Midwest Leads Single-Family Rental Yields

Michael Tucker mtucker@mba.org

June 15, 2017


The highest yielding single-family rental markets in the first quarter were older Midwestern metro areas, RentRange Data Services and HomeUnion reported.

RentRange Data Services, Westminster, Colo., said Detroit, Cleveland, Ohio and Milwaukee had the highest single-family rental property gross yields in the quarter, ranging from 15.8 percent in the Milwaukee area to 17 percent in the Detroit area. Sales price increases in these markets have lagged behind faster-growing markets in the south, southwest and on the coasts, leading to higher yields in the Midwest.

Online real estate investment management firm HomeUnion, Irvine, Calif., also examined the best and worst markets for single-family rental home investors by cap rate. Cleveland earned the top spot in the first quarter with an 11.5 percent cap rate and a $75,512 median investment-home price. Conversely, San Francisco--one of the most expensive housing markets in the U.S.--ranked lowest for investors with a 2.8 percent cap rate and a median price exceeding $1 million.

"Metros in the Midwest and southeast always earn top billing because of their low entry prices and moderate rents," said HomeUnion Research Director Steve Hovland. "Cleveland has often ranked at the top--or near the top--of the best places to purchase a single-family rental property."

Hovland called coastal locations "challenging" for investors. "Because median investment-home prices and rents are so high, we weren't surprised to see that investors will have to settle for nominal returns in most markets in the Bay Area, southern California and the Pacific Northwest," he said.

RentRange Data Services Chief Revenue Officer Dennis Cisterna said investors considering single-family rental properties should conduct due diligence by researching historical housing and rental data, the local economy and property-specific financial information like insurance, taxes, gross yield, net yield and cash flow.

"While many markets may have high yields, they may have quite different rent growth percentages and vacancy rates," Cisterna said. "A strong market would generally have a combination of high yields, low vacancies and high rent growth."

Analyzing average vacancy rates, RentRange found the lowest percentage of SFR properties unoccupied at any particular time in Pittsburgh, Indianapolis, St. Louis, Oklahoma City and Canton, Ohio. "Lower vacancy rates generally mean properties stay vacant for less time, limiting the loss of rent," Cisterna said.

Only four of the 25 highest-yielding markets nationwide showed rent declines over the past year, RentRange said: McAllen, Texas; Canton, Ohio; Columbia, Mo. and Pittsburgh, while two Michigan markets--Flint and Lansing--showed rent gains exceeding nine percent.

The pace of investor purchases can also indicate how attractive a market is, Cisterna said. Many purchases generally indicates that numerous investors find the market appealing from a single-family rental investment standpoint. Detroit, Rochester, N.Y., St. Louis and Indianapolis topped the first-quarter list of investor sales.

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