Las Vegas: Best place to buy a home and rent it out
MarketWatch, July 11, 2011, 5:53 p.m. EDT
Best cities to invest in rental homes.
In Las Vegas, investors willing to take a gamble could win big.
By Amy Hoak, MarketWatch
CHICAGO (MarketWatch) — The housing market in Las Vegas may continue to struggle, but for investors, the city is the best place to buy a home and rent it out, a new report revealed on Monday.
HomeVestors of America and Local Market Monitor released its list of best markets to invest in rental property, and Las Vegas came out on top. HomeVestors is a real-estate investment company; Local Market Monitor is a forecaster of real-estate markets. Read more: Why investing in rentals could be a good move.
In Las Vegas, home prices are down 45% since their peak in 2006, according to the news release from the companies. Even better for investors: Many people who work in the casino industry are renters.
That means investors can buy homes at low prices and have a sizable pool of renters from which to choose.
“What we’re looking for is how do you rank, based on the return that you get on the rentals, counterbalanced with the risk and what the price is,” said David Hicks, the co-president of HomeVestors, the company whose slogan has long been, “We buy ugly houses.”
The return could be short-term (the cash flow attained by renting out the property), long-term (the appreciation of the property over time) or both, he said. The risks include future potential home-price drops in the market.
The report looked particularly at single-family home rentals; about 14% of single-family homes in the country are maintained as rental properties, according to the news release. Renting a single-family home can be especially attractive to families who have lost their homes to foreclosure, Hicks said. Once parents have had a backyard for their children to play in, they often don’t want to live in an apartment home, he said.
Traditionally, HomeVestors franchisees buy only about 12% of houses with the intention of fixing them for rental. A greater percentage of homes are bought to renovate and sell right away, Hicks said.
But that’s changing, and more are looking for income properties, he said.
“We see a lot of investors stung by the stock market over the past few years,” and now they’re turning to real estate, Hicks said. “Even counting the past few years, if you take long-term investing in properties and land, the return on that is some of the best investments people have ever had.”
The calculations in the report assumed markets’ three-year home-price forecasts and gross rents to assign them a risk-return premium. Las Vegas had a 4.7% risk-return premium, relative to the national average; San Francisco, which ranks 100 on the list, had a -2.4% risk-return premium, according to the report.
HomeVestors/Local Market Monitor’s top 10 markets for people to invest in rental property are, in order:
Las Vegas
Detroit
Warren, Mich.
Orlando, Fla.
Bakersfield, Calif.
Tampa-St. Petersburg, Fla.
Phoenix
Ft. Lauderdale, Fla.
Rochester, N.Y.
Stockton, Calif.
Characteristics of best rental markets
Many of the markets with the highest ratings are those where prices have plummeted, Ingo Winzer, president of Local Market Monitor, said in the release. These homes can be bought at below-average prices and easily turned into competitive rentals.
Take Tampa, where home prices fell 10% in the past year, mainly because of an over-supply of investment properties during the housing boom. Or Phoenix, where home prices have dropped 40% since 2006.
In these metropolitan areas, job markets also may be beginning to improve, according to the release. That’s promising for long-term returns.
But Detroit, which holds the No. 2 spot on the list, is a little different. Detroit’s unemployment rate is 11% and its population has fallen 4% since 2006, according to the news release.
“You get more return on the properties [up front, in rental cash flow], but less hope for values to grow in the future,” Hicks said.
It’s not clear if jobs will return to the struggling city in the future. It’s high on the list, however, because homes can be bought so cheaply, he said.
