There have been dozens of stories of homebuyers pitted against one another in contentious bidding wars to land the home of their dreams. As if that weren’t challenging enough for most homebuyers, they’re now facing a new form of competition: real estate investors.
Real estate investors used to think that owning a portfolio of single family rental properties was too complex. There were too many operational inefficiencies for investors to make money. However, savvy investors have found ways to overcome these inefficiencies, and they now realize that single family rentals can be just as profitable as multifamily apartments. This is particularly true in areas where the multifamily market has attracted attention from institutional and overseas buyers, with whom smaller-scale investors struggle to compete.
However, Clayton County, Georgia isn’t exactly on the radar of these deep-pocketed investors. While others hone in on multifamily purchases in primary markets like New York, Boston, and San Francisco, smaller-scale investors are realizing great returns on single family rentals in secondary and tertiary markets.
Just where are single family rentals proving to be the most profitable?
Clayton County, Georgia leads the pack. The counties that follow may surprise you equally.
The Best Cities to Invest in Single Family Rentals
ATTOM Data Solutions, one of the nation’s largest aggregators of property data, recently released its Q1 2017 Single Family Rental Market report. The report looked at single family rental returns in the 375 U.S. counties with a population of at least 100,000 people, along with more than 6000 zip codes with a population of 2500 or more.
The average annual gross rental yield among the counties studied was 9.0% for Q1 2017, down just slightly from 9.1% during the same period last year.
However, investors in some markets are realizing returns more than 2.5 times the national average. On average, single family rental properties in Clayton County, Georgia are spinning out the highest annual gross rental yields (23.7%), followed by Baltimore City, Maryland (23.6%); Bibb County, Georgia (23.5%); Monroe County, Pennsylvania (20.6%); and Saginaw County, Michigan (18.8%).
Among the counties with at least 1 million people, Wayne County, Michigan has the highest gross rental yields (17.3%), followed by Cuyahoga County, Ohio (13.2%); Allegheny County, Pennsylvania (10.6%); Philadelphia County, Pennsylvania (10.1%); and Franklin County, Ohio (9.9%).
There is a pattern that emerges among these counties: Many are home to post-industrial cities that have struggled to regain the economic activity of years past. As industry fled, so did people. An overbuilt housing stock was left behind, ready to be scooped up by real estate investors at rock-bottom prices. This trend was exacerbated by the Great Recession, in which the foreclosure crisis created an opportunity for investors to buy at a discount, then rent single family homes to those who had lost their own.
Why Single Family Rentals Are So Competitive in Some Markets
In areas with more robust economic growth, the returns on single family homes are much lower.
The study found the lowest annual gross rental yields were in Arlington County, Virginia (3.4%); Williamson County, Tennessee (3.9%); Santa Cruz County, California (4.1%); Norfolk County, Massachusetts (4.2%); and Santa Clara County, California (4.2%).
Among counties with at least 1 million people, Santa Clara County had the lowest returns. Kings County, New York (4.4%); Orange County, California (4.6%); and Fairfax County, Virginia (4.6%) were not far behind.
Once again, this can be explained by the strength of these local economies. There is high demand for single family homes in cities like San Jose; Washington, D.C.; and Los Angeles. It’s not uncommon to see homes selling for well north of $1 million in these areas. This makes buying a single family home to use as a rental property much less compelling. There are only so many people willing to pay tens of thousands of dollars in rent for these homes before deciding to buy one of their own. As a result, the average rental yields are significantly lower than investors are discovering in other parts of the country.
“While good returns on single family rentals are hard to come by in high-priced coastal markets[,] and in some other housing hot spots such as Denver and parts of Dallas, Austin and Nashville[;] solid returns on single family rentals will continue to be available in many parts of the Southeast, Rust Belt and Midwest for investors purchasing in 2017,” explains Daren Blomquist, senior vice president at ATTOM Data Solutions.
Based on wage growth, the report suggests that the biggest markets for single family rental growth in 2017 will be Trumbull County, Ohio (17.2%); Saint Lawrence County, New York (17.1%); Richmond County, Georgia (16.6%); Broome County, New York (16.4%); and Lucas County, Ohio (14.5%). Each of these counties reported average weekly wage increases of at least 5% annually, and they’ve experienced outpaced growth in fair market rents. The Q1 2017 median single family sales prices in these counties topped out at just $88,400—a bargain compared to pricy coastal cities.
For investors looking to buy single family rental properties, this data provides tremendous insight as to where to look next.
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