A “hot” market in real estate rental investing doesn’t have anything to do with climate — or does it?
For rental investors, an ideal hot real estate market could be found in areas where the potential rental yield is growing, but home prices are relatively stable or even declining slightly. Those are spots where investors can find deals on homes to add to their portfolios and where they can also be confident that they’ll be able to rent those homes out for a price that accommodates the property’s mortgage, property taxes, and other expenses involved in rentals — plus a little extra for profit.
According to some new research by the data experts at HouseCanary, there seems to be a correlation between weather and hot real estate rental investment markets that’s emerged in the fourth quarter of 2017. Alex Villacorta, Executive Vice President of Analytics at HouseCanary, explained how his team identified those markets and what their analysis means for rental investors in those areas.
The end-of-year slowdown
The fourth quarter of the year (Q4) is usually the slowest for residential real estate sales, which makes it an important time of year for investors. Between the holidays, end-of-year travel and work chaos, and the weather, there are usually fewer sellers choosing to list their homes and fewer serious buyers looking for residential properties — and that means there are potential deals on the table when a seller in need meets a rental investor.
Real estate sales tend to heat up again in the springtime during the second quarter (Q2) of the year, when both buyers and sellers are more active, so it might make the most sense for rental investors to strike while their opportunity is hot (and demand is not).
So when is the best time for a rental investor to buy homes, and where should they be looking? Well, they'll be most likely to find good real estate deals in markets that show a Q4 "dip" but that also have relatively high rental yield so they can reap a return on their rental investment. Those markets are where high rental yields meet lower Q4 prices — a real estate investment "sweet spot," so to speak.
In markets where a typical seasonal market swing coincides with a high rental Effective Gross Yield (EGY) — a measurement of rental yield that accommodates local property taxes in addition to home prices and rent costs in the area — rental investors will likely find strong opportunities to snap up new properties for their portfolios.
However, in markets where the seasonal swing is negligible or flat, and where EGY is steady or declining, there will be fewer of those rental investment opportunities.
“No individual market saw an explicit increase in its growth rate in Q4 versus the typically hot Q2,” explained Villacorta; however, some markets have a smaller "gap" between the spring and winter seasons, seeing a more-or-less steady rate of homebuying through the year.
In other words, there are a handful of markets that seem to have a “year-round homebuying season,” with no significant dip in sales during Q4. Those include San Jose, San Diego, and Los Angeles — which were the three worst markets in the top 50 market statistical areas (MSAs) for Q4 rental investors to find high-return rental properties because there is no "seasonal slowdown" where investors might be able to snap up a great deal, and because EGY is relatively low.
By contrast, the three best markets for Q4 rental investment opportunities were Cleveland, Detroit, and Columbus, Ohio, markets where a seasonal slowdown is definitely present, but that still offer relatively high EGY for investors, giving them an opportunity to "buy low and rent high," so to speak.
What’s weather got to do with it?
HouseCanary found a correlation between parts of the United States with relatively cold winter weather and markets where Effective Gross Yield (EGY) for rental investors remained high while home price growth stabilized or declined.
“Weather plays a very strong factor in the seasonal dip,” Villacorta noted. “You can clearly see a band of activity from central California down through southern Nevada, Arizona, Texas, all the way through Florida.”
Not-so-incidentally, those are also parts of the country that don’t experience extreme temperature drops or other effects of “typical” winter weather. And the biggest seasonal growth slowdowns are clustered in Michigan, Minnesota, Ohio, Pennsylvania, and Connecticut — all markets in temperate zones that will likely experience cooler temperatures along with snow and ice during Q4.