A twist in the phenomenon of young urbanites moving to the suburbs is creating new opportunities for real estate investors. Instead of buying starter houses, these young people are looking to rent.
That's because entry-level homes are scarce and home prices are rising far faster than incomes.
"An increasingly competitive homebuying market bodes well for the single-family rental market relative to both demand and rental rate increases," said Wally Charnoff, CEO of RentRange Data Services.
Two new reports point to the best markets for investors seeking to profit from the single-family rental market. RentRange, a housing market data analytics firm, ranked the top 25 U.S. markets for rental rate increases on single family homes. It measured the gains between the second quarters of 2015 and 2016.
California and Florida had the most markets in the top 25, as these states are seeing the biggest gains in home values and therefore the biggest gains in rental demand. Low vacancy rates in these states are driving rents higher. Cape Coral-Fort Myers, Florida, topped the list with a 26 percent annual rent gain. New Orleans came in second at nearly 21 percent and Seattle third at almost 17 percent.
As for the best rental returns, which is the income return from an investment prior to operating costs, two markets are new to the ranking: Grand Rapids, Michigan, and Pittsburgh ranked first and third, with average gross yields over 15 percent. This means the properties rent for a lot compared with the home's value. Syracuse, New York, rounds out the top three.
In another analysis of rental markets, HomeUnion, an online real estate investment management firm based in Irvine, California, looked at the 31 metropolitan areas with NFL football teams and ranked which single family rental markets will perform best through the end of this year. It looked at employment, rent growth and turnover time, as well as rent-to-income ratio, apartment construction and single-family permits.
"Most of the metros near the top of the list have robust job growth, which is the primary driver of renter household formation. As these markets continue to add new jobs, we expect renter demand to remain healthy through the current expansion cycle," said Steve Hovland, director of research for HomeUnion.
Florida and California also had strong showings in the HomeUnion top 10, with Tampa and Jacksonville, Florida, and San Diego in the top three spots. Dallas and Atlanta followed. At the bottom of the 31 is Milwaukee. That is likely because home prices in Milwaukee are very affordable, making renting less desirable.
"Although home sales are rising, the homeownership rate continues to decline, and first-time buyers are not active enough to reverse that trend," Hovland said. "As the Fed moves closer to normalizing monetary policy, the ability of first-time homebuyers to enter the market will become more difficult. At the same time, new single-family home construction is targeted at a wealthier cohort."