5 best cities for landlords
If you're thinking about becoming a landlord, understand that not all cities will be good for your business. There are three main criteria you'll want to consider when choosing where to buy your rental home:
1. Price vs. income. Towns with cheaper home prices and more expensive rents offer a greater opportunity to make money. These areas are most often found where the foreclosure crisis hit the hardest--places like Las Vegas and Fresno.
2. The desirability of the area. Schools, culture, jobs and recreation opportunities all attract people from elsewhere, and these people need somewhere to live.
3. Population and economic trends. Good rental income now is nice, but if you're concerned about the future of your investment, you need to think long-term. Is the population growing? Is the economy improving?
HSH.com has chosen standout cities of varying sizes in all U.S. regions. Take a look at some likely locations for your next real estate investment.
Most bang for your buck: Las Vegas, Nev.
Many who doubled down on this city's housing market folded and became renters. Could Vegas's pain be an investor's gain?
"It's not just low rents and vacancy that matter, it's the purchase-price-to-annual-rent ratio, which is called a multiple," says Seth Rabinowitz, executive and lead consultant for management consulting firm Silicon Associates in Beverly Hills, Calif. "Cities with the highest multiples are the worst investments and the lowest multiples are the best investments."
The multiple for Las Vegas is the nation's lowest: a low-ball six, which means that housing prices are only six times annual rents.
Sin City is not the only bargain-priced American town. Other areas for investors seeking low multiples include:
Steepest rent increases: San Jose, Calif.
Rabinowitz recommends that you consider the future demand for your rentals before buying them. "It's not just low rents and vacancy that matter, it's the direction of the rents--are they heading up or down?"
Silicon Valley rents are emphatically heading the right direction--its landlords collected the highest rent hikes in the nation between May 2010 and May 2011--a 9.5 percent jump overall, with some communities' rents skyrocketing by nearly 20 percent! In addition, the vacancy rate in the Silicon Valley is among the lowest in the country.
If California's not your dream, rents are also spiking in these towns:
Highest projected growth: Phoenix, Ariz.
"In addition to low vacancy rates and high rents, population growth is a critical factor to ensure consistent tenancy and long-term rent growth. Because of this we target states in the sunbelt such as Florida and Tennessee," says Ryan Hinricher, senior housing analyst and portfolio manager for Investor Nation, a real estate investment company.
The Wharton School's vaunted population forecast predicts Maricopa County will experience more growth than any metro area in the decade ending in 2020, making Phoenix a hot market for rental property.
In addition, Phoenix enjoys one of the lowest price-to-rent multiples. Property prices run only about seven times annual rents, which makes rentals in Phoenix nearly as cheap as those in Las Vegas.
Hot towns don't exist only in the deserts. You can also find them on both coasts.
Most attractive to job seekers: Minneapolis, Minn.
Why do you want to invest in a town attractive to job seekers? "People often rent when they first move to a new city," explains Todd Huettner of Huettner Capital in Denver, Colo. He recommends targeting locations with younger populations ("younger people rent") and a diverse economy.
Realtor Ryan Halset of Boardwalk Real Estate in Seattle, Wash., agrees. "When assisting investors in evaluating property for rental, one of the primary indicators we evaluate is the proximity to major job centers," he says.
Minneapolis, Minn., delivers on both requirements, according to Apartments.com, and is a top city on its "Best Cities for Recent College Graduates" list. Its rents are increasing and its vacancy rate is as low as they go.
If you prefer warmer climes, don't worry, these other cities also made Apartment.com's list:
Most livable: Raleigh, N.C.
Tops on Business Week's list of "America's Best Cities," Raleigh's low vacancy rate and growing rents are no surprise.
The mainstay of the so-called Research Triangle, Raleigh is home to North Carolina State University, Duke University and the University of North Carolina at Chapel Hill. The city boasts 867 restaurants, 110 bars and 51 museums, and offers a lively social scene, good schools and tons of green space.
Why should you buy a rental in a livable city? Rabinowitz says, "It's always comforting to know that you could move into your investment property one day if necessary or because you choose to."
The most livable locales offer good wages; ample culture; a healthy, educated populace; and lots of recreation. Here are four more highly livable towns:
Today's economic forces are opening up many opportunities for investors in residential real estate. Finding a good income property in any of these areas shouldn't be too difficult.
Vacancy data and rent increase data from Axiometrics
Employment data from the US Bureau of Labor Statistics
Housing price data provided by Standard and Poor's
Best Cities data provided by Bloomberg Business Week
Population projections from University of Pennsylvania's Wharton School
Economic data provided by US Department of Labor Statistics Economy at a Glance
All other sources cited within the slides.