Investor profits are declining on single-family rentals. According to new data from ATTOM, the average rental yield is just 7.7% in 2021 -- down from 8.4% in 2020.
The problem in many markets is rising home prices, which have jumped significantly since the pandemic began.
As ATTOM Chief Product Officer Todd Teta put it:
The single-family home rental business is less profitable this year compared to last year across most of the country, with yields on the average deals decreasing. That’s happening as home prices on properties that investors are paying for -- in most areas -- are rising considerably faster than rents, which is cutting into their profit margins.
Fortunately, the trend isn’t sweeping. Not all counties have seen a decrease in rental yields. In fact, in some, profits actually jumped considerably.
Are you planning to invest in rental properties this year? Let’s take a look at some of these more profitable pockets now.
The best markets for SFRs
If you want to max out your rental yields, then little Schuykill County, Pennsylvania, home to Pottsville, is your best bet. SFRs in the area are showing 26% returns this year.
Other small- and mid-sized counties with top returns include Bibb County, Georgia (18.1%); Baltimore County, Maryland (16.2%); La Salle County, Illinois (14.1%); and Chautauqua County, N.Y. (13.7%).
If smaller markets aren’t your thing, there are a handful of large metros with decent-sized yields as well, including:
It’s not too surprising that Cuyahoga, home to Cleveland, tops the list of major metros. The area has seen rents climb nearly 5% in just the last year. Throw in that home prices are forcing many households to stay in the rental game (they’re up 13% annually), and the foundation for strong rental returns is set.
The worst places for SFRs
At the bottom of the barrel is Williamson County, Tennessee, where Nashville is located. Rental returns are a mere 3.7% in the area, making it the least profitable spot for SFR investors in the country.
It also has a pretty high rental vacancy rate, according to Housing Tides data. A whopping 8.5% of units are currently vacant, well above the national vacancy rate of 6.5%.
Santa Clara County, California, home to San Jose, along with San Mateo and San Francisco counties (both in the Bay Area) took the No. 2, 3, and 4 spots at the bottom. This isn't too surprising, either. The region has an 8.5% vacancy rate, and in San Fran, rents have dropped a whopping 8.1% over the year.
The bottom line
Choosing your location wisely has never been more important -- especially if you invest in single-family rental properties. Before buying that next investment, make sure to study up on the local market as well as forecasts for the area. Our deep-dive market reports can help you make the best decision for your portfolio.