This article is by Nick Timiraos of the Wall Street Journal.
Housing markets that have seen the biggest plunges on home values have topped
a new ranking of the best markets for rental-property investors.
Las Vegas, where home prices are down by more than 50% from their market
peak, offers the best returns on homes maintained as rental properties,
according to the report from HomeVestors of America, a property-investment firm,
and Local Market Monitor, a real-estate data firm.
The ranking takes into account the potential home-price appreciation and
gross rents to forecast the performance of rental properties, specifically
single-family homes that are rented out.
Rounding out the top five markets are perennial economic trouble-spots
Detroit and Warren, Mich. along with housing boom-to-bust cities Orlando, Fla.,
and Bakersfield, Calif. Home prices in those markets have fallen below their
2000 levels, creating opportunities for investors to compete with existing
housing stock.
But those markets also carry sizeable risks for investors, including the
prospect of continued home price weakness. Vacancies are also high—rental
vacancies are at 12% in Las Vegas at 19% in Detroit—underscoring the need for
job growth to pick up.
The survey comes amid fresh signs that the rental investor is increasingly
dominating hard-hit markets. Home price declines first began attracting big
investor activity two years ago. Many buyers looked to buy distressed homes at a
discount in foreclosure auctions from banks before fixing them up and reselling
them quickly.
But faced with increased competition from other home flippers, investors have
increasingly turned to buying homes that they can rent out for a few years.
Those sales are far more sensitive to price, requiring deeper discounts to
ensure that the rental income can cover the cost of property upkeep.
Total Las Vegas home sales hit a five-year high in May, according to
DataQuick, a real-estate data firm, with the market fueled by low-priced homes
that can most easily be converted to rentals. Around four in 10 sales went for
less than $100,000, up from three in 10 sales last year.
According to DataQuick, home re-sales activity hit a six-year high for the
month of May in Phoenix, which ranked as the seventh best rental-return market
in the HomeVestors analysis. Like Las Vegas, nearly 40% of sales went for less
than $100,000, and absentee buyers accounted for around 45% of all
purchases.
Other top rental markets, according to the survey, included Tampa, Fla.; Ft.
Lauderdale, Fla.; Rochester, N.Y.; and Stockton, Calif.
Top 10 markets for rental-property investors
1. Las Vegas
2. Detroit, Mich.
3. Warren, Mich.
4. Orlando
5. Bakersfield, Calif.
6. Tampa-St. Petersburg
7. Phoenix
8. Ft. Lauderdale, Fla.
9. Rochester, N.Y.
10. Stockton, Calif.