If you're aiming to purchase a low-cost rental property in one of America’s less affluent states, such as West Virginia, Mississippi, or Alabama, you might face challenges in finding tenants. This is because, according to data from the Federal Reserve and the U.S. Census Bureau, states with lower per capita income generally have the highest rates of homeownership.
This trend, although surprising, can be attributed to the affordability of homes and the demographics of residents. States with higher home prices often have more cities filled with younger populations who either cannot afford to buy a home or prefer not to commit to a mortgage. On the other hand, rural areas tend to exhibit the opposite pattern.
Zoning laws also play a significant role. In states where property is expensive, land is often scarce and not always designated for residential use. A recent CNN article highlighted that in West Virginia, you can buy 90 acres for under half a million dollars, while in more affluent states, that amount might not even secure a 500-square-foot studio apartment.
At the same time, both Democrats and Republicans are reevaluating restrictive zoning laws in major cities as the housing crisis has made both buying and renting unaffordable for many Americans.
The CNN article further notes Federal Reserve data, revealing that despite West Virginia’s average per capita income of $52,585—the second lowest in the nation—it also has the highest homeownership rate of any state at 77%. Similarly, Mississippi, with even lower personal income levels, boasts the third-highest homeownership rate in the U.S.
According to Federal Reserve data, the median home sales price in the U.S. was $412,300 as of the second quarter of 2024. However, Zillow data shows that as of June 30, the median home sale price in West Virginia was $218,667, with an average sale price of $169,446, reflecting a 5.3% increase year over year. In contrast, the average home value in New York City stands at $1,150,639 and $1,290,350 in San Francisco.
Americans Still Seek to Live Away From Costly Cities Given the dramatic differences in affordability, it’s not surprising that Americans are leaving big cities faster than they were before the pandemic. According to U.S. Census data analyzed by Goldman Sachs, remote work is a key factor driving this trend.
Data indicates that although the number of people working remotely has decreased from 50% during the pandemic to 20% now, this is still significantly higher than the 2% to 3% who worked remotely before the pandemic. The report also highlighted that cities with high population densities are growing more slowly than they did before the pandemic.
The data also reveals that while less affluent U.S. states currently exhibit high homeownership rates due to lower housing costs, if migration trends continue, home prices in these areas could rise sharply. This is particularly true for smaller and mid-sized cities in traditionally low-cost states, as Americans have grown accustomed to remote work and may not return to urban living.
"Maybe there isn’t going to be a rebound," Hamilton Lombard, a demographer at the University of Virginia, told USA Today about these census findings. "Maybe the rebound is over."
A Growing Gap in Home Prices Presents Investment Opportunities Lombard's study noted that domestic migration losses were concentrated in the largest metro areas with populations over 4 million. Before the pandemic, losses were around 400,000, but they have increased significantly since then, with recent figures reaching 550,000 as workers have returned to big city offices. However, as recent home price trends indicate, there remains a significant gap between home prices in different states, creating potential investment opportunities in up-and-coming smaller towns and cities.
Interestingly, the report showed that in 2023, approximately 266,000 people who left big cities moved to metro areas with populations between 250,000 and 1 million, while 291,000 relocated to areas with populations under 250,000. For the first time in decades, small towns have become the top destination for domestic migrants.
The ongoing cost-of-living crisis has prompted many Americans to reevaluate the benefits of city living, especially when considering quality-of-life factors such as clean air, open spaces, and good school systems. However, the decision isn’t straightforward for large retail chains that rely on profit-and-loss statements.
For instance, Lombard's report noted that since 2020, Starbucks has closed hundreds of underperforming urban locations while opening hundreds of new stores in small towns across the country that are attracting new residents. With new residents comes demand for businesses, housing, and restaurants.
Recently, the Mexican-style fast-casual restaurant Chipotle announced its expansion into small towns, following Starbucks' lead, along with other fast-food chains like Cava and Panda Express. Lower land costs in these areas help offset lower sales for corporations.
"We look for proximity to the interstate and whether it is a hub of commerce in the area," Chipotle's chief brand officer, Chris Brandt, told CNBC, adding that while nearby larger towns may exist, if they lack a Walmart or Target to draw traffic, they aren’t as appealing.
Bennington, Vermont, where Chipotle recently opened a location, fits this profile, with a Walmart Supercenter and Home Depot among the retail giants in town. "Small towns that have a college are also a great fit," Brandt added.
Final Thoughts While homeownership remains high in less affluent states and rental demand may be low, migration trends suggest that these statistics could shift, especially in states near major employment hubs or those experiencing significant population movements.
For example, Morgantown, West Virginia, is only 30 minutes from the Pittsburgh suburbs. The cost of living in Morgantown is 9% below the national average, compared to 2% below in Pittsburgh. Housing is far more affordable, and property taxes are among the lowest in the country. Therefore, it’s not surprising that a recent Consumer Affairs report found that more people are interested in moving to West Virginia than leaving it.
As an investor, you should analyze these metrics closely, paying attention to local development news and updates from retail giants to identify where major stores are opening new branches. While you may not have the resources to conduct the extensive data analysis that corporations do before opening a new location, you can benefit from their efforts when selecting where to invest in affordable rentals with growing demand. Not every small or medium-sized town in an affordable state is a good investment, but many soon could be.
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