BAM Key Details:
- MyPerfectMortgage.com released a study on the best cities for single-family rental cash flow. Most of the top 101 are in the Midwest, Northeast, and South.
- California has eight of the ten worst cities for single-family rental cash flow.
- The potential for profitability (or the opposite) depends on more than the results of this study.
A new study released by My Perfect Mortgage is shedding light on the best cities for single-family rental cash flow in 2023.
The top 101 cities are mostly in the Midwest, Northeast, and South. Texas and Florida had the most cities on the list.
On the flipside, California had eight out of the 10 worst cities for single-family rental cash flow.
That said, whether or not it makes sense to invest in single-family rental properties in any of these cities depends on more than the results of this study.
The challenge of making a profit as a single-family rental investor
To achieve positive cash flow with a single-family rental, investors must contend with the following challenges:
- One renter covers the mortgage—Single-family rentals have one tenant whose rent is supposed to cover the mortgage and other costs associated with owning the property. If the owner can’t pay the rent, the investor is on the hook for each missed payment. And even if the renter can consistently pay the rent, the amount may not cover all the costs.
- Higher vacancy risk–-With only one renter, the risk of a complete vacancy and zero rental income is at its highest. If your solitary renter leaves, you have to find a new one quickly to replace the lost rental income.
- Higher per-unit property taxes and insurance—Compared to multifamily properties, single-family rentals typically have higher per-unit property taxes and insurance costs.
- Home prices rising faster than rents—With home values appreciating faster than rents, the typical rent for your area may not cover what you’re paying to maintain ownership of the property.
- Home maintenance and repair costs—As the property owner, the cost of maintenance and necessary repairs fall on you, and the total cost can be considerable—as well as unpredictable—putting additional strain on your cash flow.
- Tenant management—Screening tenants and addressing any issues that come up (with the renter or the property) takes time and effort. This can make your job as a property owner/manager extra challenging, especially if you manage multiple properties.
So, why invest in single-family rentals?
Despite the challenges listed above, there are pluses to owning single-family rental properties. Otherwise, why on earth would anyone go to the trouble?
Here are the biggest reasons why they do:
- Single-family homes are the most desirable asset—Especially now with inventory shortages across the U.S., move-in ready and affordable single-family homes are a hot ticket, and demand is riding high. Multifamily properties are typically harder to sell.
- Most people are familiar with single-family homes—either because they’ve lived in one or they know someone who does (or has). That familiarity makes it a more comfortable investment option.
- Investors have a wide selection of single-family homes to choose from—though variety and numbers vary from market to market.
- Single-family homes are easier to finance—compared to multifamily homes and apartment buildings.
- They also tend to appreciate at higher rates—compared to multifamily properties, which means faster-growing equity and an increased potential for long-term wealth building.
- Lower tenant turnover—You may be dependent on one tenant’s rent payment to cover your ownership costs, but that tenant is more likely to stay in that unit longer, compared to a multi-family/apartment renter.
The top ten cities for single-family rental cash flow
The top 101 ranking cities—compared to the remaining 211 cities analyzed—had the following in common:
- High rents
- Low home prices
- Lower-than-average property taxes
- Low vacancy rates.
At number three, for example, Cleveland, Ohio, has a typical monthly rent of $1,273, low property taxes, and affordable home prices, resulting in a positive monthly cash flow of $645.
The top ten cities for single-family rental cash flow:
- Detroit, MI ($722)
- Jackson, MS ($690)
- Cleveland, OH ($645)
- Birmingham, AL ($609)
- Lehigh Acres, FL ($580)
- Baltimore, MD ($578)
- Philadelphia, PA ($475)
- Montgomery, AL ($380)
- Toledo, OH ($375)
- Memphis, TN ($375)
Single-family rental investors have a tough job. It’s much easier to find cash flow in apartment buildings or small multifamily properties. Single-family residences come with high per-unit property taxes and maintenance costs.
Acquisition costs are also through the roof. Home prices are up more than 35% since the second quarter of 2020, while rental income has risen just 17% over the same period. Mortgage rates have more than doubled. These factors are really putting the squeeze on single-family investors looking for yield.
The ten worst cities for single-family rental cash flow
The ten worst cities for turning a profit as a single-family rental investor generally have one or more of the following in common:
- Low rents + (comparatively) higher high home prices
- Higher-than-average property taxes
- Higher vacancy rates
Here are the ten cities with their respective potentials for negative rental cash flow:
- Sunnyvale, CA (-$6,682)
- Bellevue, WA (-$5,423)
- San Mateo, CA (-$5,201)
- Berkeley, CA (-$4,869)
- Santa Clara, CA (-$4,712)
- Cambridge, MA (-$4,693)
- Fremont, CA (-$4,409)
- Irvine, CA ($4,121)
- San Jose, CA (-$4,004)
- Carlsbad, CA (-$3,963)
Calculated cash flow potential isn’t the only factor worth considering
Fun fact: One of the cities on that list—Irvine, California—is also on StorageCafe’s list of the top ten cities for newlyweds.
Ultimately, your potential for turning a profit depends on more than the figures used to calculate the potential cash flow for each of the cities in this study. It’s not always bad to invest in single-family homes in the “worst” cities for rental cash flow. Nor is it always a good bet to invest in one of the “best” cities.
Markets with high cash flow might also have a declining economy, decrepit housing stock, a dwindling population, and shrinking industries. Markets with low cash flow might also have strong economic potential, increasing the long-term potential for building wealth.
When deciding whether to invest in a particular city, consider other factors besides cash flow, including—
- Property appreciation
- Local infrastructure and industry development
- Job growth
Read the full report for more details.
Takeaways for real estate agents
If you work with single-family investors in your area, send them this information to help them make savvy investment decisions. Small investors, in particular, need someone “on the inside” to help them zero in on the best options (and avoid the worst ones).
That may mean leaving your area for a different one—or focusing on a different neighborhood. Find and share any data that can lead them to their next profitable investment.