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Bang for the Buck: Where Investing in Rental Homes Is Most Profitable
Robbie Whelan / The Wall Street Journal / April 4, 2013
Where can you make the most money as a rental-housing landlord? Not California, according to a study released today by foreclosure-tracking firm RealtyTrac.
Using a formula that calculates cash purchase capitalization rates—or the annual net cash flow an investor can get from a rental property if it is purchased with cash—RealtyTrac found that Memphis, Tenn.; Saginaw, Mich.; Toledo, Ohio; and Ocala, Fla. were the most profitable places to rent out single-family homes. Each of these markets has an annual cash purchase cap rate of more than 10%.
The calculation goes something like this: The median price for a three-bedroom home in Jacksonville, Fla., is $90,000, according to RealtyTrac’s numbers. The average rent on a three bedroom is $1,198. After setting aside money for taxes, fees and maintenance, the cash flow from renting such a property is $719 per month. Divide a year’s worth of cash flow by the purchase price of the house and you get an annual yield of 9.59%, the eighth-best in the country. That’s 2 to 4 percentage points higher than what most large institutional investors, including Blackstone Group LP and Colony Capital LLC, have projected in the way of returns for their single-family rental portfolios.