Saturday, April 5, 2014

Get Out of the Market and into These Areas

As a long-time observer of real estate trends, I am satisfied with the sluggish growth I see in today’s market. Don’t get me wrong, I am working hard for my clients who want to sell their properties, and I am searching properties for clients who are planning to buy now or in the near future. But for the health of the market overall, I am seeing a healthier adolescent real estate market than we have had for some time.

I always smile at newspaper headlines that state that rental rates are getting too high, and these high rates will certainly drive potential tenants away. Naturally high rental rates are always onerous, but come on, if the rates were too high, the properties would not rent—and investors do not want empty buildings or apartments. So really what the newspapers are saying is, “the rental market is getting stronger than some can afford”. In truth, that will always be the case, no matter the price. I must say I could not afford to buy or even rent a place in New York City or Hong Kong—so I choose not to live there. It’s fair to say that rental rates and sales prices affect us all.

In many areas housing prices are rising and that has some investors thinking about if and where they should buy their next rental. But making an income on rental properties means the investment must offer not only good appreciation on the property but also a steady and lucrative rental income for the long haul. Without the rental return, the property can quickly become a major drain on the bank account.

Because the market was so slow for so long, many sellers became "accidental landlords" after realizing that they couldn’t sell their home for the price they wanted. Instead, they kept the home and became landlords. Some liked the rental business and decided to make this a second stream of income. The number of homes purchased with a mortgage loan has been dropping steadily since May. Instead, cash is king for many reasons. As mortgage rates began creeping up, investors and some homebuyers started opting to purchase with all cash. And that trend may continue as new stricter loan requirements are implemented and enforced.

The top rental return markets start off with Detroit ranked number one for rental returns thanks to its low-priced homes. A median home in Detroit is slightly under $45,000, giving investors a 30 percent annual gross yield, according to the report. Compare that to the national median home price of $189,000 and you can see why investors are heading to Detroit.

To determine the rental returns, statisticians used the 2014 fair market (monthly) rent for a three-bedroom home and multiplied that figure by 12 (months) and then divided that 12-month total by the median sales price of residential properties in the county. Positive cash-flow properties help investors build long-term wealth. And good cash-flowing rentals can be found in many U.S. markets, but rapidly appreciating home prices are making it more difficult.

Florida has three of the top 20 counties nationwide with the best rental returns:

 · Putnam County, Florida, - Palatka
 · Hernando County, Florida - Tampa, St Petersburg, Clearwater
 · Highlands County, Florida – Sebring

Investors would do well to review the sales and rental prices in these areas. Usually the least expensive properties in the most run down areas will over 10 to 20 years become the “newest, hottest” areas. Back in the 1980’s and 1990’s, run-down areas in Chicago or near New York City (think Hoboken, NJ) or around Boston and New Bedford, MA could be had for minimal amounts of money—but today these areas have become gentrified, and are now very appealing, and very expensive.

So I’ll say it again, so long as there are buyers or renters, no price is too high. But when the price becomes--in fact--too high, then there will be no buyers or renters. Dane Hahn is a real estate professional serving Sarasota and Charlotte Counties. He can be reached at 941-681-0312.

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