It is becoming difficult to pin down a market that could fetch high return on investment due to sluggish economy. Investors wonder whether they should invest in home buying and rental. It has been a lucrative investment option for last few years. But not any more.
Soaring home price is the chief reason that acts as a deterrent. A property that is good for investment is something that offers rental return for long term other than increase of value on asset.
So if an investor wants to buy a home and then rent it, it’s customary for him to have an idea of markets that are good for long term rental return and markets that are not. Nationwide, home price rise was 12.2% in early 2013. Certain areas such as California Riverside have seen an increase of 22% in home prices whereas it is up 17% in Atlanta.
A survey done recently by RealtyTrac shows Michigan, Georgia, Mississippi, Maryland and Kansas are the top five markets for rental return and New York, Colorado, California, Montana and Tennessee are the bottom five markets. The rental return was calculated by multiplying fair market rent for a three bedroom home by 12 and then having it divided by median sales price of the property in the respective county.
The survey points out if value on asset increases rapidly rental return would be poor. A median property sales price and average fair market rental would result in high annual gross yield. In New York for example, median sales price is $887000 and average fair market rent $1852. The annual gross yield would be
1852 x 12 / 887000 x 100 = 2.5
With 2.5% annual gross yield PCT, New York is the worst market for rental return. Using the same formula, rental return for Michigan would be
1124 x 12 / 44900 x 100 = 30
Thus, Michigan is the best market for rental return with 30% annual gross yield PCT.
Atlanta, which is the second best in the category has become a hot destination for real estate investors. Daren Blomquist, VP of RealTrac said, “I think that parts of Atlanta have probably been picked over pretty well by some of the big investors, but certainly the fundamentals are still strong due to the relatively low home prices…”
The big real investors are restricting their home purchases due to price appreciation and low rental. If median prices of the worst rental zones come down, they would invest again.