Canary Rental Index shows where rental investors can secure double-digit returns

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1 Canary Rental Index

2 Canary Rental Index shows where rental investors can secure double-digit returns Where there s smoke, there s fire. So where home prices are rising, there must be great opportunities for rental investors to make money. Right? Not necessarily. Even though the real estate market has seen widespread recovery from the Great Recession, surpassing pre-recession price peaks in some parts of the country, not every county or neighborhood has fully recovered from the housing bubbleand-bust experience in the late 00s so prices are still growing, and growing quickly, in some places. And in those areas that have recovered, using price growth as a jumping-off point to make an investment decision still might not work to an investor s advantage. It seems counterintuitive: After all, if prices are growing at a fast pace in one area, then that means there must be a demand for housing in the area that s outpacing supply. Why wouldn t it be a smart move to jump in with both feet and start offering rental properties to buyers who want to live in the neighborhood but can t find a home to purchase? HouseCanary s quarterly Canary Rental Index (CRI) explores rent return across the country; we examine how rental yield varies from state to state by pinpointing the effective gross yield (EGY) that investors can expect on average in any given state. The EGY calculation includes rental expenses (like the price of the home and state and local tax levies), then determines what kind of return on investment a rental investor can expect given the local fair-market rental value of homes. In our most recent CRI, we see that EGY across the country is hovering at 7.7%. Rental investors can therefore expect a return on their investment of around 7.7%. That s a solid return, but as we can see when we dive into the Mountain West region of the country, returns tend to be higher when prices are relatively low (though not always), and there are ripple effects spreading to nearby markets from hot real estate market centers exploding with buyer interest (like Denver). National EGY 7.7% 1

3 Rocky Mountain high: Colorado Colorado has seen a population explosion in the past couple of years, adding almost 100,000 new residents in 2016 and nearly 80,000 new residents in That influx of people has slowed in 2018, but population growth has still had a significant impact on Denver in particular; Colorado s capital city and the destination for many newcomers to the state. Denver Average Gross Yield Denver Year Over Year Price Change % % % % % % % % % % As a result, the home price growth in the Denver-Aurora-Lakewood metropolitan statistical area has been some of the fastest-paced growth in the country. Colorado as a whole showed an 8% increase in price growth year-over-year, and the results in the capitol MSA vary widely. For example, Franktown and Castle Rock to the south and Westminster to the north show the slowest current growth pace at 5.1%, but the ZIP code spanning the North Capitol Hill/City Park West neighborhoods down through Cherry Creek and to Alamo Placita experienced a whopping 11.8% price growth in the past year. increased rental yield for investors. high price growth doesn t necessarily translate into But that high price growth doesn t necessarily translate into increased rental yield for investors. In the ZIP code, the average gross yield for rental investors is 5.8%. But the ZIP code, which encompasses the Barnum, Westwood, Mar Lee and Harvey Park neighborhoods, show a gross yield more in line with national averages at 7.7%. It s important to remember that gross yield and EGY aren t exactly comparable (EGY includes the expenses of state and local taxes), so even that relatively high-return area of Denver sits below the national average when you factor in property taxes. You ll find the highest gross yield in the Denver MSA in Limon on the Eastern plains almost an hour outside of the city proper which boasts an 11.3% gross yield for rental investors. Closer to the city center, investors would be welladvised to look at outlying suburbs like Thornton to the north. In between Denver and Boulder, Thornton is capitalizing on both hot markets by being somewhere in the middle. Its gross yield is 11.1%, the highest in the central metro area by at least 3 percentage points. Colorado s Front Range is home to several MSAs besides Denver, that said. From south to north, the Front Range encompasses Pueblo, Colorado Springs, Denver, Boulder, Fort Collins, and Greeley, stretching in a chain across the state. 2

4 Are these metros seeing any effects of Denver s red-hot market. And should investors be considering them more closely? Absolutely! In Boulder, for example, price growth has been slower in Longmont and Lyons but the only place in the central city where price growth has been slow is on property owned by the University of Colorado. Otherwise, Boulder has seen a collective price growth of 8.4% in the metro area during the past year, and in Central Boulder and North Boulder, that price growth is up to 9.6%. Those are also some of the worst places for investors to hope for relatively high returns: Central and North Boulder showed average gross yields of 4.4%, compared to a potential 6.8% gross yield in Longmont. Boulder Average Gross Yield Boulder Year Over Year Price Change % % % % % % % % % % The best MSA to invest on the Front Range? Believe it or not, Pueblo, Colorado, has an average EGY of 15.5% one of the highest yields in the country and more than double the 7.7% national average. This is one area where high price growth hasn t seemed to hurt rental yields very much: Pueblo s price growth over the past year ranges from 7.8% in its ZIP code, which straddles I-25 from Pueblo s Mesa Junction neighborhood all the way down to Colorado City, up to 13.6% in the area, which encompasses neighborhoods from Aberdeen to South Pointe. But despite that robust price growth, the lowest average gross yield in Pueblo is a respectable 12.8% in Stone City and Pueblo West, up to 16.8% in Avondale to the east of the city. Pueblo Average Gross Yield Pueblo Year Over Year Price Change % % % % % % % % % % 3

