Landlord alert: Where to buy homes for the best rental returns

Cleveland, Ohio.

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Cleveland, Ohio.

Today’s housing market is more competitive than ever, but investors are still pouring in.

Interest rates remain remarkably low, which makes financing an investment home easier. Low rates also have investors looking for higher yield, and single-family rental homes are an attractive option. Not only do they offer a steady, monthly stream of income, but as home prices continue to rise, the value of the initial investment increases as well.

“We are seeing more investors and new investors,” said Steve Hovland, director of research at HomeUnion, a real estate investment marketplace. “The Fed has really been helping us out. Interest rates are not as high as they have been in past cycles. Commercial real estate is overheated. The bull stock market has been running for a long time, so investors are looking to diversify.”

Like all real estate, investment returns are variable and local. Markets that command the highest rents do not always offer the highest rental returns. HomeUnion, which helps investors obtain and maintain rental properties, ranked the 10 best and ten worst markets for real estate investing in the first quarter of this year, based on first-year returns, or the “capitalization rate“:

The Midwest may not seem like it offers the most attractive markets, but the cost of getting in is very low. Home prices in Cleveland are the lowest in the nation. They are also seeing something of a rebirth, especially in downtown and near-downtown areas. Millennials in search of jobs and lower costs are revitalizing Midwestern cities, and employers are paying attention.

The West Coast certainly saw huge job growth over the last decade, but home prices are so overheated in much of the region that the cost of entry is prohibitive. Even higher rents there, comparatively, don’t offset the initial investment.

Regardless of the area, the supply of entry-level homes — those most attractive to investors — is low. If the home is in good condition, it will attract multiple offers, and the more investors in the area, the more bids there will be.

“It makes it definitely harder. They have to act quickly. They have to be patient and understand that an investment property is not necessarily the only one that’s going to be out there. We lose a lot of bids. The market is hypercompetitive,” said Hovland.

A growing number of investors are looking at new construction now, the most in over a decade according to HomeUnion. The price of entry is higher on new homes, but investors get a property with a builder warranty and a very low probability of major repairs.

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