Best Markets to Buy Single Family Rentals

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As investors continue their interest in buying single-family housing units as rentals, it may not always make sense to acquire housing units in certain markets.

That is why RealtyTrac released a special report unveiling the top 20 markets to purchase single-family rentals by analyzing median price and average rental rates in hundreds of metropolitan areas throughout the country.

This report was calculated by studying which cities have the most potential cash flow and capitalization rates on a 3-bedroom home.

Overall, Memphis was listed as the best market to buy SFRs nationwide. Based on the Irvine, Calif.-based analytic firm’s data, the median sales price for a 3-bedroom housing unit in Memphis is a little more than $72,600, with the average monthly rent for this type of property going for $1,047.

Also, the monthly cash flow—the difference between the income produced by the property in the form of monthly rent and the costs associated with the property, such as mortgage payment, property taxes, insurance, and repairs—for a financed property in Memphis is $351, while an investor that purchases a 3-bedroom property with all cash has a purchase cash flow of $628.

As a result of these figures, the financed cap rate—the percentage that the net annual income produced by the property (monthly cash flow multiplied by 12) represents the original purchase price paid for the property—was 5.80% for a financed property. Meanwhile, the cap rate ended up being 10.38% for investors who buy housing units with cash.

Behind Memphis, the top five markets considered by RealtyTrac as the best places to buy SFRs were Saginaw, Mich., Toledo, Ohio, Ocala, Fla. and Las Vegas.

Other notable cities in the top 10 included Atlanta (No. 7), Jacksonville was eighth and Tampa was tenth.

“Buying single family homes as rentals that actually generate good monthly cash flow has become more difficult over the past year as institutional investors crowded into that market, snapping up tens of thousands of properties in 2012 alone,” said Daren Blomquist, vice president at RealtyTrac. “But there are still opportunities for the more conservative, individual investor to buy rental homes that generate a healthy return on investment—it often just takes persistence and willingness to pass on bad deals.”