5 Salt Lake Cities Denver s been the focus of numerous headlines about the real estate market, but another growing MSA in the Mountain West is Salt Lake City. Like Denver, Salt Lake City is also surrounded by other Utah MSAs (Ogden-Clearfield to the north and Provo-Orem to the south) that seem to be experiencing some spillover from their capital neighbor. Utah s overall average EGY is 5.4% 2 percentage points and change below the national average. In Salt Lake City, the EGY is 5.9%, and prices have increased in the past year by almost 10 percentage points (9.7%). Salt Lake City Average Gross Yield Salt Lake City Year over Year Price Change % % % % % % % % % % Grantsville, to the west of Salt Lake City, has shown the slowest price growth (7.1%) over the past year, and in terms of places to park a rental investment it s a little above average, with a 7.2% gross yield. The Capitol Hill, North Bonneville, Arlington Hills, and Greater Avenues neighborhoods (which nudge up against some of the city s parkland and open-space areas) showed the highest price growth over the past year (14.4%), but average gross yield in those neighborhoods is an anemic 4.9%. Ogden Average Gross Yield Ogden Year Over Year Price Change % % % % % % % % % % 4

6 Ogden-Clearfield to the north shows a lower overall EGY than Salt Lake City (5.0%) and comparable price growth, from 7.0% year-over-year price growth in downtown Ogden out to Taylor and Westhaven to 15.5% in Willard skirting the reservoir. But even though price growth has been strong in the MSA, there are better opportunities to find higher rental yield than in Salt Lake City. Garland, an hour and fifteen minutes north of Salt Lake City, boasts an average gross yield of 9.6%, and even in fast-growing Willard, gross yield is a respectable 8.5%. The situation isn t quite as rosy for investors in Provo-Orem to the south of Salt Lake City. In Lehi within easy commuting distance to the city prices expanded 12.0% year-over-year, but gross yield is 6.8%. In Nephi, an hour and fifteen minutes south of Salt Lake City, the average gross yield is 7.2%. That s the highest gross yield in the MSA, but it s still not excellent compared to Ogden-Clearfield s 9.6% yield in Garland. Provo Average Gross Yield Provo Year Over Year Price Change % % % % % % % % % % Big cities surrounded by nature Denver and Salt Lake City are two of the hottest markets in the Mountain West, both surrounded by MSAs capturing their spillover. But what about markets like Boise, Idaho, or Billings, Montana, where there aren t any nearby MSAs for commuters to tap, and where the nearest big city could be more than a hundred miles away? Boise is still seeing robust price growth. The average state growth in home price was 4% year-over-year, but in Boise, the lowest-growth area is nearby Wilder, Idaho, where the year-over-year price change was 5.9 percentage points. In Nampa, Idaho, that growth was 10.4% in fact, there are 10 ZIP codes in the Boise MSA that showed 10% price growth or higher over the past year. As far as rental yield, Boise doesn t have any ZIPs or neighborhoods that are exhibiting double-digit gross yield for investors. The lowest gross yield in the MSA spans from downtown north to Veterans Park and then east to Harrison Boulevard, North End, Highlands, and Sherman Hollow; that ZIP shows a 5.5% average gross yield, compared to the relatively high yield south of Boise in Grand View, Idaho, where gross yield is 4 percentage points higher at 9.5%. 5

7 Boise Average Gross Yield Boise Year Over Year Price Change % % % % % % % % % 5.9% Montana exhibits the highest EGY in the Mountain West region at 11.0%. With 4% average price growth across the state, it may seem very attractive to investors looking for rental homes, but in Billings, the biggest city in Montana, the best gross yield you ll find is 10.6% in the Red Lodge ZIP code (which is adjacent to Yellowstone National Park and the Absaroka-Beartooth Wilderness area). The gross yield in west Billings (the ZIP) is a relatively low (for Montana) 7%. Overall, price growth in the Billings area is much lower than other MSAs in the Mountain West. Price growth in Joliet, Montana, was 3% over the past year the highest in the region while price growth in Huntley, Montana, barely kept up with inflation at a mere 1.7%. Given the lower price growth and higher rental yield in Montana, it s a good state in the Mountain West region to keep tabs on as an investor. Billings Average Gross Yield Billings Year Over Year Price Change % % % % 7.0% % % % % 1.7% 6

