The Best Markets for Residential Rental Properties - Robert Greenberg

The Best Markets For Investors of Residential Rental Properties

By Robert Greenberg, Patch of Land

As the real estate cycle gets long in the tooth, residential investors are looking harder to find those places where they still have ample opportunity for sizable returns. Single-family rentals might be the next opportunity to consider.

We turned to a couple of different sources for insight on the best markets for single-family rental investors.

We looked at data provided by ATTOM Data Solutions that analyzed single-family rental returns in 432 U.S. counties each with a population of at least 100,000 and sufficient rental and home price data. It used rental data from the U.S. Department of Housing and Urban Development (HUD) and home price data from publicly recorded sales deeds.

Rental returns were calculated using annual gross rental yields: the 2019 50th percentile rent estimates for three-bedroom homes in each county from HUD, annualized, and divided by the median sales price of residential properties in each county. The bottom-line gross rental yields varied from as high as 29% to as little as 3%.

ATTOM looked at the best SFR growth markets where average wages grew over the past year and with potential 2019 annual gross rental yields of 10 percent or higher.

Of 98 SFR growth markets that ATTOM identified, the markets included several counties that were essentially ground zero during the foreclosure crisis. Investors considering these growth markets will want to weigh the growth opportunities in light of the higher risk that these recovering counties and metros may entail.

Besides its potential for rental returns, Wayne County (Detroit) was interesting for the large gain in the yearover-year percentage change in the median sales price, which rose by 30%, according to their data. Even with the rise, homes are still very affordable in Wayne County where the median sales price is just $95,000. Rent on a three-bedroom single-family house rose by 2% from 2018 to 2019.

ATTOM ranked Baltimore City, MD, which covers the Baltimore-Columbia-Towson market as the top growth market for 2019. Besides its 24.5% projected annual return this year, Baltimore City is expected to see rental rates on SFR rise an estimated 3% this year over 2018. The median sales price, as of Q1 2019, was just $91,750, up 22% over 2018’s $75,500. Average annual rental yield this year is expected to dip from 2018’s 28.8% to 24.5%, but it is still an eye-popping return.

The top five counties for the best rental returns according to ATTOM:

1. Baltimore City, Maryland (245%)

2. Bibb County, Georgia in the Macon metro area (21.9%)

3. Cumberland, New Jersey, in the Vineland-Bridgeton metro area (21.2%)

4. Winnebago, Illinois, in the Rockford metro area (17.1%)

5. Wayne County, Michigan in the Detroit metro area (17.1%)

The 10 best cities for rental returns according to Compound:

1. Indianapolis, Indiana

2. Cincinnati, Ohio

3. Kansas City, Missouri

4. Charlotte, North Carolina

5. Dallas-Fort Worth, Texas

6. Columbus, Ohio

7. Atlanta, Georgia

8. San Antonio, Texas

9. Austin, Texas

10. Cleveland, Ohio

We also looked at residential real estate investment rankings from Compound, the New York-based real estate technology company. Compound creates city-specific investment funds in markets that generally have a high barrier to entry and to single out the best cities for investors, Compound looks at risk and reward to help investors understand the correlation between the two and how much risk is too much.

You won’t find Detroit or Pittsburgh on Compound’s best cities list for rental investments. Even though those two cities might have generated higher absolute returns than the cities that ended up on their list, the returns, by themselves, don’t adequately account for how risky those markets are, according to Compound. Both are risky because they are relatively small metros and their historical performance has been inconsistent.

Compound measures risk by calculating the Sharpe Ratio of each MSA’s average home price, using monthly changes for the same period as the return calculation, which in this case was monthly for 12 months from March 2018 to March 2019. It used the Zillow Home Value Index, which includes single-family homes and condos to measure returns.

It’s interesting to see that data from both companies have cities or counties from Ohio and Georgia among their top investment choices, although both place a different city at the top of the list for the best rental market in the country.

The differences in these “top rental market” rankings come with some caveats for residential real estate investors. What’s a good growth opportunity for one investor may carry too much risk for another. While all of these cities and counties offer something to think about, investors will need to consider their own appetite for growth vs. risk when deciding where to invest.

Regardless of what market is truly the best for single-family rental investing, many private money lenders are offering rental investors aggressive rates and a variety of term products including interest-only options that are great programs for real estate investors seeking to add rental properties to their existing portfolios or even just wanting to cash out equity from existing rentals.

ABOUT THE AUTHOR: Robert Greenberg is Chief Marketing Officer at Patch of Land, a Peer-to-Real-Estate (P2RE) lending marketplace that matches accredited and institutional investors seeking high-yield, short-term, asset-collateralized investments to borrowers seeking more timely and consistent sources of funding for rehabbing properties across America.

CONTACT: 888-959-1465 | Patchofland.com