As home prices rise, yields on rental properties are declining, but only slightly, according to a new report from RealtyTrac. The data company says slightly lower returns in real estate does not seem to be discouraging investors from buying more properties to add the rental market. And in fact, RealtyTrac says investor activity is on the rise.
RealtyTrac’s parent ATTOM Data Solutions released its third quarter 2016 Single Family Rental Market Report just recently. It shows that SFR rental returns dropped to a 9-year low for homes purchased during the first seven months of the year.
The previous low point was in 2007 when average returns then were 7.3%. During the first part of this year, they dipped from 8.8% last year to 8.7% this year. Rental returns are still 1.4% higher than the 2007 low.
The rate of return is also called the average annual gross rental yield, which is calculated by dividing the amount of rent paid in a year by the median home price.
This is a news story, but I have to jump in here with my personal opinion! An average annual gross rental yield is just a matter of calculating rents vs home prices. It does not include costs, like property tax, insurance, and repairs.
While 8.7% sounds like a nice return, that is actually not the return at all. Once you deduct expenses, which would be at about 40% of the rents, then the return is closer to 5%.
When I was speaking at a single family rental conference in Miami last May, there were a lot of hedge funds present who announced their returns in this manner, using the average annual gross rental yield. It’s amazing that investors would base their decisions on gross income! Who cares? What matters is the bottom line. The real return is what’s left after expenses are paid.
With that said, at Real Wealth Network, we look for properties that rent for 1% of purchase price. This means the average annual gross yield would be closer to 12% as a baseline for our members (much higher than the 8.7% average).
Once you deduct 40% from a 12% return, your net yield is closer to 7%. 40% is just an estimate of costs. It could be higher or lower depending on the taxes and insurance of the area.
Additionally, the condition of the house matters quite a lot too. If you buy a property that has been fully renovated with all big-ticket items replaced, then your maintenance fees would be much lower than a property that has not been renovated and will need many repairs.
Other investors, namely institutional, appear to have very different guidelines and standards than we do at Real Wealth Network. It’s understandable though, considering it’s difficult to find even a 5% yield in the stock market today.
The report shows that investor activity rose 29% from last year. Institutional investors accounted for 2.7% of all single family home sales in the first part of this year, which is up from 2.1% from a year ago. Rising home prices and lower yields don’t seem to be slowing them down.
But investor activity has actually slowed down quite a bit since 2008, when institutional investors accounted for 8.4% of all single family home sales – nearly 3 times today.
Homes then were far below market value so investors were jumping into the game back then. But it was a whole new game for them as most hedge funds were used to apartment buildings that could be easily managed.
With the price of homes hitting rock bottom, and foreclosures turning many homeowners into renters, it was an opportunity that could not be ignored. At first, there were doubts about the management of homes scattered throughout an area, compared to the management of an apartment building. Now it’s a big industry.
ATTOM says one out of every four single family homes in the U.S. is a rental. That’s about 18-million non-owner occupied single family homes.
ATTOM’s report shows that out of the 473 counties it analyzed, there was an increase in institutional investor purchases in 322 of those counties this year. That’s 68% of the counties analyzed!
Counties where there have been big increases include Philadelphia, Cleveland, Orlando and St. Louis.
Seven of the top 10 counties with the largest share of purchases by institutional investors were in Georgia. The other three counties with a high investors share of sales include Jefferson and Montgomery counties in Alabama, and the Killeen-Temple metro area in Texas.
Other popular areas for institutional investors include Memphis, Charlotte, Saint Louis, Jacksonville, El Paso, and Columbia, South Carolina.
As for the places where there are higher rental returns so far this year, ATTOM lists Wayne County, Michigan at 18.5%. That’s in the Detroit metro area.
Our Real Wealth vetting team took a trip out to Detroit last month to see what’s happening there and to find out why investors are jumping back into that market. We were shocked at what we found! Downtown Detroit is being totally revitalized with billions of dollars of real estate and construction activity. Plus, many of the dilapidated foreclosures were torn down.
We found an excellent team in Detroit who finds discounted properties, fixes them to like-new condition and offers on-going properties management. Somehow they are able to keep the price points down for a fully turnkey property to under $80,000, and in some cases as low as $50,000. Gross yields are closer to 16%!
If you’re interested in meeting the team, sign up for our next live event Dec 10th in San Francisco and Dec 11th in Los Angeles. We’ll also be featuring multi-family properties in Chicago.
Find out more at newsforinvestors.com. If you don’t live in CA, you can join us on an upcoming tour to Detroit, or speak with one of our investment counselors.
If you’re not already a member of our Real Wealth Network, sign up for free at our website. You can search for cash-flowing properties right on our website and give one of our investor advisers a call to find out our how this strategy will work for you.
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