The best markets for rental rate returns for investors are highlighted in a new report

Markets with the highest returns on rental properties

Among all 461 counties analyzed the average potential annual gross rental yield for homes purchased in February 2015 was 9.34 percent. The annual gross rental yield is calculated by annualizing the rental income and dividing that amount into the purchase price of the property.

“From a pure affordability standpoint, renters who have saved enough to make a 10 percent down payment are better off buying in the majority of markets across the country,” Daren Blomquist, vice president at RealtyTrac, said in the release. “But factors other than affordability are keeping many renters from becoming buyers, a reality that means real estate investors buying residential properties as rentals still have the opportunity to make strong returns in many markets.

“Also, keep in mind that in some markets buying may be more affordable than renting, but that doesn’t mean buying is truly affordable by traditional standards,” Blomquist added. “In those markets renters are stuck between a rock and hard place when it comes to deciding whether to buy or continue renting.”

There were 351 counties out of the 461 analyzed (76 percent) where house payments on a median-priced home in the first quarter of 2015 were lower than fair market rents on three-bedroom homes.

Among these 351 counties, there were 56 counties where home prices rose at least 7 percent compared to a year ago and wages rose at least 3 percent annually — additional factors that could make owning a home more attractive than renting. Wages were from the most recent weekly wage data available from the Bureau of Labor Statistics, the third quarter of 2014.

Out of the 56 counties where conditions favor buying over renting, the most affordable for buying were Bay County, Michigan in the Bay City metro area (11 percent of median income to make house payments on a median priced-home), Fayette County, Pennsylvania (11 percent) and Beaver County, Pennsylvania (14 percent), both in the Pittsburgh metro area, Tazewell County, Illinois in the Peoria metro area (14 percent), and Butler County, Ohio in the Cincinnati metro area (14 percent).

“When considering the financial aspects of renting versus owning within the majority of the Ohio markets, the better financial opportunity is in ownership,” Michael Mahon, executive vice president at HER Realtors, covering the Ohio housing markets of Cincinnati, Dayton and Columbus, said in the release. “With many markets in Ohio seeing double-digit appreciation year over year, the cost of homeownership and renting will only go up in future years, while purchasing options offer attractive low interest rates for homeowners to stabilize monthly household expenses, while equally building equity within their household investments.

“As wage growth continues to stagnate, those consumers choosing to rent will see more and more of their net wages being devoted to increased housing costs in the future,” Mahon added.

“As wages continue to lag home price appreciation in Southern California, and a significant percentage of buyers still coming from outside and internationally, the need for rental units will continue to grow,” Mark Hughes, chief operating officer with First Team Real Estate said in the release. Hughes covers the Southern California market, where the fair market rent on a three-bedroom home in Los Angeles County requires 42 percent of the median household income and where house payments on a median priced home require 61 percent of the median household income. “The inequity between service wages and property costs in our region lends itself to a high rental population of folks that may have been priced out of buying. I recommend that renters who are able to purchase do so with a four- to five-year ownership horizon.”

“Buying single family homes as rental properties in Southern California is reserved for those that have a very specific investment strategy,” Chris Pollinger, senior vice president of sales with First Team Real Estate said in the release. He covers the Southern California market, where annual gross yields on rentals range from less than 5 percent in Orange County to nearly 9 percent in the inland San Bernardino County.

Methodology

For this report, RealtyTrac looked at all U.S. counties with a population of 100,000 or more and with sufficient home price and rental rate data. Rental returns were calculated using annual gross rental yields: the 2015 average fair market rent of three-bedroom homes in each county from the U.S. Department of Housing and Urban Development (HUD), annualized, and divided by the median sales price of residential properties in each county.

RealtyTrac also incorporated average weekly wage data and unemployment rates from the Bureau of Labor Statistics and demographic data from the U.S. Census into the report.

Estimated home payment amount was made assuming a 10 percent down payment, an interest rate of 3.7 percent on a 30-year fixed loan, and property tax and insurance totaling 1.39 percent of the total median sales price. An additional 1 percent of total loan amount was assumed for private mortgage insurance.