We often say that we invest in the “most profitable housing market in the country.” This means that we buy affordable homes, valued between $25,000 and $60,000, in the heartland of America. We’re not the only ones who know that this is the best market to be in. This article from DS News recently shared a new report by HouseCanary, a leading real estate data analytics firm, which identifies where the rental market is hot (and where it is NOT). You can read the full article below, but first, I’ll tell you a bit more about our approach.
For our fund, Guardian, we currently buy investment properties in five main cities: Memphis, Tennessee; Toledo and Cleveland, Ohio; Birmingham, Alabama; and Jackson, Mississippi. How do we determine where we want to buy? We use a method similar to the one that HouseCanary uses to establish its index. We look for the most consistent, highest yields for affordable rentals, which we base off of the net return in each area. Of our five cities, Memphis, Cleveland, and Birmingham make HouseCanary’s “best return” list with a yield of 10 percent. Compare this to a city like San Jose, California, which has one of the lowest yields in the country at only 2.8 percent.
The article doesn’t cover this, but we like to go a step further in ensuring steady, consistent returns by staying within the lower price range of the affordable homes. This offers real stability in pricing since these homes barely fluctuate in value, sometimes for decades, and it provides the best rent-to-price ratios available. Enjoy the article below.
Which Region Has the Best Return on Rental Investment?
With rising home prices and insufficient inventory hampering homebuyers in markets across the country, investment opportunities within the rental space are abundant. But which metros are the best places to invest? HouseCanary’s Canary Rental Index (CRI) for Q1 2018 shines a light on where the rental market is booming—and where it’s not.
Soaring home prices and limited inventory seems like a surefire combo to spur the rental market, with some would-be homebuyers having to rent while they save up for a larger down payment or just keep hunting to find the right home for them. However, HouseCanary’s Canary Rental Index points out that this assumption doesn’t always play out that way, as not all markets are created equal.
Nationwide, the effective gross yield (EGY) for rental investments is 7.7 percent, according to the Q1 2018 CRI. According to HouseCanary, the effective gross yield calculations “include rental expenses (like the price of the home and state and local tax levies), then determines what kind of return on investment a rental investor can expect given the local fair-market rental value of homes.”
ROI varies significantly even within individual markets and doesn’t always correspond solely with increasing home prices. Using the Denver-Aurora-Lakewood, Colorado, metropolitan-statistical area (MSA) as an example, the HouseCanary CRI found that, while Colorado as a whole has shown an 8 percent growth increase in home prices year-over-year, the Denver neighborhoods of Franktown, Castle Rock, and Westminster were sitting around 5.1 percent price growth. The 80218 ZIP code on the north side of the city came in at 11.8 percent growth year-over-year.
However, HouseCanary found that the EGY for rental investors for the 80218 ZIP code was only 5.8 percent. The 80219 ZIP code, “which encompasses the Barnum, Westwood, Mar Lee, and Harvey Park neighborhoods,” shows a rental EGY that aligns with the national average at 7.7 percent. Moreover, the highest rental EGY within the Denver MSA is actually found in the Eastern plains, almost an hour outside of the city proper—that’s where rental investors can average an EGY of 11.3 percent.
“Recovery from the housing crisis has happened at a different pace for each state and even each metro area within each state,” HouseCanary’s CRI report states. “Prices are growing more quickly in some places than in others, and in MSAs where recovery has been most robust (and even in surrounding metros), price growth is probably not the best metric to use for rental investors seeking a new property to buy and hold. Although the EGY for the country as a whole was 7.7 percent in Q1 2018, the variance in the Mountain West shows the danger of relying on an average—there are metros with much better (and much worse) EGY and gross yield than the 7.7 percent national average.”
So, which metros are showing the strongest rental EGY? Of the 50 metros listed in the Q1 CRI report, Kansas City, Missouri-Kansas showed a 14.1 percent yield, a 2.5 percent quarter-over-quarter increase. Pittsburgh, Pennsylvania, is right behind Kansas City with a 14.0 percent yield and a 1.7 percent quarter-over-quarter increase.
Other MSAs demonstrating a yield above 10 percent include Memphis, Tennessee-Mississippi-Arkansas (13.3 percent); Birmingham-Hoover, Alabama (12.3 percent); Buffalo-Cheektowaga-Niagara Falls, New York (11.9 percent); Cleveland-Elyria, Ohio (11 percent); Indianapolis-Carmel-Anderson, Indiana (10.9 percent); St. Louis, Missouri-Illinois (10.7 percent); Rochester, New York (10.7 percent); and Oklahoma City, Oklahoma (10.1 percent).
On the other end of the spectrum, the San Jose-Sunnyvale-Santa Clara, California, MSA showed the lowest yield of those markets reported on in the Q1 CRI. Yield within San Jose-Sunnyvale-Santa Clara was only 2.8 percent, down 0.7 percent quarter-over-quarter.
You can download the full HouseCanary Q1 Canary Rental Index by clicking here.