Are you thinking about investing in rental real estate? Despite rising home prices, some markets still provide solid investment returns on rentals. In fact, RealtyTrac's Q2 2014 Residential Property Rental Report which surveyed 370 counties across the United States found that investors purchasing residential rental homes earn an average of 9.97% annually - not too shabby. Some rental areas across the nation even broke 20%.
If you're wondering how to identify which rental markets are best to invest in, here are a few tips to help you figure out where to buy real estate to get the best rental returns on your investment dollar.
Compare the City's Median Home Price to Median Rental Price
One of the simplest ways to find a lucrative rental home location is to compare the city's median home sale price with its median rental price. The lower the median home price, and the higher the median rental price in an area, the better the potential rental returns for investors. Locate a city or town's median home sale price on the National Association of Realtors Metropolitan Median Area Prices and Affordability site, or use the search tool on the site to find your particular town or region. Then, find the median rental price of areas you're interested in by visiting the U.S. Department of Housing and Urban Development, which publishes lists of median rent estimates for all Fair Market Rent areas. If your area isn't on the list, visit the government site for your city or region.
Look for Low Unemployment Rates
To be a successful landlord, you want renters who have a steady income stream, who can afford to rent, and who will make their payments. To find rental markets that include tenants that meet these requirements, research demographics and check out local unemployment rates prior to buying rental real estate. Compare the potential market's current local unemployment rates against the national unemployment rate found at the United States Census website. One possible market for aspiring residential landlords is Anderson County, S.C., where in April 2014, the unemployment was just 4.3%, lower than the national average of 6.3%.
Millennials and Baby Boomers Good News for Landlords
If you want to become a successful landlord, another thing to keep an eye out for are cities, towns or neighborhoods with large and growing populations of millennials and baby boomers – two groups who are likely to want to rent, but for different reasons. Millennials often rent because they can't yet afford to buy a home, don't yet want the commitment of home ownership, or they're averse to buying big-ticket items. And baby boomers often feel the need to downsize as their children grow up and leave home, but they may prefer to rent until they find the perfect new (smaller) home to buy. Visit the United States Census Bureau Population Estimates site to get the most recent figures on populations by age group for counties across the country, as well as information on whether these populations are growing or shrinking in each area. Examples of areas with large numbers of potential millennial and baby boomer renters include Placer County in the Sacramento, Calif. area and Charleston County, S.C.
Look for Major Corporations and Colleges
Some people choose to rent because they're involved in a temporary activity that requires them to live away from their hometown. For example, young people attending college and contract workers may prefer to rent because they can't afford to buy a home and/or they're staying in a city for a set amount of time with a known end-date. Therefore, search for cities or large towns with colleges and/or large corporations. These areas make great rental markets. However, watch out for high real estate purchase prices.
Philadelphia, Pa. or Baltimore, Md. are good examples of college or corporate towns with reasonably priced rental real estate for purchase, and higher than average rents. With both cities considered a millennial rental market, Baltimore saw a 21.32% gross rental yield in Q2 of 2014 while Philadelphia County saw 20.78%.
To view RealtyTrac's Q2 2014 Residential Property Rental Report, click here.
The Bottom Line
Though home prices have increased over the past year, investing in rental real estate is still a good option for investors who know how to use demographics to choose areas that include populations of high quality potential tenants - people who can and will pay rent. These tenants include college students, contract or short-term employees of large corporations, as well as baby boomers and millennials; two age groups experiencing life stage transitions and lifestyles which make renting more attractive than buying. Once you find an area with favorable potential tenants, comparing the median purchase price of residential rental real estate against the median rental rate will give you a good idea of the potential return on your investment, and help you make a wise decision about where to become a landlord.