Housing Market Heats Up–But So Do Rental Markets
Owning a single-family rental in today’s tight housing market will likely yield strong returns, says ATTOM Data Solutions, Irvine, Calif. And if you happen to own a rental in the Los Angeles area, said HomeUnion, Irvine, you’re doing especially well.
ATTOM’s first quarter Single-Family Rental Market report, which ranks the best U.S. markets for buying single family rental properties in 2017, said SFR returns in 375 U.S. counties with a population of at least 100,000 showed average annual gross rental yield (annualized gross rent income divided by median purchase price of single family homes) among the 375 counties was 9.0 percent for 2017, down slightly from 9.1 percent in 2016.
“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,” said Daren Blomquist, senior vice president with ATTOM Data Solutions. “And single-family rentals should continue to yield strong returns in many parts of the country going forward given the market undercurrents of low rent-ready housing inventory and low homeownership rates.”
Blomquist said average fair market rents increased in 2017 in 86 percent of the markets analyzed even while average wage growth outpaced rent growth in 67 percent of markets, which he called “a recipe for sustainable growth in the rental market.”
Meanwhile, HomeUnion said based on demand alone, Los Angeles will be one of the tightest rental markets this year–and subsequently, one of the best investment markets.
“Stellar job growth and one of the lowest vacancy rates in the country have combined to make Los Angeles one of the most constricted markets in the country,” said Steve Hovland, director of research with HomeUnion. “The metro is on track to add 90,000 new jobs this year. Vacancy is expected to drop below 3 percent, a level only six other U.S. markets have achieved. With strong demand and constricted supply, rent growth and prices are elevated, while cap rates remain compressed. Investors who choose to enter the market may want to focus on further-flung neighborhoods such as Inglewood and Highland Park.”
The HomeUnion report (https://info.homeunion.com/rs/456-QRK-012/images/HomeUnion 2017 NSFR Report.pdf) noted L.A. metro employment growth is projected at 2.1 percent this year, compared to 1.7 percent growth nationally. SFR vacancy in Los Angeles is expected to drop by 10 basis points to 2.9 percent, while rents for Los Angeles SFRs are anticipated to grow to $2,644 per month, up 3.8 percent from year-end 2016.
The median sales price for investment homes in Los Angeles ended the third quarter at $530,000, with 73 percent of investors choosing to use leverage.
ATTOM noted other markets, with counties in Georgia, Maryland and Pennsylvania posting highest SFR returns. Counties with the highest annual gross rental yields were Clayton County, Ga. (23.7 percent); Baltimore (23.6 percent); Bibb County, Ga. (23.5 percent); Monroe County, Pa. (20.6 percent); and Saginaw County, Mich. (18.8 percent).
Among 40 counties with a population of at least 1 million people, highest gross rental yields included Wayne County, Mich. (17.3 percent); Cuyahoga County, Ohio (13.2 percent); Allegheny County, Pa. (10.6 percent); Philadelphia (10.1 percent); and Franklin County, Ohio (9.9 percent).
Counties with the lowest annual gross rental yields were Arlington County, Va. (3.4 percent); Williamson County, Tenn. (3.9 percent); Santa Cruz County, Calif. (4.1 percent); Norfolk County, Mass. (4.2 percent); and Santa Clara County, Calif. (4.2 percent).
Other report findings:
–Median sales prices for single family homes rose faster than average fair market rents in 213 of the 375 counties (57 percent), resulting in declining gross annual rental yields in the same percentage of counties.
–In 25 counties, average weekly wages increased at least 5 percent annually and outpaced growth in fair market rents. All 25 counties also had gross annual yields of 9.5 percent or higher. Trumbull County, Ohio had the strongest growth (17.2 percent).
–Best millennial SFR markets were in Detroit, Duluth, Kansas City and Oklahoma City. The top 10 counties saw the millennial share of the population increase by at least 5 percent between 2014 and 2015
–Zip codes with best SFR returns were in Toledo; St. Louis; Baltimore; Camden, N.J.; and Birmingham, Ala.
