deals abound. Ashor is that rarity among brokers, focusing not solely on either the residential or commercial sector, but both – all the more to capitalize on an uncertain market as something of a double-threat broker.

“On the commercial space right now, that’s a hard ask in this market right now,” he said when asked to list his top markets. “There’s really not good ROIs that I’ve been coming across lately in the commercial space sector. Interest rates are just so high. The only success some of my savvy clients have been finding is through targeting seller-financed deals. They convince a seller to finance a chunk of the whole thing. Some of my investors have gotten 2% to 6% interest rates directly from the seller.”

It sure beats leaving it to the market rate: “Because of the interest rates being so high – anywhere from 8% to 13% depending on if it’s a restaurant, office buildout or a warehouse – they are really just targeting a lot of seller-financed deals.”

Sellers are increasingly more amenable to such arrangements, he added: “Surprisingly yes,” Ashor said. “It takes a little bit of dealing with making a lot of calls, but my investors haven’t had a tough time,” he added. “A lot of times what they’ll do is finance half and put through the other half in lending. We’ve been finding a little of that too.”

Increased vacancy rates may be an inducing factor in seller-financed deals – again, because of the grim state of the CRE sector: “in the commercial space, there’s a ton of vacancies – almost 70% in key markets like San Diego, San Francisco, New York – which is killing the market right now.”

And the past may prove to be prologue: “We do know there’s $1.5 trillion expected to be coming due from commercial lending balloon payments by the end of 2025,” Ashor said, “so there’s a lot of investors who are wondering if they should hold back and wait from purchasing any sort of commercial space right now until the market crashes and they can come in and swoop those spaces or pennies on the dollar.”

Pressed for a market breakdown of his own delineating where he’s been able to capitalize the most, Ashor kindly indulged MPA: “A lot of western regions like California, Washington, Arizona, and Colorado are my biggest players. On the East Coast, I’ll do Florida, New Jersey, Connecticut. I’ve now even done one in Vermont recently, and Pennsylvania. Those are what I would say are our target markets on the East Coast. I’m actually doing a little bit in Ohio too now.”

Pressed even further, he invoked the “hottest” spots among his market focus: “The ROI for me is Florida, which is still pretty hot so far. Colorado is doing pretty good. Arizona is still doing pretty good. I still get some deals from Washington here and there. But I would say those are the main ones.”

But again, it really depends on who you ask.

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