According to recent data from Zillow, the cost of renting a home is rising across the country. Some of the gains can be attributed to the rise in home values over the past couple of years, and some can be the result of the reluctance or inability of people to buy homes.
However, just because rent is rising doesn't necessarily mean it's a good time to buy an investment property. If home prices are rising faster than the cost of rent, it doesn't make good financial sense to buy a home to rent out. For example, rent prices in Florida rose by 6.5% last year, one of the highest rates in the nation. However, home prices rose by 14.2% during the same period, so it has actually become less lucrative to buy a rental property in the state.
Here are the five states that have posted the highest increases in rent relative to the cost to buy a home, meaning that the return on investment (ROI) for rental homes is on the rise.
5. South Carolina
Despite home values rising by 4.2% over the last year, South Carolina's rent prices have risen by more than 7.5%, making it a solid place to buy investment property.
And, South Carolina is an affordable market to get into with a ton of sub-$100,000 homes on the market. The state's housing market is rated just a 2.5 out of 10 by Zillow in terms of overall health, and homes are sitting on the market for an average of 130 days, making it a good time to be a buyer in South Carolina.
4. South Dakota
Even though rent has barely budged in South Dakota, up by just 0.1% over the last year, home values have fallen by 5.6%, meaning you'll pay significantly less for a home that brings in roughly the same amount in rent.
As far as the states go; Missouri has the second least healthy market in the country, ranked just 0.41 out of 10, mainly due to a high inventory of foreclosed homes and more than 21% of homeowners underwater on their mortgages.
This has created a high demand for rental homes in the state, and the average rent has risen by 4.5% over the past year, despite the fact that homes have declined in value.
Similarly to Missouri, Louisiana's home values have declined while the cost of rent has risen. The average rental property in Louisiana brings in over 5% more in rental income than it did a year ago. And, if you're not quite ready to buy, you may get another chance at a bargain. According to Zillow's projections, Louisiana's home values are expected to fall a little more over the coming year.
Indiana has a relatively healthy housing market, with a pretty low supply of foreclosures and a lower-than-average mortgage delinquency rate. Home prices have actually done pretty well in Indiana, with the average house worth 3.5% more than it was a year ago, and more gains are projected for the coming year.
However, Indiana's rental market is on fire, with rent prices up by 9.7% over the past year, the fastest increase in the U.S. Also, Indiana is one of the most affordable markets to invest in, with the average home value in the state $114,000, the lowest on the list.
This isn't to say you can't be a profitable landlord in other states. These are simply places where rental properties are selling for a "discount" relative to the increased income potential.
There are plenty of factors that determine the profitability of a rental property, such as your taxes and insurance, whether or not you hire a property manager, and how long it takes to find tenants. The bottom line is that as long as you do your homework and get a good deal on a property, there is money to be made everywhere. These states just make it a little easier.
More from The Motley Fool: Warren Buffett Tells You How to Turn $40 into $10 Million