Top 14 Markets to Buy a Rental Property
December 13th, 2013 by Diane Moore
The economy is growing, the government says. But to millions of Americans, the battle is far from over. The Great Recession may have officially ended in June 2009, but recent numbers released by the Census Bureau indicate that the country is onto another challenge.
According to the bureau, 15% of Americans still live in poverty. Translated to actual numbers, that’s more than 46 million people. As if that’s not bad enough, the median household income in 2012 was 8.3% lower than pre-2008 levels. Of the people who continue to struggle, it’s the young generation (mostly under 35) who have been hit the most.
This is just one of the reasons that could explain why despite economic growth, most Americans are still cautious of their spending and that their attitude towards the economy is still sour. According to MSN, the median home price is $163,700. Compared to last year’s statistics, this is lower by 5%. But because lenders have implemented tight credit requirements (such as a 20% downpayment), only the cash-rich can afford to own a home right now.
Although the American dream of home ownership is not totally gone, consumers prefer to live in rentals. Also, the changing preferences of the young, coupled with the trends in urbanization, are shifting the market preference from single-family homes to apartment complexes and single-family rentals.
To the commercial real estate investor, this could mean a profitable opportunity. In fact, it’s so profitable that firms such as PwC and Jones Lang LaSalle predicted that it will enjoy a steady rise in the next coming years. This upward surge is fueled and sustained by pent-up demands from empty-nesters, urban dwellers, and those whose homes were foreclosed during the recession.
According to Reis, potential landlords will be happy to know that the average rental prices (for both asking price and actual paid rent) are up to about 2%. In 79 key cities in the US, supplies are shrinking while rent increases.
Below is a list of the best markets to buy rental property. These cities are aggregated from top sources such as HomeVestors of America, Local Market Monitor, Reis, and RealtyTrac.
1. Las Vegas, Nevada
Las Vegas has always been the go-to place for people who would like to gamble. But according to MSN, Las Vegas has cemented its way to the top as the best place to purchase rental properties. It can be remembered that in 2011, firms such as Local Market Monitor and HomeVestors of America also put Las Vegas on top of their rankings.
This year, Las Vegas managed to edge out top market contenders such as Detroit and Michigan because of the following reasons. First, median home prices have fallen significantly, and Las Vegas homes fall below national averages. MSN says that this is due to the 3.21% foreclosure rate in the area. Homes that cost $220,000 in 2011 are now just worth half of this price today.
Experts say that the situation in Las Vegas is slightly improving. However, its problems still remain. In fact, the unemployment rate is still at 12%, and the number of tourists has dropped by 3% in 2012.
2. Orlando, Florida
Alongside six other areas in Florida, Orlando sits on top of RealtyTrac’s list of best markets for property buyers. What’s attractive about Orlando is its golf courses, burgeoning tourist industry, and of course, its high rental returns.
Orlando is also still recovering from the condo-bust that happened in the last few years, so many properties have been foreclosed. Those that were not have been probably rented out. Though this is the case, MSN says that rents have risen to only 0.2%. Because of this, landlords in the area are not happy.
But the good news for investors is that home prices in Orlando are down to 7.6% from last year. In 2008, the price of a home was around $209,000. This year, it’s down to $120,000.
3. Memphis, Tennessee
Memphis was ranked number one by RealtyTrac as the best market in the country. This suggests that now is the best time for commercial real estate investors to pump in money in the area. Data collected by RealtyTrac suggest that Memphis has a median sales price of $72,607 and an average rate for a 3-bedroom house of $1,047.
The vacancy rate of Memphis is pegged at 11.2%, and it’s said to be the highest in the country. According to the Wall Street Journal, Memphis may have the reputation to be a second-tier city, but it has a proven solid base of renters. Almost 50% of Memphians choose to rent. Also, as jobs continue to pour in, the vacancy rate is expected to dip in the coming years.
4. Detroit, Michigan
In July of this year, BLAC Detroit said that Detroit has close to 80,000 vacant houses. This makes the city popular among commercial real estate investors. Detroit is so popular that even investors living as far as China have come in and scooped hundreds of these vacant properties. According to a Detroit-based real estate broker, these investors are attracted to the properties’ price. Houses in the area range from $10,000 to $30,000.
Is Detroit a paradise for investors?
CNN thinks so. In fact, it has put Detroit second on its list of the best cities for rental property investors. Though its data do not coincide with what BLAC Detroit published, CNN says that the annual rent projected in 2015 for Detroit is $9,016.
CNN also said that the incomes of renters have become much more stable, thanks to the recovery of the auto industry. Unemployment rate is now 8.7%, which is a 2.4% improvement compared to last year.
5. Jacksonville, Florida
The Jacksonville Business Journal says that Jacksonville is an important market in terms of multifamily and apartment complexes. It says that Jacksonville is one of the few markets in the country that has retained its “cash-flowing market” status. In fact, Florida’s largest city has been a gold mine for real estate investors since 2011. There is a strong demand for rentals, and this is fueled by the tourism industry and the strong military presence in the area.
MSN says that Jacksonville’s average housing prices have dropped to 9.5% in 2012 alone. Unemployment rate climbed to as high as 11.2% early this year, but it is now down to 9.7%.
