HVF: Elastic Markets Have Highest Rental Yield

REO-to-rental investors would be best served by looking to markets with elastic housing supply and low house prices, a report from HomeValueForecast.com (HVF) suggested. The June 6 edition of HVF’s “Lessons from the Data” showed that rent-to-value ratios, also called rental yields, tend to be highest in areas with elastic markets, where it is easy to add new housing supply, such as Las Vegas. In areas of the city where the ease of adding new housing keeps home prices low, rental yields in certain neighborhoods climbed to 14 percent or higher. On the other hand, areas with restrained housing markets (like many neighborhoods in the New York metro) see yields lower than 2 percent. Many metros showed mixed results, with areas like the Atlanta metro split almost through the middle in terms of rental yields. In neighborhoods where distressed sales have driven average home prices down, rental yields are higher. North of the city, where distressed sales are not as common, yields tend to be much lower. With house prices down from pre-crash highs, investors may be able to make good returns with rentals as the market recovers. However, investors are urged to look beyond rental yields when searching for rental properties. There are other fundamental drivers of home value appreciation, including vacancy rates, rental rates, months of inventory on the market, price trends, and the amount of distressed sales in the area. Mortgage rates, household income, and employment growth also come into play when looking at long-term drivers of appreciation. “Other factors, including the property’s carrying costs (yearly cost for maintenance, insurance, taxes, etc.) and expected appreciation, should be explored to gain a clearer picture of a property’s income potential,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “However, the rental yield by itself, like the classic earnings-to-price ratio, is not a guarantee for a successful investment. It is necessary to look carefully ‘under the hood’ at other considerations.” By: Tory Barringer