Rising home prices, low inventory and high demand are all working together in California to create seven of the top 10 worst markets to invest in single-family rentals.
A list released by HomeUnion, an online residential real estate investment management firm, analyzes first-year SFR returns, or cap rates, in each market. The cap rate is the relationship between an investment property’s net operating income, rents less expenses, and the market value of the property.
“Through midyear, owners of SFR investment properties benefited from healthy returns in many markets nationwide, but especially in markets located in the Midwest and Southeast,” said Steve Hovland, HomeUnion director of research services.
“SFRs are outperforming many other investment vehicles, including bonds and gold,” Hovland said. “As interest rates remain low after the June Brexit vote placed downward pressure on U.S. treasuries, bonds and other investments will continue to be low yielding assets.”
“Investment real estate has proven to be a successful part of a diversified portfolio, and these markets offer the largest returns,” he said.
Here are the top 10 highest-yielding markets to invest in SFRs:
10. Philadelphia, Pennsylvania with a cap rate of 8%
9. Tampa, Florida with a cap rate of 8%
8. Greenville, South Carolina with a cap rate of 8%
7. Memphis, Tennessee with a cap rate of 8%
6. Cincinnati, Ohio with a cap rate of 8.2%
5. Milwaukee, Wisconsin with a cap rate of 8.4%
4. Pittsburgh, Pennsylvania with a cap rate of 8.4%
3. Birmingham, Alabama with a cap rate of 8.5%
2. Columbia, South Carolina with a cap rate of 9.7%
1. Cleveland, Ohio with a cap rate of 11.1%
"On the other hand, these [below] markets don’t offer such great returns,” Hovland said. “If an investor’s horizon is long term, these coastal markets might be worth exploring, but the ROI won’t be as immediate as it will in the Heartland.”
Here are the top 10 lowest-yielding markets to invest in SFRs:
10. Portland, Oregon with a cap rate of 3.8%
9. Sacramento, California with a cap rate of 3.7%
8. Seattle, Washington with a cap rate of 3.5%
7. New York City, New York with a cap rate of 3.5%
6. Oakland, California with a cap rate of 3.5%
5. San Diego, California with a cap rate of 3.5%
4. Los Angeles, California with a cap rate of 3.1%
3. Orange County, California with a cap rate of 2.7%
2. San Jose, California with a cap rate of 2.6%
1. San Francisco, California with a cap rate of 2.5%
No one envies the plight of the homebuyers in California, who struggle against low inventory, high demand, and rising prices. Due to a recent rise in inventory, however, it could be getting slightly better.
California pending home sales increased in June, the third straight month of annual increases, according to the California Association of Realtors.