Zillow research reveals most homes can be rented out for a profit

couple in front of house for rent

The majority of U.S. homes could be purchased and rented out for a profit, according to the latest findings in a Zillow Research study.

According to a June 19 article on the Zillow Research site, small investors in 25 of the 35 biggest U.S. markets could most likely buy a home and rent it out for a profit, with the exception of a handful of high-priced metros along the West Coast and the Northeast.

Zillow did some number crunching to determine where rental revenue on investment property will exceed the monthly fixed costs of homeownership (mortgage payments, property taxes, insurance and HOA dues). According to their findings, the vast majority of homes in 25 of the 35 largest U.S. markets would be suitable for the math to work out in the investor’s favor.

“In each of these markets, at least 70 percent of homes can be purchased and rented out for more than their fixed monthly expenses, and in 17 of them, 9- percent of more of the homes meet that criteria,” writes Jamie Anderson, data scientist at Zillow Research. “But in nine particularly pricey markets (and almost in another), prices on the majority of properties are high enough that rental payments won’t cover the costs of ownership.”

Where Being a Landlord Doesn’t Pay

San Jose, California is the heart of Silicon Valley and one of the least affordable places to call home. Only five percent of homes here can be rented out for more than the monthly expenses involved in owning them, according to Anderson.

Moving a few miles north to San Francisco won’t help much. Here, only about 1 in 7 homes (14.3 percent) are likely to produce a positive net monthly cash flow.

Anderson goes on to point out that in another seven metro areas, between 23 and 49 percent of homes can be rented out for more than their mortgage. These areas include…

  • Los Angeles (26 percent)
  • San Diego (30 percent)
  • New York (40 percent)
  • Sacramento (40 percent)
  • Boston (45 percent)
  • Seattle (46 percent)
  • Portland (49 percent)

What may be somewhat surprising to many, more than half of homes in the nation’s capital of Washington, D.C. (54 percent) can be rented for more than the cost of ownership, but just barely.

So what makes these markets less profitable for investors? According to Anderson, these markets are within the top 10 most expensive major housing markets in the nation. Also, Anderson points out that while rents are high in these markets, home prices are also considerably higher.

“Nationwide, the full purchase price of the average home is equivalent to 11 years of the median U.S. rental payment,” writes Anderson. “In the most expensive markets, it would take almost double that length of time – more than 20 years of rental payments – to pay for the price of a home in full. If expected home and rent price appreciation were projected to be the same across all markets, we would expect all markets to have a similar price-to-rent ratio. But that’s not what happens: In more expensive markets, home values are a higher multiple of annual rental payments.”

Despite these markets being mostly unprofitable for small investors, the research did find that, within these markets are small, affordable “pockets where home prices are modest enough that rent payments should cover monthly ownership costs.”

In Seattle, for example, there are very few homes that can be rented for more than the costs of homeownership within the city proper or along the eastern shore of Lake Washington. However, travel north or south of Seattle’s city limits and you might find better deals in the middle-class suburbs of Lynnwood and Renton. Most homes in these areas can be rented out for a profit, according to the Zillow Research data.

Where Being a Landlord Does Pay

According to the data, Zillow Research found that 25 of the nation’s 35 biggest major metros were conducive to renting out for a profit. In 17 of the 25, more than 90 percent of homes were able to be rented out for a profit.

The five markets that have the highest share of homes that can be rented for a profit include…

  • Indianapolis (98.7 percent)
  • Kansas City (98.5 percent)
  • Cincinnati (98.4 percent)
  • Cleveland (98.2 percent)
  • San Antonio (97.9 percent)

Rounding out the top 10 are Atlanta (97.3%), Detroit (97.1%), Dallas (96.9%), Orlando (96.8%) and Houston (96.6%).

Thinking of Buying Rental Property?

Being a landlord is a big responsibility and it’s not for everyone. But for the right person, owning rental property can be a great way to diversify investments, supplement monthly cash flow and build overall wealth. If you’re considering being a landlord and purchasing an investment home, start by researching investment property financing and second home loans.

Investment Property Loan vs Second Home Loan

With an investment property loan, the borrower can use the anticipated rental income to qualify but the interest rate may be higher, along with the minimum down payment. This option is best suited for those interested in buying a home that will be rented out to long term tenants.

By contrast, a second home loan is essentially the same as a mortgage for a primary residence; however, the property must be occupied by the borrower a certain number of days out of each year. This option is better suited for those interested in buying a vacation rental or short term rental home.

Want to learn more about rental home financing? Let’s talk. Give us a call at 866-544-7013 or complete the form on this page and one of our mortgage professionals will contact you.

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Disappointing Data and Fed Rate Hike

Economic Observer
Disappointing Data and Fed Rate Hike

Downside misses in major reports on inflation and retail sales were favorable for mortgage rates this week. The Fed meeting was viewed as slightly negative. The net effect was a small decline in mortgage rates, which ended at the best levels of the year.

As widely expected, the Federal Reserve raised the federal funds rate on Wednesday afternoon by 25 basis points, bumping it to a range of 1.0% to 1.25%. Investors mostly reacted to new information in the Fed’s statement about the plan to reduce the $4.5 trillion of mortgage-backed securities (MBS) and Treasuries on its balance sheet. If the economy performs in line with the Fed’s forecast, the plan calls for a gradual reduction in the holdings by no longer reinvesting all of the principal payments received. The reductions are expected to begin this year. The amount that will not be reinvested will begin at $10 billion per month (split between Treasuries and MBS roughly in proportion to the Fed’s holdings) and will increase every three months until the total monthly amount not reinvested reaches $50 billion. These figures may have been larger than anticipated by investors, and mortgage rates moved a little higher after the statement was released.

