Return on Rent: In Most Major Markets, Most Homes Can Be Rented Out For A Profit
A large majority of homes in 25 of the 35 biggest U.S. markets could be purchased by a small investor and rented out for a profit.
In a handful of pricey markets on the West Coast and in the Northeast, high purchase prices mean the costs of ownership likely could not be covered by rent revenue.
Mom-and-pop real estate investors looking to buy a home and rent it out for a profit essentially can’t go wrong purchasing a large majority of homes in major markets nationwide – except for a handful of metros largely clustered along the West Coast and Northeast.
Over time, it can be all-too-easy for smaller-scale investors to become cash poor when a property’s monthly expenses regularly exceed its monthly revenue. In these instances, the property owner can wind up trading liquidity – the immediate cash they have on hand to pay for monthly expenses – for gains in home equity only realized over a longer term when a property is sold. One way to safeguard against this is to ensure (to the extent possible) the rental revenue on each investment property will exceed the monthly fixed costs of homeownership – including mortgage payments, property taxes, insurance and any HOA dues.
We crunched the numbers and found the math works out for a vast majority of homes in 25 of the 35 largest markets. In each of these markets, at least 70 percent of homes can be purchased and rented out for more than their fixed monthly expenses, and in 17 of them, 90 percent or more of the homes meet that criteria.
But in nine particularly pricey markets (and almost in another), prices on the majority of properties are high enough that rental payments won’t cover the costs of ownership.
Where and Why Price-Rent Doesn’t Pencil
In San Jose – the heart of Silicon Valley and among the least affordable housing markets in the country – only 5 percent of homes can be rented out for more than the monthly expenses involved in owning them. The situation isn’t much better a few miles north in San Francisco, where only about 1 in 7 homes (14.3 percent) are likely to offer investors a positive net monthly cash flow.
In another seven metro areas, between just 23 percent and 49 percent of homes can be rented out for more than their mortgage: Los Angeles (26 percent), San Diego (30), New York (40), Sacramento (40), Boston (45), Seattle (46), Portland (49). In the nation’s capital region in and around Washington, D.C., a majority of homes (54 percent) can be rented out for more than the cost of ownership, but only barely.
There’s an obvious trait these markets share: With the exception of Denver, they also top the list of the ten most expensive major housing markets in the country. And while rents are also high in these markets, home prices are higher.
Nationwide, the full purchase price of the average home is equivalent to 11 years of the median U.S. rental payment. In the most expensive markets, it would take almost double that length of time – more than 20 years of rental payments – to pay for the price of a home in full. If expected home and rent price appreciation were projected to be the same across all markets, we would expect all markets to have a similar price-to-rent ratio. But that’s not what happens: In more expensive markets, home values are a higher multiple of annual rental payments.
Even within this collection of markets that are generally bad for small investors, there are affordable pockets where home prices are modest enough that rent payments should cover monthly ownership costs. In Seattle, for example, very few homes in the city proper or in the affluent communities on the eastern shore of Lake Washington can be rented for more than the costs of home ownership (the median home value in the city of Seattle is currently about $650,000). But north and south of Seattle, in middle-class suburbs like Lynnwood and Renton (where the average home is worth about $433,000 and $428,000, respectively), the majority of homes can be purchased and rented out for a monthly profit. As you continue moving farther north or south from the city, a higher share of homes can be rented out for a monthly profit.
The other nine, largely bad-for-small-investors markets show strikingly similar patterns. Scroll through and interact with the maps below to find where the highest share of investment-worthy properties can be found in each of these otherwise expensive markets.