With interest rates near record lows and rising rents, real estate can be a good investment these days — depending on where you buy and how you pay for it.
The ROI on rentals
RealtyTrac has just released a list of the 20 best markets to buy a rental home as an investment. The company analyzed median sales prices and average rental rates for three-bedroom homes nationwide and estimated the average return an individual investor should expect to get in these markets.
“The top 20 markets we selected represent the best chance to buy rental homes that generate good cash flow,” says Daren Blomquist, vice president at RealtyTrac. “But opportunities are available in most markets across the country given the combination of relatively low prices, low interest rates and a strong rental market.”
Beyond Graceland
Whether you are paying cash or financing the purchase of the rental, Memphis is the hottest investment market at the moment, according to the RealtyTrac’s analysis. You can buy a three-bedroom home in Memphis for about $72,605 and rent it for more than $1,000. After expenses such as property taxes, insurance and estimated maintenance repairs, you’d get about $628 per month in cash flow. The return based on how much you pay for the property, or cap rate, would be about 10.38 percent.
If the same home is financed with a 20 percent down payment and a mortgage rate of 4 percent, the investor would still get about $351 per month, which translates into a cap rate of about 5.8 percent.
At least it’s better than a CD
That’s not a bad investment considering how little you would get if you invested in a certificate of deposit or left the money in a savings account. Just remember that buying real estate isn’t a risk-free investment like a CD. And if you are a newbie, be ready to compete with larger and more experienced investors who often pay cash.
Watch for institutional investors
“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 the market,” Blomquist says. “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.”
