Where Are Rents Rising the Most?
Being a renter in the U.S. has become a pricey proposition these days. As of December 2016, the national median rental rate for a one-bedroom apartment was $1,100, according to Apartment List. The price climbed to $1,260 per month for a two-bedroom unit.
In some cities, renters are seeing their monthly housing costs grow at an accelerated rate. RentRange, a leading provider of market data and analytics for the housing industry, just released a list of the 25 markets that have seen the biggest leaps between the third quarter of 2016 and the same quarter in 2015. The report revealed some surprising trends, which may be of particular interest to real estate investors. (Read also: Top 10 Features of a Profitable Rental Property.)
Most interesting: The cities with the biggest rent increases aren't necessarily the most profitable for real estate investors. It's worth looking closely at these numbers.
Ranking by Year-Over-Year Rental Rate Increase – Q3
Change in Rent Average Gross Yield
Source: RentRange and Altisource Portfolio Solutions S.A.
Rust Belt Turns Profitable
According to the RentRange data, the five cities offering the best investment yield through the third quarter of 2016 were all in the Rust Belt. Cleveland took the top spot, with an average gross yield of 15.3%, following by St. Louis and Pittsburgh with 13.7%, Canton, Ohio with 13.6%, and Cincinnati, which recorded a yield of 12.6%.
Interestingly, these weren’t the cities that recorded the largest year-over-year increase in rental rates. In fact, none of them cracked the top five. So what accounts for the evident improvement in rental yields? A slow but subtle economic recovery could be one driving factor.
In recent years, the Rust Belt has undergone a renaissance of sorts as more young job-seekers have moved into these cities in lieu of more expensive markets like New York or San Francisco. Downtown Cleveland, for example, has seen a 76% increase in residents aged 25 to 34 since 2000.
That reflects a larger trend of Millennials opting to move to 18-hour cities, which offer numerous job opportunities paired with a reasonable cost of living. According to HSH, Pittsburgh, Cleveland, Cincinnati, and St. Louis rank among the top five most affordable cities to live in the U.S. As more newcomers move into these areas, the result is a more consistent demand for rental housing, which works to the advantage of investors. (See: '18 Hour Cities' Are The Next Big Thing For Real Estate Investors.)
Seattle, Portland, Austin, Atlanta, and Dallas-Fort Worth are some of the other 18-hour cities that made it onto RentRange’s list. Seattle took the top spot for rental rates, with a 16% increase. In terms of yield, however, it ranked closer to the bottom, with a 5.9% increase.
Sun Belt Loses Some Steam
The Sun Belt has historically been a hotspot for housing. Census Bureau data shows that the Sun Belt states saw the arrival of more than 500,000 new residents between 2014 and 2015. Florida’s rental market has been something of a mixed bag for investors, with cities like Naples yielding a return of just 0.5%, while Jacksonville produced a gross annual yield of 62.9% through 2016, according to RealtyTrac.
Data from RentRange suggests that the Sun Belt is beginning to level off for a degree, with rent increases in the Sunshine State stabilizing. Just two Florida metropolitan areas cracked the top 25: Daytona Beach and Cape Coral-Fort Meyers. These cities showed an increase in rental rates of 13.4% and 11.4% respectively. The average gross yield for each city came in at 9.9% and 8.9%.
While the yields in some of the Sun Belt cities included in the list were lower than their Rust Belt counterparts, one trend does stand out. Several cities – San Francisco, most notably – saw their ranking on the list go up, even though industry projections suggest that the rental market in these cities has hit a plateau. (See: How Much Money Do You Need to Live In San Francisco?)
The Bottom Line
RentRange’s report opens up some new possibilities for real estate investors who are hoping to cash in on rising rental rates. Zillow estimates that rental rates will appreciate by 1.7% through August 2017, with Seattle and Portland leading the charge with the fastest rate of growth. If you’ve been contemplating adding real estate investments to your portfolio, now may be the time to consider making a move. Just be sure to factor in the broader economic outlook of the rental market in question before taking the leap.