IRVINE, CA—Orange County was among several California counties that made RealtyTrac‘s most recent list of the bottom 20 markets for residential rental returns in the country, while Wayne County, MI, led the top 20 markets for rental returns. Good cash-flowing rentals can be found in many US markets, but rapidly appreciating prices are making it more difficult.
RealtyTrac has released an interactive heat map showing rental return for each county. Rental return is the gross rental yield, which the firm calculated by taking the 2014 fair market rent for a three-bedroom home multiplied by 12 months, then divided that 12-month total by the median sales price of residential properties in the county. The results showed that San Francisco, Marin, San Mateo, Santa Cruz, San Luis Obispo and Orange counties were among the bottom 20.
As GlobeSt.com reported last week, 96% of US county residential real estate markets are better off than they were at the height of the foreclosure crisis four years ago, according to a report from RealtyTrac. The firm analyzed four different key categories of housing-market health in 410 US counties to make this determination: home price appreciation, affordability, percentage of bank-owned sales and the unemployment rate. The categories were studied in two-year increments over the past eight years.
GlobeSt.com spoke with Daren Blomquist, VP of RealtyTrac, about the firm’s rental-return findings and what contributes to good and poor rental returns.
GlobeSt.com: What market traits make for good rental returns?
Daren Blomquist: Relative low median home prices between $100,000 and $200,000 (or lower) are the primary trait needed to generate a healthy rental return. Secondly, strong enough rental demand to garner rents of $1,000 to $1,500 a month on three-bedroom homes. The underlying factors that tend to result in such markets are markets that are lagging the recovery a bit, so home prices have not received as quickly as some of the fastest-to-recover markets, and also markets that have been hit hard by foreclosures over the past seven years, resulting in many displaced homeowners who are now renters.
GlobeSt.com: How does geography come into play for rental returns?
Blomquist: The more slow-and-steady appreciating markets of the Midwest tend to be more favorable for consistent returns on rentals. The closer you get to the beach or mountains, the less chance you have of generating a strong rental return—at least on a regular rental; you might have good success in those locales with a vacation rental.
GlobeSt.com: What contributes to poor rental returns?
Blomquist: High median home prices are the main culprit. These tend to be in some of the markets that have been quickest to bounce back from the housing slump with home price appreciation upwards of 40% since hitting bottom in some of these markets.
GlobeSt.com: Are these rankings likely to be fairly consistent over time? Why or why not?
Blomquist: The slow-and-steady markets, mainly in the Midwest, will consistently generate decent rental returns, although the mix of recently bottoming-out prices and displaced homeowners makes those more favorable than usual right now. In some of the high-priced coastal markets that tend to operate in more volatile home price cycles, there will be much better opportunities in the future to buy properties that generate strong rental returns. The key with those markets is to have the stomach to buy rental properties when prices are falling and everyone else is running away from real estate.