Atlanta, Houston, Dallas Rank Among Best Single-Family Rental Markets

Investors looking to buy single-family rental houses would see the highest yields in Atlanta, Houston, central Florida and Dallas Zip codes, reported ATTOM Data Solutions, Irvine, Calif.

ATTOM examined potential rental yields and cash flow, vacancy rates, home price appreciation, population growth, neighborhood quality and average property age in its analysis.

Daren Blomquist, Senior Vice President with ATTOM Data Solutions, said the top areas for SFR investment nationwide all have solid rental returns, positive cash flow opportunities and neighborhoods with relatively low vacancy rates and home price growth and population growth. He noted these factors should continue to put upward pressure on rental rates.

“Nearly half of [the top 25] Zip codes–11–have been discovered by larger investors, evidenced by an increase in the share of institutional investor purchases compared to a year ago, but the other 14 Zip codes posted a flat or decreasing institutional investor share compared to a year ago, indicating less competition for single-family rentals in those markets,” Blomquist said.

Among the top 25 Zip codes, those with the highest potential annual gross rental yield (annualized gross rent income divided by median purchase price) in the third quarter were 30238 in the Atlanta area (17.7 percent), 77373 in the Houston area (13.5 percent), 34472 in Ocala, Fla. (13.1 percent), 76140 in the Dallas-Fort Worth area (12.7 percent) and 30228 in the Atlanta area (12.6 percent).

The top 25 Zip codes for buying single-family rental assets all posted year-over-year increases in rental rates, population and home prices, the report said. All 25 Zip codes also had a 5 percent or lower vacancy rate for non-owner occupied homes and at least 25 percent of all single-family homes were non-owner occupied. All 25 Zip codes had 10 percent or higher potential gross rental yields and potential annual cash flow exceeding $10,000 for a cash buyer after property taxes, insurance, maintenance and other property management costs.

“I can buy lots in areas that I can’t sell homes, but I can rent [them],” said Adam Whitmire, Acquisitions Director with Whitmire Group, Atlanta. He said his firm shifted from buying existing houses as rentals to primarily buying lots and building new houses as rentals.

Whitmire noted neighborhoods south of Atlanta with a higher share of renters are good markets for this build-to-rent strategy. “The local economy may not have enough income or enough credit to buy but there is enough income to rent … and I can make a good cash flow,” he said.

The lowest potential rental property returns were in coastal markets, led by Zip codes in the Miami, Los Angeles, Santa Barbara, Calif., New York and San Jose, Calif. areas. All ranked among the bottom for gross annual rental yield among the 4,854 Zip codes analyzed.

Data analytics firm HouseCanary, San Francisco, said the nationwide effective gross yield for U.S. single-family rentals held steady at 8.0 percent in the third quarter despite the continued rise in housing prices.

HouseCanary Executive Vice President of Analytics Alex Villacorta said the index results show the “recalibration” of home prices to historic norms continues to put overall downward pressure on effective gross yields for the single-family rental sector. “In particular, the accelerated growth in the western and northeast regions over the past few years has seen the strongest effect of compressing yields as the cost to acquire continues to increase,” he said.

Villacorta noted only three of the 50 largest metros showed positive growth in yields over the last quarter, “suggesting that nationwide, the growth of rents is slowing relative to that of home prices,” he said. “Though the most abundant double-digit opportunities reside in the southern region of the country, there are still several localized pockets of high-yield opportunities in most markets throughout the country.”

The average vacancy rate among single-family rental securitizations climbed to 5.7 percent in August–the latest data available–as property managers dealt with “typical” increased summer-month lease expirations, said Morningstar Credit Ratings, New York. August represented the fifth straight month of vacancy rate increases. “This rate may improve in the coming months as fewer leases are due to expire,” Morningstar said.

Despite decreasing slightly month-over-month, the retention rate for full-term leases remained strong at 75.2 percent, Morningstar noted. Rents rose 4.1 percent in August.