RealtyTrac has released its second quarter 2014 Residential Property Rental Report, which ranks the best markets for buying residential rental properties along with the best markets for renting to baby boomers and the best markets for renting to millennials. For the report, RealtyTrac analyzed median sales prices for residential property and average fair market rents for three bedroom properties in 370 U.S. counties with a combined population of 186 million people—60 percent of the total U.S. population. Rental returns were calculated using annual gross rental yields: The average fair market rent of three-bedroom homes in the county, annualized, and divided by the median sales price of residential properties in the county.
The 370-county analysis found that investors buying U.S. residential rental property in the second quarter of 2014 are getting an average annual return of 9.97 percent, down from an average annual return of 10.60 percent a year ago.
Median home prices in the 370 counties analyzed in the report increased more than seven percent on average in the second quarter of 2014 compared to a year ago, while average fair market rents for three-bedroom homes increased an average of less than one percent.
“Home prices have increased at a faster pace than fair market rents in most counties over the past year, eroding the average returns available to investors buying rental properties,” said Daren Blomquist, vice president at RealtyTrac. “Even so, an average annual return of nearly 10 percent across all the counties we analyzed nationwide is still solid, and investors holding on to rental property for the long term will also typically benefit from home price appreciation on top of the annual returns from rental income."
“Investors leveraging demographic trends will often be able to amplify rental returns and home price appreciation, particularly when it comes to trends in the Baby Boomer and Millennial generations, which combined account for approximately 147 million people—more than 60 percent of the U.S. adult population,” Blomquist said. “Many individuals in both of those demographic groups are in the midst of major life changes that will often involve changes in housing, something that smart real estate investors should take into consideration when deciding when and where to buy or sell.”
Top 25 overall markets for buying rental properties
RealtyTrac factored in unemployment rates along with annual gross rental yields to select the 25 best markets for buying residential property rentals. Counties in the top 25 all had unemployment rates of 4.5 percent or lower in April 2014—well below the national average of 6.3 percent—and had an annual gross rental yield of nine percent or higher.
The three best markets for buying residential property rentals were Anderson County, S.C. in the Anderson metro area (15.33 percent annual gross rental yield); Woodbury County, Ia., in the Sioux City metro area (13.02 percent); and Pickens County, S.C., in the Greenville-Maudline-Easley metro area (13.00 percent).
Other metro areas with counties in the top 25 best markets for buying residential property rentals were Gainesville, Fla., Washington D.C., Columbia, S.C., Pittsburgh, Pa., Columbus, Ohio, Charleston, S.C. and Omaha, Neb.
“We have not had the apartment building development that we really need leading to a decreased supply in available rentals, which is causing rental rates to increase,” said Sheldon Detrick, CEO of Prudential Detrick/Alliance Realty, covering the Oklahoma City and Tulsa, Okla. markets, both of which had counties in the top 25 best markets for buying residential property rentals. “We are also noticing that the new qualified mortgage rules are restricting many first-time homebuyers from being able to qualify, which is adding to the demand for rental properties.”
Top 25 markets for renting to baby boomers
RealtyTrac combined demographic data from the U.S. Census Bureau with the annual gross rental yield data to identify the 25 best markets for renting to the baby boomer population — those born between 1945 and 1964. All 25 counties on the list saw an increase of at least 10 percent in the baby boomer demographic between 2007 (looking at the population aged 43 to 62 at that time) and 2013 (looking at the population aged between 49 and 68 at that time) and had a baby boomer population that represented at least 24 percent of the total population in 2013.
Annual gross rental yields for the top 25 baby boomer rental markets ranged from 5.50 percent in Placer County, Calif., in the Sacramento metro area up to 20.93 percent in Pasco County, Fla., in the Tampa Bay-St. Petersburg metro area. Pasco County was joined by 15 other Florida counties in 12 other Florida metro areas in the top 25.
Other metro areas with counties in the top 25 for renting to baby boomers were Lake Havasu City-Kingman, Ariz., Wilmington, N.C., Daphne-Fairhope-Foley, Ala., Prescott, Ariz., Asheville, N.C., Seaford, Del., Bend, Ore., and Hilton Head, S.C.
Markets in the top 25 for renting to baby boomers with the biggest increase in baby boomer population between 2007 and 2013 were Brunswick County, N.C., in the Wilmington metro area (49.7 percent increase), Charlotte County, Fla., in the Punta Gorda metro area (34.3 percent increase), Beaufort County, S.C., in the Hilton Head Island-Beaufort metro area (33.9 percent increase), Sussex County, Del., in the Seaford metro area (31.0 percent increase), and Citrus County, Fla., in the Homosassa Springs metro area (28 percent increase).