6. Houston, Texas
Commercial real estate investors from all over the world are falling in love with Houston. Some of the reasons for this strong inflow include the following:
- fast-growing energy sector
- low-cost and higher-returns properties
- a least risky according to HomeVestors of America
MSN says that there isn’t much building constraint in the area, and the strong demand is due to the rising employment rate. Rental rates in the city have increased to 2.1%, and this is brought about by the energy sector.
7. Atlanta, Georgia
There’s a reason why Ellington Housing, Inc. is raising $100 million to buy single-family homes in Atlanta. The Connecticut-based company is planning to turn these homes into rental properties, and profit from them.
Ellington’s reasons for buying Atlanta properties reflect what other investors have to say about the place.
- Atlanta’s home prices are among the cheapest in the US.
- Rent declines are low.
- Atlanta has a diversified economy
According to MSN, the average housing price in Atlanta was $150,000 in 2008. Now, it declined to about $99,000.
8. Columbus, Ohio
Columbus is another ideal city to buy a rental property mostly because it’s home to many colleges. Being a college town, Columbus has a lot to offer. It has a diverse economy, which includes insurance, defense, food, retail, and education.
According to MSN, its unemployment rate is 7.3%, which falls below national average numbers. Vacancy rate in the city is 8.6%, and rent has increased to 1.2% in the past year alone.
9. Phoenix, Arizona
Though Phoenix suffered severely in the housing crash in 2008, it has surprisingly kept the rents relatively stable. Vacancy rates in 2011 were 13%, but the numbers have improved significantly last year, which was 8.9%. Rent has grown to 0.8% last year, and home prices have dipped to as low as $126,700.
Unemployment rate in the area is 8.1%. Notable employers include the Arizona State University, the city government, and the Luke Air Force Base.
10. Tulsa, Oklahoma
If there is one thing that can support the demand for rentals in Tulsa, it’s the city’s high employment rate. Its jobless rate falls at 5.8% in October, according to the Bureau of Labor Statistics. Compared to most cities in America, this rate is quite impressive.
Although the city is known for its oil industry, Tulsa has successfully diversified into notable industries such as technology, telecommunications, and finance. Meaning, renters can mostly sustain living in apartment complexes and rental homes.
According to MSN, Tulsa is still suffering a housing slump. This can be seen from the decline of home prices. In 2008, median home prices were $137,000. Today, they slipped to $123,000.
11. Warren, Michigan
Just like Detroit, Warren’s economy was driven by the automobile industry. Its most notable employer was General Motors, who supplied the residents with jobs since the 1950s. But when the industry collapsed, the local economy suffered as well. In 2012, the median home price was $114,000. This is a 35% decrease from 2005 prices.
Just like Detroit, Warren’s economy is on its way to recovery. Data from the Bureau of Labor Statistics show that Warren’s unemployment rate for October 2013 was 9.0%. Compared to the same month last year, this is a 1.4 % improvement. According to CNN, rents will increase with the improvement of the economy.
12. Bakersfield, California
Residents of Bakersfield were hit the hardest during the housing bubble. Many of them lost their homes to foreclosure, which forced them to look for rental alternatives. Until now, many of these residents are still living in rental properties. As a result of this, rents have increased by more than 20%.
CNN says that Bakersfield is a less risky market as compared with Detroit. This is because of the area’s diverse industries. The projected annual rent is $10,628 in 2015, and the median home price in 2012 was $115,000.
13. Tampa, Florida
The Tampa Tribune says that the buying spree of single-family homes in Tampa is mostly from hedge funds and private equity firms. These companies are buying mostly foreclosed homes from different sources. Some are bought through real estate agents, while others are through auctions.
These investors are mostly from California, but other foreign firms are also visiting the area. They are drawn to the rising demand for family home rentals, which rose to 11% last 2011.
Aside from that, homes are also relatively cheap. In 2012, the median price of homes dipped to $100,000. This could rise to $150,271 by 2015. The projected median annual rent for 2015 is $11,186.
Besides tourism, Tampa can sustain its demand for rentals with a recent growth in employment rate. According to the Bureau of Labor Statistics, Tampa’s unemployment rate was 6.4% in October. Compared to July, this is a 0.9% improvement.
14. Reno, Nevada
Reno is a popular investment hub not because of its single-family homes but because of its vacation properties. According to CNN, the city attracts people from Northern California who go to Reno for vacation purposes. This reflects a growing preference for easy-drive vacation spots, and investors would like to fill in this demand.
In 2012, the median home price in Reno was $137,000. This is lower than most homes offered in major cities. In 2015, this is projected to go as high as $152,509. Projected rent for the same year is $11,366.
The buy-to-let sector in real estate is one of the hottest opportunities created by the housing crash. While millions of Americans suffer the consequences of a foreclosed home, investors swoop in and take this as a profitable opportunity.
This trend has been going on since after the recession, and it looks like it’s not going anywhere. In fact, it is just getting started. Several companies have already spent millions of dollars to acquire these foreclosed properties, and others are expected to follow.
A review of the reports released by respectable organizations such as RealtyTrac suggests that invesment opportunities are concentrated on markets that have been hit hard by the housing crash. In this article, it’s clear that Nevada and Florida topped these markets.
However, there are risks involved with investing in these cities. After all, they are the ones whose median home prices have declined the most. That said, commercial real estate investors are suggested to look into factors such as unemployment rate and economic indexes. These should show whether a market can sustain the demand for rentals.
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