When venturing into the world of real-estate investing for the first time, it’s natural to think that the best places to invest are those with the highest rents. However, the world of real estate investing isn’t always that simple. Properties in areas with lower rents may be more attractive overall, particularly if you’re looking to make a long-term investment.
Do high rents equal high returns?
Although it’s tempting to assume that high rents equal high returns, it’s not necessarily true. Both California and New York have cities with some of the highest rents in the country, with fair market rents for a two bedroom home standing at $1354 and $1293 a month respectively. However, these same places feature heavily in some of the country’s worst-performing real estate markets.
Calculating gross yield as the cost of the property divided by the annual rental income, a property in New York County only returns 3%, while the figure is 4% for San Francisco County. This is far below the double digit figure most investors tend to aim for.
In contrast, several of the top performing markets are in Georgia. In Georgia the average fair market rent is only $809, but investors can generate yields of up to 20% in some areas. A more detailed look at the data shows that some of the best returns in the state are found in neighborhoods with higher rents, even somewhere like Montgomery County, where a fair market rent is below average at $792 for a three bedroom house and $636 for a two-bedroom home, boasts a yield of 15%.
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Is Detroit or Oklahoma City the better investment?
Wayne County, Michigan, otherwise known as Detroit, tops the chart for best real estate investments. At $843 Detroit rents are higher than the state average of $784, with the possibility of 30% gross yields.
As a result both private and institutional investors are buying up foreclosed properties, anticipating a rise in values and rental income that will provide a steady income stream.
Meanwhile Oklahoma City has one of the most heavily tipped emerging real estate markets. Rents are low across the state, with $689 as a fair market average for a two bedroom property. This rises to $723 in Oklahoma City, where landlords can expect yields around 10%.
House prices are expected to rise by 16% in Oklahoma City over the next three years. This is built on healthy levels on employment across a range of sectors including higher education, tech and the energy industry.
These jobs make the state increasingly attractive to millennials, which is why Oklahoma City ranks as one of the fastest growing metro areas in the country. This trend is also mirrored throughout the state, where the population has steadily increased since the 1960s.
In contrast, Detroit’s population has been in decline for 60 years, and the city is still in the throes of economic regeneration. Investors in the city also report serious problems with crime and vandalism in unoccupied properties. This combination of factors makes Detroit a much riskier proposition than Oklahoma, despite higher yields on paper.