As an appraiser and investor, I have always stated that a residence, to be truly considered an investment, must rent for at least 1 percent of its market value each month. I can recall in 1990 traveling in a shuttle van in Oahu, Hawaii, with a group of pilots and flight attendants that all had rented condominiums in the Waikiki Beach area. Each of their monthly rents were less than ½ percent of the market value of the property. That market was a house of cards at that time, and time proved that statement as values dropped significantly.
The same house of cards is not true today, however, in many markets across the U.S. Residential rents economically support ownership of residential dwellings as investments. Earlier this month, RealtyTrac released a top-10 list of the best places for investors to acquire dwellings to rent. Their top-10 list was based on the greatest returns in renting single family residences. In addition to their information, I added year-over-year job growth rates.
If you want even more information, these 10 markets are just one-half of the 20 reported in an article by the Wall Street Journal earlier this month. Included in that analysis were calculations of cash flows, mortgage payments and capitalization rates. For all 20 of these markets, capitalization rates were a minimum 8.44 percent — a very attractive yield in today’s investing environment.
This topic also addresses a recurring question at my economic forecasts presentations regarding a concern of what will happen when these dwellings purchased by investors are placed back on the market. In each of these 10 respective markets, monthly rents are greater than 1 percent of the market value of the property. See my blog discussing the megatrend towards younger people being renters rather than owners.
By the way, last Friday (April 19th), the five-year U.S. Treasury closed yielding 72/100ths of 1 percent per year while the 10-year Treasury yield was a massive 1.73 percent. For daily U.S. Treasury yields click here. That makes the minimum 8.44 percent capitalization rate in these residential markets look stellar.