Two major economic reports released on Wednesday morning fell short of expectations, causing mortgage rates to improve. In May, the core Consumer Price Index (CPI), which excludes the volatile food and energy components, was 1.7% higher than a year ago, down from the 1.9% year-over-year rate of increase in April. After holding steady during the second half of 2016, core CPI inflation peaked in January at 2.3% and has declined every month since then. According to the statement, most Fed officials expect that inflation will remain below their 2.0% target in the near term but will stabilize near their target in the medium term.

Excluding the volatile auto component, retail sales in May fell 0.3% from April, which was well below the consensus for an increase of 0.2%. Retail sales are volatile month to month, however, and they still were 4.0% stronger during the first five months of 2017 than they were over the same time period last year.

Week Ahead

Looking ahead, the housing starts data will be released on Friday. The Existing Home Sales report will come out on June 21, followed by New Home Sales on June 23. In addition, Industrial Production, an important indicator of economic growth, will be released on Thursday.


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Jason R. Richardson Photo Jason R. Richardson
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Commentary provided by MBSQuoteline. For live MBS pricing visit www.mbsquoteline.com.

This letter is for information purposes only and is not an advertisement to extend customer credit as defined by Section 12 CFR 1026.2 Regulation Z. Program rates, terms and conditions are subject to change at any time.

Even with higher home prices, most Americans say it’s a good time to buy

house money keys

Even with home prices on the rise, most Americans still see homeownership as a valuable investment and believe now is a good time to buy. Those were the key takeaways from a recent study from Fannie Mae.

According to Fannie Mae’s April National Housing Survey, nearly two-thirds of Americans, or 62%, said it was currently a good time to buy a home. That’s just slightly more than the 60% who felt the same way in March, and 61% who felt that way in April 2016.

The monthly survey polls 1,000 Americans with more than 100 questions, asking the respondents to rate their attitudes on owning and renting a home, price changes in the housing market, and the overall health of the economy.

“[Historically] low mortgage rates are a top reason Americans think it’s a good time to buy,” Sarah Shahdad, a market insights researcher at Fannie Mae told realtor.com. Shahdad also noted that summer is a particularly good time to buy for families with children. “A lot of people are thinking about getting settled before their kids start school,” said Shahdad.

Of the 27% of respondents who felt it was currently a bad time to purchase a home, practically all of them cited high home prices as the key factor in their attitude, said Shahdad. However, the number of April nay-sayers were fewer than March’s 30% and April 2016’s 31%.

“Housing affordability is still a challenge for people,” Shahdad said. “Incomes have not been rising as rapidly as home prices.”

About 53% of survey respondents said they believe home prices will go up in the next 12 months, and 62% said they think mortgage rates are likely to rise over the same time period. More than half of the respondents, 52%, said they anticipate rental prices to increase.

Despite the commonly held belief that home prices will continue to rise, fewer Americans said it was a good time to sell a home, according to the Fannie Mae survey. Those who felt bullish about selling comprised 57% of respondents in April, compared to 60% of respondents in March. However, more respondents felt good about selling in April when compared to the previous year. Fifty-two percent of respondents felt good about selling in April 2016, and 46% felt good about selling in April 2015.

The respondents who felt good about selling cited low mortgage rates, said Shahdad. Improvements in the economy are also likely playing a role, explained realtor.com’s senior economist, Joseph Kirchner.

“People are going to make a long-term financial commitment to purchasing a home because they have the income, they have the job, and they are more confident they are going to be able to keep that job,” said Kirchner. “People’s fears and insecurities [that] they got during the recession are waning.”

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Decline in multifamily construction lowers nationwide housing starts in April

new construction

After a decline in multifamily production, housing starts across the country dropped 2.6 percent in April to a seasonally adjusted annual rate of 1.17 million units, according to recently released data from the U.S. Department of Housing and Urban Development (HUD). Multifamily housing starts fell 9.2 percent to a seasonally adjusted annual rate of 337,000 units while single-family production increased 0.4 percent to 835,000. 

“Despite this minor pull back, builders are optimistic about market conditions and expect more consumer activity in the months ahead,” said Granger MacDonald, chairman of the National Association of Home Builders (NAHB) and a home builder and developer from Kerrville, Texas in a May 16 press release. “However, builders need to be careful to manage expenses as construction costs continue to rise.”

“While we saw a little pause in market growth this month, single-family production is still up 7 percent since the start of 2017,” said NAHB Chief Economist Robert Dietz in the same press release. “The April report falls in line with our forecast for continued, gradual strengthening of the single-family sector throughout the year.”

On a regional level, April saw combined single- and multifamily housing production increase 19.4 percent in the Midwest and 9.1 percent in the West. Starts dropped by 3.4 percent in the South and 29.2 percent in the Northeast.

Overall permit issuance was lower in April to a seasonally adjusted annual rate of 1.23 million units. Multifamily permits inched up 1.4 percent to 440,000 units while single-family permits fell 6.2 percent to 789,000.

Regionally, permits increased overall by 8.7 percent in the West and 1.0 percent in the Midwest. Permits dropped 7.4 percent in the South and 10.3 percent in the Northeast.

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