ATTOM Data Solutions, released its Q3 2017 Single Family Rental Market report, identifying the top 25 U.S. ZIP codes for buying single family rental homes based on potential rental yields and cash flow, vacancy rates, home price appreciation, population growth, neighborhood quality, and average property age.
The report analyzed the single-family rental market in 4,854 U.S. ZIP codes and 439 U.S. counties with 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 ATTOM Data Solutions (see full methodology below).
ZIP codes in the top 25 single family rental markets all posted year-over-year increases in rental rates, population and home prices. All 25 ZIP codes also had a vacancy rate of 5 percent or lower for non-owner-occupied homes, and at least 25 percent of all single-family homes were non-owner occupied in these ZIP codes. The ZIP codes all scored a D grade or better in the ATTOM Neighborhood Housing Index, and single family homes in these ZIP codes had an average age of 40 years or less. Lastly, all 25 ZIP codes had potential gross rental yields of 10 percent or higher and potential annual cash flow of $10,000 or more for a cash buyer after property taxes, insurance, maintenance, and other property management costs.
“This top 25 list includes ZIP codes that not only have solid rental returns and positive cash flow opportunities, but are also located in neighborhoods with relatively low vacancy rates and with home price growth and population growth — which should continue to put upward pressure on rental rates,” said Daren Blomquist, senior vice president at ATTOM Data Solutions. “Nearly half of all these ZIP codes — 11 — have been discovered by larger investors, evidenced by an increase in the share of institutional investor purchases compared to a year ago, but the other 14 ZIP codes posted a flat or decreasing institutional investor share compared to a year ago, indicating less competition for single family rentals in those markets.”
Top ZIP Codes Fall in Atlanta, Houston, Central Florida, Dallas
Among the top 25 ZIP codes, those with the highest potential annual gross rental yield (annualized gross rent income divided by median purchase price for single family homes in Q3 2017) were 30238 in the Atlanta metro area (17.7 percent); 77373 in the Houston metro area (13.5 percent); 34472 in the Ocala, Florida metro area (13.1 percent); 76140 in the Dallas-Fort Worth metro area (12.7 percent); and 30228 in the Atlanta metro area (12.6 percent).
“I can buy lots in areas that I can’t sell homes, but I can rent,” said Adam Whitmire, director of acquisitions for Atlanta-based Whitmire Group, explaining his company has shifted from buying existing homes as rentals to primarily buying lots and building new homes as rentals. Whitmire said neighborhoods south of Atlanta with a higher share of renters are good markets for the build-to-rent strategy. “The local economy may not have enough income or enough credit to buy but there is enough income to rent … and I can make a good cash flow.”
Institutional Investor Share Down Nationwide, Up In 37 Percent of Markets
Nationwide institutional investors (entities with 10 or more purchases in a calendar year) accounted for 2.9 percent of all single-family home sales in the third quarter, up from 2.3 percent in the previous quarter but down from 3.1 percent in Q3 2016 and down from a peak of 9.6 percent in Q1 2013.
Counter to the nationwide trend, the institutional investor share of single family home purchases increased from a year ago in 136 of the 439 counties (31 percent) analyzed in the report and in 1,804 of the 4,854 ZIP codes (37 percent) analyzed in the report, including ZIP codes in Dayton, Ohio; Detroit, Michigan; Memphis, Tennessee; Chattanooga, Tennessee; and Chicago, Illinois.
“One of the things we’re excited about is the secondary and tertiary markets that are getting some action,” said Greg Rand, CEO at OwnAmerica, an online platform designed to facilitate the exchange of occupied rental properties. “What was being done in Nashville, they’re doing in Chattanooga instead. Oklahoma City instead of Dallas.”
Highest Average Rental Yields
The average annual gross rental yield in the 4,854 ZIP codes analyzed in the report was 7.7 percent for properties purchased in Q3 2017, down from 8.0 percent in Q3 2016 and 8.5 percent in Q3 2015. The average gross rental yield in those ZIP codes based on Q3 2011 median prices and fair market rents was 10.9 percent.
The highest potential single-family rental returns for properties purchased in Q3 2017 were in the Rust Belt, Mid-Atlantic and Southeast, led by ZIP codes in the Detroit, Philadelphia, Chicago, Baltimore, Toledo and Memphis metro areas ranking among the top 10 for gross annual rental yield.
“We love the SFR rental model and the opportunity that exists in the market, and we’re no longer able to find any good yields in Florida. In order to grow that business, we have to go elsewhere,” said Jamie Nahon, president of Eagle River Homes, which he said has acquired about 150 single family rentals mostly in Florida over the past five years. “We are looking from the Midwest through to some Northeast markets. All the usual suspect markets throughout Pennsylvania, Ohio, into Illinois, maybe Indiana. Places where you can still find good blue-collar houses where the demographics are showing opportunity for rental appreciation and asset appreciation.”
Lowest Average Rental Yields
The lowest potential rental property returns were in coastal markets, led by ZIP codes in the Miami, Los Angeles, Santa Barbara, New York and San Jose metro areas ranking among the bottom 15 for gross annual rental yield among the 4,854 ZIP codes analyzed.
“The single-family rental market in the Seattle area has peaked and rental rates will continue to take a hit,” said Matthew Gardner, chief economist at Windermere Real Estate, covering the Seattle market, where the King County annual gross rental yield for properties purchased in Q3 2017 ranked 25th lowest among the 439 counties analyzed in the report. “This can be attributed to two factors: firstly, 2017 represents the first year that homeowners who lost their homes to foreclosure during the housing market downturn can qualify for another mortgage, and many of them will want to buy again. This will reduce demand for single-family rentals and, obviously, have a negative impact on rent. Another factor is home price growth in the Seattle region which remains very strong. This impacts financial returns for landlords and investment buyers who have to pay increasingly higher prices for homes that they want to use as rentals.”
For this report, ATTOM Data Solutions looked at all U.S. counties with a population of 100,000 or more and with sufficient home price and rental rate data along with ZIP codes with sufficient rental, price and neighborhood data. Rental returns were calculated using annual gross rental yields: the 2016 50th percentile rent estimates for three-bedroom homes in each county and ZIP codes 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 and ZIP code.
Investment property vacancy data, average property age, and share of non-owner-occupied homes were sourced from public record data collected by ATTOM Data Solutions. Neighborhood quality data was based on the ATTOM 2017 Neighborhood Housing Index.
Net cash flow and cash-on-cash returns for financed purchases were calculated assuming a 25 percent down payment with a 30-year fixed rate loan with a 4.625 percent interest rate. Net cash flow for financed purchases is the gross rental income produced by the property minus mortgage payments, property taxes, insurance along with estimated maintenance costs and other property management expenses. The cash-on-cash returns for financed purchases are the net annual cash flow divided by the 25 percent of the median sale price. Net cash flow for cash purchases is the gross rental income produced by the property minus property taxes, insurance along with estimated maintenance costs and other property management expenses. Cash-on-cash returns for cash purchases are the net annual cash flow divided by the median sales price.
For the original report, click here.
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About ATTOM Data Solutions
ATTOM Data Solutions is the curator of the ATTOM Data Warehouse, a multi-sourced national property database that blends property tax, deed, mortgage, foreclosure, environmental risk, natural hazard, health hazards, neighborhood characteristics and other property characteristic data for more than 150 million U.S. residential and commercial properties. The ATTOM Data Warehouse delivers actionable data to businesses, consumers, government agencies, universities, policymakers, and the media in multiple ways, including bulk file licenses, APIs and customized reports.