The FINANCIAL -- RealtyTrac on March 31 released its Q1 2016 Single Family Rental Market Report, which ranks the best markets for buying residential rental properties in 2016.
The report analyzed single family rental returns in 448 U.S. counties each with a population of at least 100,000 and sufficient rental and home price data. Rental data was from the U.S. Department of Housing and Urban Development, and home price data was from publicly recorded sales deed data collected and licensed by RealtyTrac markets (see full methodology below).
The report ranked all 448 counties based on the potential annual gross rental yield (monthly rent, annualized, divided by median home price) and also identified the best counties for future growth in the single family rental market and the best millennial magnet single family rental markets.
“Rapidly rising home prices and tepid wage growth have dampened single family rental investment returns and growth potential in many markets, but there are still plenty of solid opportunities available for real estate investors willing to cast a wider geographic net,” said Daren Blomquist, senior vice president at RealtyTrac. “Rents are rising faster than median home prices in 45 percent of the markets analyzed — indicating continued strong demand for rentals in those markets — while annual wage growth is outpacing rent growth in 43 percent of the markets — indicating room for rising rental returns in those markets.”
Counties with highest single family rental returns
The average annual gross rental yield among the 448 counties was 9.4 percent, down from an average of 9.5 percent in the first quarter of 2015.
Counties with the highest annual gross rental yields were Baltimore City, Maryland (28.5 percent); Clayton County, Georgia, in the Atlanta metro area (25.8 percent); Wayne County, Michigan in the Detroit metro area (24.2 percent); Bay County, Michigan, in the Bay City metro area (21.2 percent); and Macon County, Georgia (20.6 percent).
“The strong South Florida rental market continues to give solid returns to the investors,” said Mike Pappas, president and CEO of the Keyes Company, covering the South Florida market, where Miami-Dade County’s potential single family rental return was 8.4 percent with rents rising 4 percent annually and home prices rising 11 percent annually. “Our limited land with growing population give the investors an additional equity kick in rising prices.”
Counties with lowest single family rental returns
Counties with the lowest annual gross rental yields were Arlington County, Virginia in the Washington, D.C., metro area (3.3 percent); California Bay area counties of San Francisco (3.4 percent), San Mateo (3.6 percent), Marin (3.9 percent), Santa Cruz (4.0 percent) and Santa Clara (4.0 percent); Williamson County in the Nashville metro area (4.0 percent); and Kings County (Brooklyn), New York (4.0 percent).
“I would expect to see a modest slowdown in rental rate growth given the distinct ties that there are between rental rate growth and income growth.” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market, where King County’s potential rental returns for 2016 ranked 394 out of the 448 counties analyzed. “If incomes do not keep on growing, rental rates cannot either.
“I am also finding that some softness is starting to enter the single family rental market in Seattle for other reasons,” continued Gardner, who noted that the RealtyTrac analysis shows King County rents grew 6 percent annually, home prices grew 10 percent annually while average wages grew less than 1 percent annually. “The first is that home prices are increasing to such a degree — specifically in King County — that investors will not be able to get sufficient yield on rents given high prices that they have to pay for houses.
“Secondly, many single family rental households are families who had lost their previous home to foreclosure and are now becoming so-called ‘boomerang buyers’ who are now starting to be able to qualify for a mortgage again and are likely heading back into home ownership. This will reduce demand for single family rentals, and millennials will not take their place as they prefer urban multi-family units. Because of these confluence of factors, landlords are going to be cautious with any potential acquisition.”
Best single family rental growth markets
The report identified and ranked 17 counties as the best markets for future growth in single family rental returns. In all 17 counties average weekly wages grew at least 5.0 percent annually and annual wage growth outpaced annual rental rate growth
The top five counties are Genesee County, Michigan in the Flint metro area (15.3 percent annual gross rental yield and 5.0 percent annual wage growth); Camden County, New Jersey in the Philadelphia metro area (12.9 percent annual gross rental yield and 5.5 percent annual wage growth); Woodbury County, Iowa in the Sioux City metro area (11.4 percent annual gross rental yield and 11.3 percent annual wage growth); De Kalb County, Illinois in the Chicago metro area (11.3 percent annual gross rental yield and 8.9 percent annual wage growth); and Warren County, New Jersey in the Allentown, Pennsylvania metro area (10.8 percent annual gross rental yield and 6.0 percent annual wage growth).
“With increasing jobs and immigrant growth, housing demand continues to grow across Ohio,” said Michael Mahon, president at HER Realtors. As available housing inventory and new construction inventory remain low, rental pricing shall continue to rise throughout much of 2016.”
Best millennial magnet single family rental markets
The report also identified and ranked 15 counties as the best markets for renting single family homes to millennials. In all 15 counties, the millennial share of the population increased at least a 10 percent between 2008 and 2013 and annual wage growth outpaced annual rental rate growth.
Top five counties are Milwaukee County, Wisconsin (15.7 percent annual gross rental yield and millennial population share increase of 16.4 percent); Richmond City, Virginia (13.7 percent annual gross rental yield and millennial population share increase of 27.6 percent); Bell County, Texas in the Killeen-Temple metro area (11.9 percent annual gross rental yield and millennial population share increase of 20.6 percent); Jackson County, Missouri in the Kansas City metro area (11.1 percent annual gross rental yield and millennial population share increase of 13.5 percent), and Okaloosa County, Florida in the Crestview-Fort Walton Beach-Destin metro area (10.5 percent annual gross rental yield and millennial population share increase of 22.2 percent).
Zip codes with best and worst single family rental returns
The report analyzed single family rental returns in 6,551 zip codes nationwide with a population of at least 2,500 and sufficient rental and home price data.
The top five zip codes with the highest potential single family rental returns for 2016 were 48505 in the Flint, Michigan metro area (150.2 percent); 21223 in the Baltimore, Maryland metro area (102.0 percent); 35208 in the Birmingham, Alabama metro area (89.7 percent); 21205 in the Baltimore, Maryland metro area (87.8 percent); and 48205 in the Detroit, Michigan metro area (87.1 percent).
The top five zip codes with the lowest potential single family rental returns for 2016 were 34102 in The Naples, Florida metro area (0.5 percent); 33480 in the Miami, Florida metro area (0.6 percent); followed by three zip codes in the Los Angeles metro area: 90210 (0.9 percent), 90069 (1.0 percent), and 90402 (1.1 percent).