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The top towns for real estate investors

Millennials are finally moving into their homebuying years, but with precious few starter houses available for sale, a growing number of these buyers are choosing to rent single-family homes. That is a big opportunity for investors overall, especially in markets seeing the greatest rent growth — and some of those markets are surprising.

Large-scale, institutional investors may have cleaned house during the foreclosure crisis, buying distressed homes in markets like Las Vegas, Phoenix and much of Florida, but the bulk of investors today are smaller scale. They are seeing more lucrative opportunities in less-obvious markets.

Looking at house for sale
Joshua Lott | Bloomberg | Getty Images

Knoxville, Tennessee, for example, saw a nearly 20 percent jump in single-family rent rates in the first quarter of this year, compared to a year ago, according to RentRange, a provider of market data and analytics for the single-family rental industry. Its average gross yield for investors was just more than 8 percent. Syracuse, New York, also ranks in RentRange's top 10 list of the most lucrative rental markets, with rent gains of more than 17 percent annually and an average gross yield of nearly 11.27 percent. Milwaukee, New Orleans and Charleston, South Carolina, round out the top 10 list.

"The single-family rental market across the U.S. continues to offer significant opportunity for investors," said Wally Charnoff, CEO of RentRange. "The robust data available today empowers even noninstitutional investors to analyze geographies and select the investment locations throughout the U.S. that are most opportune, as opposed to being limited to their own backyard."

The just-released data actually show a shake-up at the top of the list, with Syracuse and Milwaukee entering the top 10 for the first time. Florida continues to have more markets on the list than any other state, even increasing in the first quarter compared to the end of 2015, due to single-family rent rises in the state.

The share of institutional investors, defined as those who purchase at least 10 properties in one calendar year, continues to shrink, now just 2.6 percent, compared to 3.4 percent a year ago, according to RealtyTrac. That has opened the door for smaller-scale investors to compete.

Real estate agents are reporting growing spring demand, but warn that it is being met with, "persistently tight inventory, making competitive multiple-offer situations commonplace in many markets," according to a monthly report for April released Monday by Credit Suisse analyst Michael Dahl. Of the 40 markets he surveyed, 36 saw higher prices.

Tight supply and higher prices will push ever more potential buyers into rentals. Saving for a down payment is one of the biggest barriers to entry for first-time buyers, and finding a well-priced starter home ranks right up there as well. Until the housing market regains a healthier balance between buyers and seller, rentals will clearly be a lucrative investment.