Day #356: The Best Place to Be a Landlord

I read an article recently that listed the top 10 places to own rental property in the U.S.  Before I get to that list, I wanted to share the results of my own digging on the subject.  The article based its findings on supply and demand.  That is, from a landlord’s perspective, you would want to rent property in markets where supply is low and demand is high.  This would give you greater assurance that your property would be rented regularly and you could command top rent.

With this thinking in mind, the article listed cities with low vacancy rates and high rents.  However, compared to national averages, I wasn’t convinced that I believed their findings.  First, let’s look at supply.  According to figures from the U.S. Census, in the first quarter of 2011, the average vacancy rent for rental property was 9.2%.  That is, nearly one in every ten rental units was unrented in the first quarter of this year.  Vacancies were the lowest in the northeast (6.8%) and the highest in the south (12.5%).  I would venture a guess that vacancy rates have gone down significantly in the South due to the tornados that struck the area in late April.

Based on the vacancy data, I figured that landlords do best in the Northeast — particularly in the pricier areas.  To figure out where that is, I consulted the Department of Housing and Urban Development’s Fair Market Rent document.  This is a huge (54-page) document that spells out what HUD deems are fair rent prices in most major metropolitan areas (and non-metropolitan counties) based on the number of bedrooms in the unit.  In the Northeast (CT, ME, MA, NH, NJ, NY, PA, RI and VT), the highest rent for a one-bedroom unit is in Nassau-Suffolk (Long Island), New York at $1,407 per month.  This is followed closely by Westchester County, NY at $1,342.  In fact, at 3.7%, the vacancy rate in Long Island is much lower than the regional and national averages (6.8% and 9.2% respectively).  Real estate analysts in the area would argue that this is clearly a supply-side story because the apartment stock is quite small (and old) in Long Island and there is little development.

That’s my two-cents worth.  Interestingly, in the article that I read, none of the top 10 rental markets (for landlords) were in the northeast.  In fact, three of the cities had vacancy rates that were higher than the national average (according to U.S. Census figures).  Only one market in the midwest made the list.  This is Columbus, OH where the vacancy rate is 8.6% compared to the regional average of 10.2% and average rents are $690 which is 12% higher than the fair market rent for the area.

In the west, potential landlords are urged to check out Phoenix, Las Vegas and Colorado Springs where vacancy rates are 8.9%, 8.6% and 5.3% respectively.  In the west, however average rents in Phoenix and Las Vegas are lower than the fair market rates.  This may because these are areas where the foreclosure crisis has hit the hardest which may have raised the supply significantly (relative to demand) causing a drop in prices.  In Colorado Spring, however, landlords are getting 17% over fair market rates on average.

The majority of the markets on the list were in the south.  Personally, I would ignore Memphis, Houston and Jacksonville because at 11.2%, 10.2% and 10.2% respectively, their vacancy rates are all above the national average indicating that finding reliable renters may not be as easy as in other markets.  This leaves Atlanta, Oklahoma City and Orlando with vacancy rates of 9.1%, 8.3% and 7.9% respectively.  Further, all three markets boast average rental rates higher than fair market.  However, the difference is negligible in Oklahoma City and Orlando making Atlanta the clear winner in this region with average rents 7% higher than fair market rates.

What does this all mean to you?  If you are in a position to invest in real estate right now, that might not be a bad idea.  Even with low interest rates and good buys to be had in the real estate market, a lack of consumer confidence is keeping many potential buyers on the sidelines and exploring rentals.  If you choose to consider becoming a landlord, be sure to look before you leap.  Understand the vacancy rate history for the area that you are choosing and the rent your unit might command.  Will that rent allow you to meet your expenses and make the venture worth your while?  These are tough but necessary questions to answer!

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