Single-Family Rental Property Vacancy and Turnover Improve

The single-family rental vacancy rate decreased to 4.6 percent in February–partly because of a firm and still-improving 79 percent average retention rate–reported Morningstar Credit Ratings, New York.

Additionally, the single-family rental property overall turnover rate fell to 2.4 percent over the last three months, Morningstar’s Performance Summary report said. The ratings firm said it expects that these factors may lead to lower vacancies in the coming months.

Single-family rental property rents increased 3.5 percent on average in February, the same growth seen in January, Morningstar reported. The rent change for vacant-to-occupied properties equaled 2.2 percent, but the rent change for lease renewals was 4.2 percent. “That trend matches the relationship that these measures experienced one year ago, and renewal rent changes may continue to outpace vacant-to-occupied rent changes through the first quarter of 2017,” Morningstar said.

But single-family rental property performance varied significantly across the country. RentRange Data Services, Westminster, Colo., examined fourth-quarter data and said that many of the top-performing SFR markets are in noncoastal, Midwestern states including Ohio, Missouri and Kansas. “Additionally, the data also identified multiple smaller markets on the list, including Birmingham, Cincinnati and Tulsa,” RentRange said.

RentRange ranked the Cleveland area’s SFR market first with a 13.7 percent gross yield, followed by metropolitan Detroit with 13.5 percent yield and Dayton, Ohio’s 13.1 percent gross yield.

“Cleveland, Detroit and Dayton top our list of markets with the highest returns for single-family [rental] homes,” said RentRange Data Services Chief Revenue Officer Dennis Cisterna. “These three markets fall within the Rust Belt region, which was once dominated by an industrial-powered economy and is now experiencing population loss and economic decline.”

Though Detroit ranked second, Motor City yields have declined from a year ago, perhaps due to recent economic improvements, RentRange noted. “If economic conditions continue to improve, yields may continue to fall as a result of a potential rise in home prices,” the report said.

But Cisterna noted that a high yield does not necessarily make a particular metro a great place to invest–there are other factors to consider. “For investors, whether you are an everyday investor or an institutional investor, it is vital to analyze each property to determine whether it will produce the returns you expect prior to purchasing a single-family residential investment property,” he said.

Looking at the total pool of renters–both single-family house renters and those who rent an apartment in a larger multifamily community–monthly rent is a bigger financial burden for people living in predominantly black or Hispanic neighborhoods than in white neighborhoods, reported Zillow, Seattle.

Nationally, renters in predominantly black neighborhoods can expect to spend more than 43 percent of their income on rent and renters in Hispanic communities can expect to spend nearly half their income on rent, Zillow said. In white neighborhoods, renters can expect to spend just over 30 percent of their income on rent, essentially in line with the standard rule of spending about 30 percent of income on housing.

“Renters in African-American or Hispanic neighborhoods find themselves in a catch-22 situation–while owning a home is a great way to build wealth, you need to save up some cash to be able to buy,” Zillow Chief Economist Svenja Gudell said. “If you’re spending close to half of your income on rent, saving up that down payment is going to be incredibly difficult.”

Zillow noted that rent affordability across the nation has diminished since 2011 as housing costs have outpaced income. “It has worsened more in minority areas than it has in predominantly white neighborhoods,” the report said, noting that the share of household income needed to pay monthly rent in black and Hispanic neighborhoods increased by four percentage points and seven percentage points respectively over the past five years while the share of income needed to pay rent increased by three percentage points in white communities.

“Making the transition from renter to homeowner is a bigger financial challenge for renters living in mainly black or Hispanic areas,” Zillow said.