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Compare Your Single-Family Home Rental Numbers to Best in Class

ATTOM Data Solutions just published the numbers for the top 25 zip codes for single family home rentals. There is a lot we can learn from these numbers, not just about the current market conditions, but how well we are doing with our own rentals in our own non-hot markets.

Spoiler: If you buy right, your numbers can be competitive with the best in class. My single-family home rentals in South Jersey are in line with the best in class. It CAN be done.

Click here for the raw data.

Following are highlights:

  1. $1,000 PER MONTH NOT UNUSUAL in top 25: The “Annual Net Cash Flow” from a cash purchase for 20 of the top 25 zip codes are in the range of $10,000 per year to $14,000 per year. Four of the five other zip codes that had higher annual cash flow than $14,000 per year had fair market rents for 3-bedroom rental homes above $2,000. Annual Net Cash Flow was the difference between the rent and the property taxes, insurance, estimated maintenance costs and other property management expenses. Vacancy was not included in this calculation, but vacancy rates are provided in the data table. Obviously, financing was not taken into account (similar to cap rate calculation) and the cash flow was based on a cash purchase.

  2. 10% YIELD NOT UNUSUAL in top 25: 20 of the 25 top zip codes enjoyed a “Gross Rental Yield” of 10%-12% in the 3rd quarter 2017. Gross Rental Yield was calculated by the ratio of the annualized rent for a 3-bedroom rental home in the 3rd quarter 2017 to the median sales price in that zip code. One of the zip codes in Atlanta had an unusually high Gross Rental Yield due to the very low median sales price of only $90,000.

  3. LOW VACANCY NOT UNUSUAL in top 25: Nine of the 25 top zip codes had vacancy rates in the range of 0.0%-0.2%. Wow. None had a vacancy rate of 5% or higher

  4. Top 25 mostly in Southeast and Southwest: Six of the top 25 zip codes for single family homes rentals are in Florida, five are in Phoenix, four are in Atlanta, four are in Texas, two are in Charlotte (NC), two are in Tennessee, one in Los Angeles and one in Seattle (that was the only with a high purchase price of $330,000…the second highest median purchase price was in LA at $230,000). None were in the northeast.

Each of us can compare our numbers against these top 25 zip codes.

One ridiculously obvious arithmetic conclusion from the numbers is that in order to make $1,000 per month from a single-family home rental, the rent must be at least $1,000 higher than the monthly taxes, insurance, maintenance and management costs. That means that the minimum rent must usually be higher than at least $1,400 per month (higher in high property tax areas like South Jersey).

Remember that these numbers are for cash purchases with no mortgage loan.

Another obvious conclusion is that if you want to achieve a yield of 10% or higher, you need to buy low and/or have very high rent. That means that the all-in cost must be low.

For example, in order to enjoy a yield of 10% and make $1,000 per month after all expenses (the table excludes vacancy expense for some unknown reason), your all-in cost must be $120,000 or less that includes purchase price, repairs, buying and holding costs.

So, the question for you then becomes: can you identify neighborhoods in which you can, for example, rent for about $1,400 per month or more and buy & fix for about $120,000 or less? How about rent at $2,000 per month and buy & fix for $160,000 or less?

In most localities, this excludes war zones, that are typically high rental areas and rarely have rents above $1,400 per month. This also excludes many apartment complexes, though to be fair, the analysis was done for single-family home rentals.

Where I live in South Jersey, such neighborhoods and subdivisions do exist that meet the criteria of rents above $1,400 per month and all-in costs under $120,000, even though property taxes are high. However, this requires buying distressed single-family homes at a significant enough discount to allow for extensive repairs.

The last three single-family home rentals I bought had all-in costs in the range of $110K and $130K, titled and funded with all cash from my SD 401k or Roth 401k. These costs included purchase, renovations, buying costs and holding costs until tenants moved in. The rents for all three of these single-family homes rentals are $1,650-$1,795 per month. The Annual Net Cash Flow for these three properties are in the range of $11,000-$13,000 though that accounts for vacancy using my historical numbers. Remember that property taxes in South Jersey are unusually high (about 3.5% of the fair market value every year!). The Gross Rental Yields for these three single-family home rentals are about 16%, but due to exceedingly higher property taxes in New Jersey, the net rental yields (cap rate or cash-on-cash return for cash purchase) are 10%-11.5% after taxes, insurance, vacancy, repairs and admin costs.

I have been very pleased with these numbers. Now that I see the numbers for the top 25 zip codes, I am pleased on a comparative basis as well.

The point is that if you buy right, you can achieve the magnitude of the cash flow numbers and ratios that were just reported for the top 25 zip codes for the 3rd quarter of 2017. These magnitudes of impressive numbers can be achieved in the high property tax rate regions of South Jersey that are definitely not hot markets. This is consistent with my article and its recommendations from a few months ago.

If your numbers are significantly lower than the numbers shown in this article and if you want to improve the efficiency of utilizing your time and money for buying rentals, you should purchase the “Smarter Investing” home study course to learn of best practices in the lectures entitled “How to Choose Houses for Rentals” and “Establish Acceptable Standards of Behavior with Tenants”. The Smarter Investing home study course will teach you how to think strategically to leverage your valuable constrained resources and result in living a happier life.

If you’re smart and perceptive, you are wondering why anyone would buy free and clear rentals instead of financing rentals to achieve a much cash-on-cash return. That’s a great question since financed single-family home rentals often enjoy cash-on-cash returns above 15%.

The answer is that some investors shift from “accumulation mode” to “consolidation mode” and are happy in their later years to manage less tenants for the same amount of absolute dollars instead of manage more tenants for a higher amount of absolute dollars.

That is a topic for another article.

If you want to learn more about answering the question about buying high yield financed rentals versus solid but lower yield free and clear rentals, be sure to watch the 1 hour 11 minute training video “Decision Making, Happiness and Lifestyle Aspects of Real Estate Investing” that is part of the “Smarter Investing” home study course.

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