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If you’re looking for the best places to buy a rental home, you want a neighborhood that’s tops in two categories:
- Rental returns or gross yield — gross yield is your annual rents as a percentage of your purchase price, so if your $300,000 property rents for $30,000 a year, that’s a gross yield of 10 percent
- Neighborhood quality — affordability, home price appreciation, school scores, crime rates, unemployment rates and property taxes
It’s not that hard to find high yields in bad neighborhoods, but the best places to buy a rental home also have good neighborhood scores.Verify your new rate (Oct 15th, 2018)
Best places to buy a rental home
Buying a rental home can be a good investment. That’s because demand for rentals today is strong. With the right planning, you can buy a property that brings a high rental return.
But you’ll need to do your homework first. After all, not every neighborhood or rental home is a sure thing. Thankfully, new data reveal the best places in which to buy a rental home.
What the research found
ATTOM Data Solutions recently reviewed the potential rental returns for single-family homes bought as rentals in nearly 11,000 local markets. Here’s what they found:
The 10 best neighborhoods with an A rating for rental returns
- Westover (Fayetteville, N.C.)—41.7 percent (gross annual rental yield); $1,380 (average 3-bedroom fair market rent charge)
- Terminal Park (Bradenton, Fla.)—41.5 percent; $1,340
- Southwest York (York, Pa.)—35.8 percent; $1,110
- Griffin Park (New Port Richey, Fla.)—35.8 percent; $1,260
- Portland (Louisville, Ky.)—33.5 percent; $1,120
- Lagrange (Toledo, Ohio)—32.3 percent; $1,050
- Fowl River (Irvington, Ala.)—32.2 percent; $1,050
- Century Village West (Boca Raton, Fla.)—32.2 percent; $1,690
- Breckenridge Hills (St. Louis, Mo.)—30.9 percent; $1,160
- Kings Point (Delray Beach, Fla.)—29.8 percent; $1,860
Daren Blomquist, senior vice president for ATTOM Data Solutions, says this list ranks neighborhoods with the highest rental returns.
The 10 highest-quality neighborhoods
A second ATTOM list ranks markets based on their total neighborhood index score; this score factors in school ratings, crime and unemployment rates, and other metrics. Here’s the list:
- Hunters Hill (Englewood, Colo.)—11.6 percent (gross annual rental yield); $2,630 (average 3-bedroom fair market rent charge)
- Providence (Elgin, Ill.)—11.3 percent; $2,250
- Winds West (Oklahoma City, Okla.)—15.6 percent; $1,750
- Devonshire (Mobile, Ala.)—18.8 percent; $1,220
- Park Central (Orlando, Fla.)—19.1 percent; $1,460
- Baker (Mobile, Ala.)—10.6 percent; $1,300
- East English Village (Detroit, Mich.)—21.2 percent; $1,180
- Section 21 (Port Charlotte, Fla.)—10.3 percent; $1,360
- Eastside (Savannah, Ga.)—12.5 percent; $1,550
- Boca West (Boca Raton, Fla.)—11.0 percent; $1,690
What these findings mean to you
Pondering the purchase of a home you’ll rent out? These lists can be helpful in finding the best places to buy a rental home based on rental returns and neighborhood quality.
“The character of the neighborhood is important,” says Blomquist. “It sheds light on the true market value of the property, the true rental rate that can be charged, and vacancy rates.”
He adds that the biggest rental appreciation is actually seen in neighborhoods with an F grade.
“These areas come with risks,” he says. “These include higher vacancy rates, higher turnover, more delinquencies, and higher maintenance costs. With more risk comes more potential reward. But it’s important to factor in that risk.”
A-rated neighborhoods may not yield quite as much in rent yields as some of the F-rated ones. But Blomquist suggests choosing a higher-rated market, especially for first-time landlords.
“Most newbie passive investors want good returns but not a lot of hassle associated with managing the property. That’s why it’s best to set parameters on both neighborhood quality and potential returns. This helps you focus on the cream of the crop potential neighborhoods to invest in.”
Blomquist says key neighborhood traits to examine include schools, crime, and economic-based factors.
“Good quality schools will attract and keep families in a neighborhood. High crime will tend to result in higher turnover of tenants and more risk of property damage,” he notes.
“Strong home price appreciation indicates strong demand to live in that area. A low unemployment rate indicates more job stability; that translates into longer-term tenants. And the cost of property taxes should be looked at, too.”
Real estate attorney and Florida International University instructor Suzanne Hollander also recommend weighing other factors when choosing the best places to buy a rental home.
Comparable rental rates. “Look closely at rental rates for similar units in that market,” she says.
Price appreciation. “Try to buy in a location where indicators point toward property appreciation. These include if new businesses are coming to the area and if new infrastructure is being planned.”
Your lender’s debt service coverage ratio. “A lender normally requires at least a 1.25 percent debt service coverage ratio from an income property. This means that the rent should return a little extra gravy to cover the amount of the debt. The lender doesn’t want you to be stretched too tight to pay the monthly mortgage in case there’s a vacancy.”
Lease terms. “What will the length of your lease be? Some jurisdictions prevent rentals of less than six months. Or they may heavily tax short-term rentals.”
Outside help. “Would it help to hire a property management company? Can you handle a tenant with a leaky roof or a broken toilet?”
Area laws. “Each state has its own set of landlord-tenant laws. These govern the legal relationship between you and your renters. You need to understand these laws, your obligations, and the eviction process.”
Why buying a rental home may be worth it
Becoming a landlord could be smart in the current real estate climate.
“We are in a housing market more favorable for rentals than it has been historically. Homeownership rates are below the historic average. This means there’s more demand for rentals,” Blomquist says. “Plus, rapidly rising home prices and tight lending standards make it tough for renters to make the jump to owning.”
But to find the best deal, “you may have to go outside of some of the well-known markets. And you may have to be willing to look closer for hidden neighborhood gems,” he adds.
Hollander recommends a particular strategy.
“Consider buying a duplex,” she says. “Then, live in one unit while renting the other one out. Lenders normally offer competitive financing on this type of arrangement. That’s because they believe you’ll take more care of the property if you live within it.”Verify your new rate (Oct 15th, 2018)