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Top Markets for Investing in Rental Housing in 2015

Man with shopping cart that's filled with houses

  |  By Chris Shanahan, CISP®

In San Francisco, where I live, the residential rental market is on fire!

Rental prices for a 1-bedroom apartment shot up 13.5 percent in 2014, ending the year higher than those of New York City. As workers flock to the city, Silicon Valley wealth is combining with a housing shortage to push rents ever higher. Rents are expected to continuing rising this year, as tech companies lure new talent and no quick fix is in sight for the region’s lack of housing.

The San Francisco residential rental market is clearly an exceptional one, and it is certainly not indicative of rental markets throughout the United States. But many clients are asking us what the rental market outlook is for 2015. It is a popular investment strategy for PENSCO's clients to hold rental properties in their self-directed IRAs, which enables them to build their retirement savings with a steady income stream and the potential for long-term appreciation.

Your first instinct may be to focus on “hot” areas known for high rents, like San Francisco. But rapidly rising prices mean there are certain places where buying a single family rental home may no longer makes sense because your rental income might barely offset the high price you paid for the property. That could result in a low-yielding investment as you struggle to earn back your large initial purchase. Instead, it helps to focus on markets where there is a better balance between purchase price and rental demand, helping to ensure a sufficient yield on your investment.

RealtyTrac has put out its residential rental property forecast for the first quarter of this year, and it has found numerous markets where investors can find options with the potential for solid rental returns.

To identify these markets, it studied median sales prices for single-family homes and condos and average fair market rents for three bedroom properties, along with unemployment rates and demographic trends in 516 U.S. counties. It then segmented the data by renter-type and presented the top markets for investors who want to target “homeownership-shy” Millennials, Gen Xers who have migrated from homeowners to renters, or Baby Boomers who are testing out new markets for retirement.

Here are the Top 50 Markets that RealtyTrac identified for investors wishing to target Millennial renters:

RealtyTrac found that Millennial markets with the highest annual rental returns were Baltimore City, Md., (20.99 percent annual gross yield), Richmond City, Va., (20.42 percent) and  Philadelphia County, Pa.

Here are the Top 20 markets for investors who would like to target Gen Xers:

The Gen X-heavy markets with the highest annual rental returns were counties in the Atlanta, Chicago, Jacksonville, Fla., Little Rock, Ark., and Orlando metro areas, according to RealtyTrac.

And here are the best markets to rent to Baby Boomers:

RealtyTrac found that Baby Boomer markets with the highest annual rental returns were counties in the Tampa, Ocala, Fla., East Stroudsburg, Penn., Homosassa Springs and Binghamton, N.Y. metro areas.

For investors who are comfortable choosing properties, buying real estate with your IRA can be a great way to diversify your retirement portfolio and move beyond stocks and bonds. If you are more comfortable buying a house than buying a bond, that can translate into greater confidence in your retirement savings. And at a time when the low interest rate environment has made it challenging to generate returns, RealtyTrac said the average potential return on residential rental properties was 9.04 percent in the first quarter of 2015. By concentrating on finding the sweet spot between the purchase price of a house and the average rent you can charge, it can help maximize the return on your real estate investment.

If you want to learn more about investing in real estate with your IRA, download our guide:

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.