Investors with an Appetite for Risk Nab High Rental Yields
Investors with an appetite for risk are pulling in substantial double-digit annual rental yields in some markets around the country, according to data from real estate analyst RealtyTrac.
“In the high-risk, high-yield markets, where unemployment and vacancy rates are higher than national averages, the average return was a whopping 19 percent,” said Daren Blomquist, vice president at RealtyTrac.
The Rocky Mount, N.C., metro area recorded the highest annual gross rental yield at 41.57 percent, followed by the Clayton County, Ga., portion of the Atlanta metro area with 26.88 percent, and Duplin County, N.C., with an annual rental yield of 24.4 percent.
The annual gross rental yield is high in part because of the low selling price of homes in many of the markets on RealtyTrac’s high-risk, high-yield list. To give an example, the median home price for a single-family residence in Rocky Mount, N.C., is just $26,500.
RealtyTrac examined two risk factors in compiling its data: unemployment and vacancy rates. All high-risk markets had an unemployment level significantly above the national average, coming in at 8.7 percent when employment data was gathered in July, compared to a national average at that time of 6.2 percent.
“That is a risk because jobs are what drive real estate in many ways,” Blomquist said, “not just sales, but people moving to that area, people having money to either buy a place or rent a place to live.”
The high-risk markets had an average rental vacancy rate of 11.7 percent, based on 2012 Census Bureau data, significantly higher than the rate for all markets of 7.4 percent. The risk for investors is that at any given time their rental units may be vacant and not generating rental income.
Home prices were volatile in some of the high-risk, high-yield markets as well, with three markets posting double-digit percentage decreases in median home price appreciation from August 2013 to August 2014. Those markets were Clayton County, Ga., (down 14 percent); Duplin, N.C., (down 13 percent) and Edgecombe, N.C. (down 10 percent). A downward play on prices can entice some renters to become homeowners.
To be sure, the risks are important to consider but so is the potential for financial gain. Double-digit annual rental yields have enticed institutional investors into Atlanta, Ga. — a high-risk market — in a big way.
“I think the institutional investors are onto something,” Blomquist said of the Atlanta metro area. “It is a great market for buying rental properties. I think it’s also great if you are an individual investor to get into a market like that as well. Just because the institutional investors are there, it shouldn’t scare you off.”
Two Atlanta metro counties are in the top 10 for rental yields. Clayton County, Ga., is commanding rental yields of 26.88 percent while Spalding County, Ga., is getting yields of 20.35 percent.
Many of the markets on the high-risk, high-yield list are places where significant foreclosures occurred during the housing crisis between 2008 and 2012. Former homeowners, who are now renters, have increased the strong demand for single-family rental residences. Atlanta and several Florida markets are examples of places where significant numbers of homeowners are now renting.
To provide the data, RealtyTrac analyzed median sales prices for residential properties and average fair market rents for three–bedroom properties in 586 U.S. counties with a combined population of 218 million people — 71 percent of the total U.S. population. Rental returns were calculated using annual gross rental yields: the average fair market rent of three-bedroom homes in each county, annualized, and divided by the median sales price of residential properties in the third quarter.
To view some of the homes available in the nation’s high-risk markets, click here.
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