July 11, 2011, 11:53 AM ET
The Top Markets for Rental-Home Investors
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.
5. Bakersfield, Calif.
6. Tampa-St. Petersburg
8. Ft. Lauderdale, Fla.
9. Rochester, N.Y.
10. Stockton, Calif.
(Source: HomeVestors/Local Market Monitor)