8 Low prices + demand for rental =? Although there is sometimes a link between slower price growth and higher rental yield and Montana is a prime example it s not always so clear-cut. Remember Willard, Utah, with its 15.5% year-over-year price growth and relatively robust 8.5% gross yield? Recovery from the housing crisis has happened at a different pace for each state and even each metro area within each state. Prices are growing more quickly in some places than in others, and in MSAs where recovery has been most robust (and even in surrounding metros), price growth is probably not the best metric to use for rental investors seeking a new property to buy and hold. Although the EGY for the country as a whole was 7.7% in Q1 2018, the variance in the Mountain West shows the danger of relying on an average there are metros with much better (and much worse) EGY and gross yield than the 7.7% national average. MSA Name Yield QoQ Kansas City, MO-KS 14.1% 2.5% Pittsburgh, PA 14.0% 1.7% Providence-Warwick, RI-MA 5.8% 0.1% New York-Newark-Jersey City, NY-NJ-PA 5.0% 0.1% Virginia Beach-Norfolk-Newport News, VA-NC 7.7% -0.1% Chicago-Naperville-Elgin, IL-IN-WI 9.1% -0.1% Milwaukee-Waukesha-West Allis, WI 8.8% -0.2% Boston-Cambridge-Newton, MA-NH 5.1% -0.3% Washington-Arlington-Alexandria, DC-VA-MD-WV 5.4% -0.3% Seattle-Tacoma-Bellevue, WA 4.7% -0.3% Phoenix-Mesa-Scottsdale, AZ 6.1% -0.3% Sacramento--Roseville--Arden-Arcade, CA 4.8% -0.3% Portland-Vancouver-Hillsboro, OR-WA 5.3% -0.3% Memphis, TN-MS-AR 13.3% -0.4% Los Angeles-Long Beach-Anaheim, CA 4.1% -0.4% Cincinnati, OH-KY-IN 9.6% -0.4% Minneapolis-St. Paul-Bloomington, MN-WI 6.9% -0.4% Richmond, VA 7.8% -0.4% Denver-Aurora-Lakewood, CO 6.1% -0.5% St. Louis, MO-IL 10.7% -0.5% Charlotte-Concord-Gastonia, NC-SC 8.6% -0.5% Baltimore-Columbia-Towson, MD 8.4% -0.5% Raleigh, NC 7.1% -0.5% Philadelphia-Camden-Wilmington, PA-NJ-DE-MD 8.5% -0.5% San Diego-Carlsbad, CA 4.2% -0.6% MSA Name Yield QoQ San Jose-Sunnyvale-Santa Clara, CA 2.8% -0.7% Austin-Round Rock, TX 5.6% -0.7% Jacksonville, FL 8.1% -0.8% New Orleans-Metairie, LA 9.3% -0.8% Riverside-San Bernardino-Ontario, CA 5.3% -0.8% Birmingham-Hoover, AL 12.3% -0.8% San Francisco-Oakland-Hayward, CA 3.5% -0.8% Louisville/Jefferson County, KY-IN 9.1% -0.9% Nashville-Davidson--Murfreesboro--Franklin, TN 7.3% -0.9% San Antonio-New Braunfels, TX 7.6% -1.0% Orlando-Kissimmee-Sanford, FL 6.8% -1.0% Oklahoma City, OK 10.1% -1.1% Columbus, OH 9.8% -1.1% Houston-The Woodlands-Sugar Land, TX 8.4% -1.2% Indianapolis-Carmel-Anderson, IN 10.9% -1.2% Las Vegas-Henderson-Paradise, NV 4.6% -1.3% Tampa-St. Petersburg-Clearwater, FL 7.7% -1.3% Dallas-Fort Worth-Arlington, TX 7.3% -1.4% Buffalo-Cheektowaga-Niagara Falls, NY 11.9% -1.4% Hartford-West Hartford-East Hartford, CT 5.9% -1.5% Miami-Fort Lauderdale-West Palm Beach, FL 6.3% -1.5% Atlanta-Sandy Springs-Roswell, GA 7.8% -1.6% Detroit-Warren-Dearborn, MI 9.1% -1.7% Cleveland-Elyria, OH 11.0% -2.0% Rochester, NY 10.7% -3.2% To determine the best place to park your rental investment dollars, it makes sense to look at year-over-year and historic price growth, gross yield, and EGY, and then target the ZIP codes and neighborhoods that are most likely to generate the highest return for your investment. The CRI provides a bird s-eye view; to get deeper neighborhood-level and blocklevel data that can inform your investment decision, contact HouseCanary and learn more about our rich real estate datasets and cutting-edge data science, which help investors at all levels determine their next move. 7