While COVID-19 has been detrimental to many American families, it has helped solidify the financial footing of others. With less money being spent on expenses like travel, commuting, or eating out, household savings rates rose to record levels in 2020. For middle- and high-income workers whose jobs were not interrupted by the pandemic, direct payments from the federal government and other economic stimulus funds also meant more money in the bank. And with at least a few more months before the bulk of the U.S. is vaccinated and life begins returning to normal, many of those people have been looking for the best ways to manage that money while waiting out the pandemic.
But COVID-19 has also created much more economic uncertainty, and this will affect what sort of opportunities people pursue with the money they have on hand. For instance, the uncertain environment could lead to lower rates of startup formation as would-be entrepreneurs might be more hesitant to put their savings toward new ventures. The stock market nosedived early in the pandemic before recovering over the course of 2020, but many of the gains were driven by sectors like technology that took on extra significance in the pandemic. It remains to be seen whether those sectors can keep up the level of growth they showed in 2020—and whether the sectors that struggled can bounce back after the threat of COVID-19 has passed.
Meanwhile, simply holding money in savings may be a losing proposition as well. After trillions of dollars in federal stimulus and with demand for many goods and services likely to recover in 2021, some experts are worried that the U.S. will soon see rapid inflation. Given the low interest rates most banks pay, money left in a savings account may end up worth less in an environment of high inflation.
In light of all these factors, many have turned to real estate, sending residential sales skyrocketing in 2020. Rental properties, in particular, are a product with steady demand, even in difficult economic times, and rent payments often cover the bulk of the investor’s costs over the life of the investment. Current mortgage interest rates are low, which means that favorable financing is easier to obtain. And while the residential real estate market is highly competitive for buyers at the moment due to low housing inventory, these conditions are also accelerating an appreciation in home values nationwide, which boosts investors’ long-term return.
As is often the case with real estate, the potential investment opportunity in rentals looks different across different local markets. The key measure to analyze is gross rent yield, or the annualized rent to home price ratio. In general, there is a strong correlation between home prices and rent, which makes sense because one of a landlord’s primary considerations in setting rent is the cost of their home loan payments. But home prices tend to vary more across markets than rents do, so areas with more expensive homes will not generate as favorable of a return as areas with lower priced homes but comparable rent levels.
To identify the states and metros where rentals are the best investment, researchers at Construction Coverage created a composite score based on five key factors. The most important is gross rent yield, which accounts for half of the composite index; higher scores are preferable. Other factors include recent and projected changes in home prices, which indicates the potential long-term returns; the property tax burdens, which can increase costs for owners; and the unemployment rate, which is preferred to be lower, indicating that more potential tenants are working and have the ability to pay rent.
At the state level, this combination of factors highlighted locations in the South and Midwest as best for buying a rental property. Alabama (88.3 out of 100 on the composite score), Oklahoma (85.5), and West Virginia (85.2) led all states. States in these regions tend to have lower median home values, which improves the gross rental yield, and property owners also benefit from lower property tax levels.
The story is much the same at the metro level. Many of the best markets to buy a rental are located in states that our composite score highlighted, and largely for the same reason: lower home values driving the key ingredient in the index, a favorable gross rental yield.
The analysis found that the average gross rental yield in the Shreveport metro area is 10.28%, compared to the national average of 6.26%. Additionally, with median Shreveport home prices at $117,098 and a projected 1-year change in home price of 2.20%, Shreveport is the 5th best midsize metro to buy a rental property. Here is a summary of the data for the Shreveport-Bossier City, LA metro area:
- Composite score: 85.1
- Gross rental yield: 10.28%
- Median home price: $117,098
- Previous 1-year change in home price: 5.26%
- Projected 1-year change in home price: 2.20%
- Average property tax burden: 0.66%
- 2019 unemployment rate: 4.8%
For reference, here are the statistics for the entire United States:
- Composite score: N/A
- Gross rental yield: 6.26%
- Median home price: $262,604
- Previous 1-year change in home price: 8.39%
- Projected 1-year change in home price: 10.50%
- Average property tax burden: 1.03%
- 2019 unemployment rate: 4.5%
For more information, a detailed methodology, and complete results, you can find the original report on Construction Coverage’s website: https://constructioncoverage.com/research/best-cities-to-buy-rental-property-2021