If you're looking for affordable houses that will produce solid rental cash flows for long-term holds, check out the Midwest. That's the word from the latest national "investment affordability" rankings by Port Real LLC (Port Reel) -- an advisory firm that provides risk-reduction statistical profiles on 379 U.S. market areas for Wall Street and small investor clients.

In its third quarter report, three of Port Real's top five most affordable investment markets were in Michigan -- including Detroit, Warren and Bay City.

Port Real rates rental affordability based on an investor's ability to break even -- or better -- acquiring what it calls "investor grade" properties and renting them out.

The company defines "investor grade" as properties in good physical condition with a minimum three bedrooms, locations near employment centers, with prices at or above the 15th percentile price point for all properties on the local market.

Also in the top 10 most affordable rental investment areas ranked this quarter were: Muncie, Indiana; Pine Bluff, Arkansas; Kokomo and Anderson, Indiana; and Wheeling and Weirton, West Virginia.

On the flip side of the rankings - essentially markets where investor grade properties are least likely to cash flow at current rent and price levels -- are Wenatchee and Bremerton, Washington; San Luis Obispo, California; Bend, Oregon; Tacoma, Washington; Grand Junction, Colorado; Missoula, Montana, and Seattle, Washington.

Higher entry level prices in these markets make it difficult -- if not impossible -- to obtain positive cash flow from rental income using typical financing terms. In some cases, higher property taxes also contribute to investors' negative cash flows.

As to opportunities in Detroit, a city hard hit by auto industry-related layoffs and foreclosures, Port Real's third quarter advisory says this: "We still like Detroit as a potential region for investment. Total inventories are about twice the national level - comparable to California but better than most of Florida - (yet) for-sale inventories are coming down." The city offers the lowest "entry level" investor grade price among major markets nationwide, but "it may have bottomed out as buyers realize (prices) can't go any lower."

For growth-oriented investors looking to pick up properties at discounts in more volatile markets and hold for potential capital gains over time -- though not necessarily positive cash flows from rents -- Port Real ranks California, central Florida, the upper Midwest, and new England as among the most likely to see price increases in the years ahead.

Published: August 22, 2008

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Kenneth R. Harney writes an award-winning, nationally-syndicated column on housing and real estate from Washington, D.C. He is also managing director of the National Real Estate Development Center, a professional education company. He is a past member of the Federal Reserve Board's Consumer Advisory Council, a committee that by federal statute reviews all Fed actions on home mortgage, consmer credit and banking industry regulation. He served as a member of the U.S. Department of Housing and Urban Development's Working Group on Computerized Loan Origination (CLO) systems, and is a member of the Editorial Board of the Fannie Mae Foundation's journal, Housing Policy Debate. He is the author of two books on mortgage finance and real estate.