Despite the robust activity in the real estate market, profit margins on rentals of three-bedroom, single-family homes have decreased annually across the majority of the United States. The purchase prices that investors have paid are being cited as evidence by analysts. ATTOM Data Solutions, a real estate data company, found that in 72 percent of the counties that they recently tracked, the average gross rental yields before expenses on single-family homes with three bedrooms that were purchased by property owners this year fell. The majority of these decreases in rental yields are less than one percentage point from what was recorded in 2021.
A Decline in Gross Returns
Two-thirds of the markets in which homes typically sell for less than $250,000 are experiencing a decline in gross returns. These markets are primarily located in the Midwest and the South. Even so, in excess of half of those counties continue to report returns that are higher than 8 percent, despite the declines. The decreases are the direct result of property owners paying higher prices for their homes. The median sale price of three-bedroom houses increased by at least 15 percent from 2021 to 2022 in one-half of the counties that were analyzed, whereas the average rent increased by only one-third of those markets during the same time period.
The report looked at rental yields for single-family homes in 212 counties across the United States that had populations of at least 100,000 residents in the first quarter of 2022 and had adequate rental and home price data. Data on rental rates and home prices were obtained from ATTOM’s nationwide property database, as well as publicly recorded sales deed data that was licensed by the company (see full methodology below).
According to the findings of the report, landlords in 72 percent of the counties covered by the report are experiencing a decline in the average gross rental yields before expenses on single-family homes with three bedrooms that they purchased this year. (The most recent yields have been calculated by dividing the annualized gross rent income for 2022 by the median purchase prices for the first quarter of 2022)
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The majority of projected decreases in rental yields in 2021 are less than one percentage point. However, rental yields are decreasing in approximately three-quarters of the markets where the median price of a home was greater than $250,000 in the first quarter of 2022. In addition, the report demonstrates that those markets typically have lower profit margins, with yields that are most of the time lower than 7 percent. In the meantime, gross returns are falling in two-thirds of markets where homes typically sell for less than $250,000. These markets are primarily located in the Midwest and the South. Despite the decreases, returns are still higher than 8 percent in more than half of those counties.
The reason for the decline in yields for single-family rental properties is that the prices that landlords have to pay to buy properties are rising at a rate that is higher than the rents. The median sale price of a home with three bedrooms increased by at least 15 percent from 2021 to 2022 in one-half of the counties that were analyzed, whereas the average rent increased by only one-third of those markets during the same time period.
Low Supply Homes
As a result of a glut of homebuyers continuing to chase a historically low supply of homes for sale, housing prices shot up again in 2017, marking the latest uptick in a boom that has lasted for a decade. In a time when home mortgage rates were below 3 percent and many households were looking to trade congested areas that were most vulnerable to the ongoing Coronavirus pandemic for the wider spaces afforded by single-family homes and yards, buyers continued to flood the market.
Yields on Rentals of Single-Family Homes Top 7 Percent in Approximately Half of the Country
Yields before expenses on three-bedroom, single-family rentals are at least 7 percent this year in 98 counties, which accounts for 46 percent of the total number of counties in the United States for which there is enough data to conduct an analysis in the first quarter of 2022. The counties with the highest returns are as follows: Collier County (Naples), Florida (yield of 16 percent); Atlantic County (Atlantic City), New Jersey; Mercer County (Trenton), New Jersey; Indian River County (Vero Beach), Florida; and Charlotte County, Florida (outside Fort Myers) (10.7 percent).
The counties with the lowest returns on three-bedroom, single-family rentals in 2022 are Santa Clara County (San Jose), California (3.1 percent), San Mateo County (outside San Francisco) (3.2 percent), Williamson County, Tennessee (outside Nashville) (3.9 percent), San Francisco County (San Francisco), California (3.9 percent), and Fayette County (Lexington), Kentucky (3.9 percent). These counties are located in the United States (3.9 percent).
Single-Family Rental Returns Are Highest in Counties With the Lowest Home Prices
In the first three months of 2022, the yields on new single-family homes with three bedrooms and less than $250,000 in median home price are expected to exceed eight percent in approximately six out of every ten counties in the United States. They are as follows: Atlantic County (Atlantic City), New Jersey (yield of 12.2 percent); Wayne County (Detroit), Michigan; Jefferson County (Beaumont), Texas; Hamilton County (Cincinnati), Ohio; and Montgomery County, Alabama (9.7 percent).
In approximately three-quarters of the counties with first-quarter median prices of at least $500,000, yields are lower than six percent. The counties with the lowest population densities are Santa Clara County (San Jose), California (3.1 percent), San Mateo County (outside San Francisco), California (3.2 percent), Williamson County (outside Nashville), Tennessee (3.9 percent), San Francisco County (San Francisco), California (3.9 percent), and Kings County (Brooklyn), New York (3.9 percent) (4 percent).