Pennsylvania offers its residents a diverse mix of city and outdoor experiences and many cultural opportunities. No matter where in the state they live, families can choose from among many unique neighborhoods and historical areas that hold appeal for every demographic, all with a different rent trend.
Philadelphia and Pittsburgh are the state's two largest metropolitan areas; both are active rental markets. Each city has different draws, but both offer an attractive and varied lifestyle. Whether you are looking for food, art, culture, history, education, entertainment, or professional sports, you can find it. How do these two popular rental markets compare head-to-head for returns for real estate investors?
Methodology for city rent comparisons
Working with Rentometer reports, we set parameters to compile average rents over the most recent 12-month period for a 2-bedroom, 1-1/2 (or more) bathroom house/duplex, first in Philadelphia and then in Pittsburgh. We looked at sample properties renting at the 25th, average, and 75th percentiles to estimate potential cash flow across different rent levels.
Using Realtor.com®, we also gathered additional data to track price and sales increases in both areas.
Three key metrics will combine to reveal which market is most attractive for the real estate investor:
- average purchase price
- the average rent for a 2-bedroom, one 1/2-bath house
- cash flow potential
To estimate cash flow, we looked at the details for an "average" property in the rent report from Rentometer.
- assessed tax value
- last purchase price
- mortgage amount, or if not available, the average cost from Realtor.com®
We'll assume loan terms based on a standard 20% downpayment and an interest rate of 5% on a 20-year loan – typical terms an investor might get at a local bank.
To estimate operating costs, we used conservative industry standards and then factored in debt service for the loan:
- 5% vacancy allowance
- 8% management fee
- 5% maintenance allowance
- 10% for insurance
- 5% to fund capital reserves
With the three key metrics in mind, let's see which area will generate better returns for real estate investors – Philadelphia or Pittsburgh?
Philadelphia's housing market
Rentometer's Quickview report for 2-bedroom, 1 1/2-bath properties showed 230 homes listed for rent, with rent distribution as follows: This data tells us Philadelphia is a strong seller's market. What does this mean for rental properties?
25th percentile property
For properties in the 25th percentile, the area's rent trend line shows a two-year low in October 2019, with properties renting for an average rate of $980. After spiking up in early 2020, average rents settled at $1,100 for the rest of the year but have made a healthy recovery going into 2021.
If the property is in reasonably good condition, you may get away with a capital reserve of less than 5% to increase your chance of positive cash flow. The rent trend shows proper-ties in this percentile could represent a decent investment proposition.
75th percentile property
The rent trend line shows the area has held a higher rental rate than the trend for the 25 percentile area, although there was some volatility through 2020. In April, the trend line shows a dip to $1,850, showing that the area's average rent may be a little unrealistic.
Taxes in this neighborhood seem a lot higher than for Aramingo Ave., which could be the deal-breaker.
So what does a Philadelphia property generating an average rent deliver for cash flow?
The rent trend line for Philadelphia overall has been on a roller-coaster ride since April 2019, where it started at $1,200/mo. It hit $1,400 and has now settled at $1,325 for the Almond St. neighborhood. Our sample property is asking $1,700, which is higher than the neighborhood average.
What's happening in the Pittsburgh housing market? While the rent rates seem reasonable initially, the high housing costs and higher taxes correlate to lower cash flow. The property segment that seems to make sense in Philadelphia is the average-rent property, thanks to lower purchase prices and lower taxes.
Pittsburgh is also in a seller's market. For 2-bedroom, 11/2-bath houses, Pittsburgh has 165 properties currently listed for rent. Here is Rentometer's QuickView summary:
25th percentile property
According to the rent trend line, rents for properties in the 25th percentile crashed in early 2019. Throughout 2020, rents hovered around $750 per month, finally recovering to $845 by April 2021. Our sample property is asking $950, quite a bit higher than the neighborhood average.
At the 25 percentile, this area seems to have properties at the right price for the right rent.
75th percentile property
According to the rent trend line, the area did much better than most we've seen throughout 2020. With an increase from $1,200 in October 2019 to $1,400 in January 2020, rents have stayed above $1,300. Now in April 2021, the average has settled to $1,425. A little lower than our sample property asking for rent.
This higher-rent property shows positive cash flow, though not as strong as the lower-rent property on Sagamore St.
What does our average rental property in Pittsburgh look like for cash flow?
The area's rent trend line has been volatile, with many ups and downs over the past two years. After bottoming out at $1,025/month in January 2021, rates are now back up to $1,225. This trend is a little lower than the asking rent for our sample property.
This property's negative cash flow may result from a purchase made at the top of the market; with the property rent now almost as high as it can go, the best route to achieve positive cash flow will be to pay down the mortgage.
Both of these Pennsylvania cities look like they should generate reasonable rents and returns for the rental property investor. With strong seller's markets in both areas, investors intent on finding attractive deals may have to work harder to pursue properties before they hit the market.
The bottom line? Today's retail prices make it tough to cash flow in Pennsylvania. Pittsburgh comes out on top when we compare the two cities across all percentile segments, with positive cash flow in 2 out of 3 market segments. Overall, Pittsburgh wins the battle of Pennsylvania rental markets.
This article was written by the Rentometer Content Team. The Rentometer Blog features fresh takes and insights on rental housing topics, services, and technology. If you liked this article, subscribe to Rentometer's email newsletter to stay up-to-date on the latest trends in rental housing.