Rental properties have been, and very rightly so, a favorite of investors over the past few years. Rentals offer better returns than many other assets at a time of low interest rates: you don’t need expensive expertise; you can maximize your return with low-cost financing; and if you want to sell, there’s a ready demand.
Yet, rentals are not a slam dunk. You could find yourself in a local market where rental demand is small and will remain low. You will find that at the rates that you need there are just not enough renters. And in a boom market, you might find yourself overpaid.
Local Market Monitor has sifted through 330 markets to find 25 markets in the United States where you have the best chances for success to give you the greatest opportunity of a successful investment.
These aren’t the country’s best real estate markets. San Francisco, Seattle, Denver or Miami aren’t on the list. Why? Home prices are now far into booming territory in those markets — and in a dozen or so like them. That means there’s a fair chance you’d be buying at high rates that would collapse when the bubble bursts once again. It’s better to invest in apartments in markets like that, but their prices might also be on the high side.
Our 25 U.S.A. markets share some important economic figures.
First, and most critically, last year’s positive rise in house prices means that demand for all housing is high in both single-family and rental markets. I’ve rated them by how high the increase was, but over the past year, 6 percent is just as good as 10 percent when you look at an investment that will last five to ten years. This could be even better, if you want stability as well.
Second, the local economy in those markets is doing very well, better than the U.S. average, calculated by the rise in employment in the past year. In the long run, it is the local economy that drives rental demand, particularly these days when many new jobs only have modest pay.
Third, these markets are not overpriced, at least not yet, given the increasing home prices. For each market, we calculate an “income” price and compare it to the current average home price to see whether prices are high or low relative to local money. It’s not a precise measure — real estate isn’t science — and a 10% swing one way or the other doesn’t mean anything, but it shows that only Orlando and Sacramento are near to overpriced territory from our list, near to 20%, while most markets are far below it.
The benefit of getting inside the usual “wealth” price range is that you don’t have to worry about buying into a bubble that might inevitably pop. The probability that the average home price will ever fall below the price of today in a typical market is virtually zero.
I have provided some figures on recent population growth and the current average home price, as some markets have risen faster than others, and some are more costly to invest in. You may have a personal favorite. Only Boston and Sacramento are in the expensive range among our markets while Lakeland, Orlando and Raleigh have risen the most.
Finally, the Rent/Price Ratio shows the type of investment that could work best in every one of those markets. It’s the average current home price divided by the current annual rent. If the ratio is 21 or higher, buying and renting a single-family house is more difficult — you’ll find less tenants who can afford that. You have a greater chance of investing in condos in these areas, or breaking single-family homes into multiple rental units.
When the ratio is 20 or less, it is cheaper to rent straight single-family homes, but the other options are good too.
Investing in rentals is a good option now. You’ll increase the chances for success in these markets.