Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

Determining Where To Buy Your Next Rental Property

Written by Than Merrill

With three consecutive years of historical appreciation rates across the country, traditional real estate exit strategies have moved on from the standard rehab and wholesale. Essentially, gains in the last few years have made attractive spreads harder to come by. There is simply not enough breathing room for some investors to feel comfortable. However, just as the housing sector is subjected to cycles, so to are the strategies in which investors implement to generate wealth. Having said that, savvy investors have transitioned from a buying and selling approach to a buying and holding strategy. With rents as high as they are and spreads on rehabs shrinking, it is only natural that investors would consider owning rental property.

With buy-and-hold properties increasing in popularity, it is only natural to want to jump on the bandwagon. However, rents – just like any other exit strategy – are extremely localized. Some markets are better than others for those looking to take advantage of the rental market. Therefore, investors are advised to mind due diligence. Understand each market before you head in. Better yet: find out where the biggest increases in rental rates are likely to occur in the coming year.

According to RealtyTrac; Georgia, Maryland, Virginia, and Michigan may offer some of the highest returns for investors.

“With home ownership rates at their lowest level in 20 years, historically low levels of housing starts and relatively low home prices in many parts of the country, there is still plenty of opportunity in the U.S. housing market for single-family rental investors employing a variety of investing strategies,” says Daren Blomquist, vice president at RealtyTrac. “Whether focusing on markets where home ownership-shy Millennials are migrating, markets where recovering Gen X home owners-turned-renters are prevalent, or markets Baby Boomers are testing for retirement, investors can find good options with solid potential rental returns.”

According to a recent report issued by RealtyTrac, the average potential return on residential properties is 9.04 percent, as of the first part of 2015. At the high end of the spectrum; Clayton County, Atlanta, Bibb County, Baltimore, Richmond and Wayne County represented the best markets for rental returns.

Again, rental markets are extremely localized. What works in one area may not have any bearing in another region. That said; your investing strategy should cater to a particular city. If you are looking to rent to a certain population, you will want to buy properties in specific cities. According to RealtyTrac data, those looking to rent to Millennials are advised to purchase properties in the following cities:

    • Baltimore City, Md.
    • Richmond City, Va.
    • Philadelphia County, Pa.
    • Wyandotte County, Kan.
    • Richmond County, Ga.

These markets are perhaps best suited towards Millennial rentals because they each have a gross annual rental yield of at least 9 percent, where the Millennial population is larger than the national average. Perhaps even more importantly, each of these cities saw their Millennial population grow at least 5 percent between 2007 and 2013. However, these are not the only cities that cater to Millennial renters.

“With the aggressive growth of companies like Amazon, and the arrival of several Silicon Valley newcomers like Facebook, Twitter, Google, and Apple, Seattle is becoming an increasingly popular spot for Millennials,” said OB Jacobi, president of Windermere Real Estate.

If Millennials are not your speed, maybe you should consider renting to those in the Generation X population. RealtyTrac data suggests that the following cities provide the best markets for those looking to rent to GenXers:

The same methodology was used to find Generation X markets that was used to find Millennial markets. In other words, markets witnessing an increase in Generation X populations, and those where the GenXers were greater than the national average made the list.

After compiling data from a total of 516 eligible counties, RealtyTrac found the average fair market rent for a three-bedroom property: $1,255. At that rate, similar rentals increased 2 percent from last year. However, some areas saw an even more significant increase. Denver, for example saw an increase of 24 percent.

Of course, with rents continuing to increase, first-time buyers are looking to exit the rental market. Younger populations, or more specifically those in their 20s and 30s, are looking to escape high rental prices. In some markets, it is actually cheaper to buy than rent. With mortgage rates continuing to hover near historical lows, government efforts to ease loan requirements, and rents still increasing, it is no wonder why more Millennials are drawn to the prospect of homeownership. In a surprising turn of events, first-time buyers actually accounted for 36 percent of all purchases in December. That number is expected to rise in the coming months, especially with the highly anticipated spring season nearly upon us.

Nevertheless, the fact remains: until Millennials can afford to purchase, they will be forced to rent. Those investors that are keen on where to purchase rental properties will have an advantage over the completion – not to mention a wealth building vehicle for the foreseeable future.