What Is Cost of Living?
Cost of living measures how much it costs to live in an area relative to other metros. Lower-cost metros (Memphis, Indianapolis, Birmingham) attract migration from higher-cost metros (LA, NYC, San Francisco), which supports demand-drivers for rental-property. Investors use cost-of-living indexes to compare markets and project rent growth. Housing is typically 30–40% of cost-of-living indexes—the largest component.
Cost of living is the amount of money required to maintain a standard of living in a given area—housing, food, transportation, healthcare, and other expenses—relative to other geographies.
At a Glance
- What it is: Relative cost of housing, food, transport, healthcare, etc.
- Why it matters: Drives migration and demand-drivers for rental-property
- Index sources: C2ER, BLS, Numbeo, regional surveys
- Housing share: 30–40% of typical index
- Migration: Lower-cost metros attract workers and retirees
How It Works
How indexes work. Cost-of-living indexes compare a metro to a national or regional baseline (often 100). Memphis at 85 means 15% below average; San Francisco at 185 means 85% above. Housing is the largest component—typically 30–40% of the index. Rental-income and market-value correlate with cost of living, but migration flows from high to low cost.
Migration impact. Workers and retirees migrate from high-cost metros to lower-cost metros. That migration supports demand-drivers—population growth, rental-income growth, appreciation. Secondary-market and tertiary-market metros with low cost of living often outperform on demand-drivers metrics.
Rent burden. Census-data tracks rent burden (rent as % of income). In high-cost metros, rent burden can exceed 50%—tenants are stretched. In lower-cost metros, rent burden is often 25–35%, leaving room for rent growth and tenant stability.
Real-World Example
Ava compares Memphis (85) vs. Austin (105). Memphis 2-bed: $1,100 rent, 28% rent burden for median household. Austin 2-bed: $1,650 rent, 38% rent burden.
Memphis attracts migration from Austin and Dallas—lower cost-of-living, landlord-friendly-state. She models 4% rent growth in Memphis vs. 3% in Austin over 5 years. Demand-drivers favor Memphis for rental-property in the current cycle.
Pros & Cons
- Strong predictor of migration and demand-drivers
- Complements census-data and market-fundamentals
- Secondary-market and tertiary-market often have favorable indexes
- Rental-income and appreciation potential in lower-cost metros
- Indexes vary by methodology—C2ER vs. BLS vs. Numbeo
- Housing component can lag actual rental-income and market-value
- Inflation-rate affects all metros; relative differences matter
- Migration can reverse if jobs or cost-of-living shift
Watch Out
- Methodology risk: Different indexes can rank metros differently
- Migration reversal: Remote work and cost-of-living changes can shift flows
- Overweighting: Cost-of-living is one input; combine with market-fundamentals
- Exit risk: Market-value in low-cost metros can lag in downturns
Ask an Investor
The Takeaway
Cost of living drives migration and demand-drivers. Lower-cost secondary-market and tertiary-market metros often attract migration and support rental-income and appreciation. Use with census-data and market-fundamentals.