These single-family rental markets have the lowest—and highest—yields

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Real estate investors, like all investors, chase returns. It’s really that simple.

To find out which single-family housing markets have the highest and lowest yields, ResiClub reached out to the data pros at Parcl Labs, a fast-growing residential real estate analytics firm.

They provided us with their “gross yield” calculation.

“Gross yield is determined by dividing the annual median rental income by the median price of new listings for sale (cost of acquisition). We calculate annual median rental income by multiplying the monthly median price of new rental listings by 12. This metric represents the annual return on investment before any deductions for expenses, taxes, or other associated costs are made. A higher gross yield indicates a greater potential for investor returns,” says Jason Lewris, co-founder of Parcl Labs.

Click here to view an interactive version of the map below

Among the 52 single-family rental markets that Parcl Labs analyzed, these 5 metro areas had the highest “gross yields.”

Cleveland: 8.4%

Buffalo-Cheektowaga: 8.1%

Chicago-Naperville-Elgin: 7.8%

Detroit-Warren-Dearborn: 7.5%

Pittsburgh: 7.4%

Among the 52 single-family rental markets that Parcl Labs analyzed, these 5 metro areas had the lowest “gross yields.”

San Jose-Sunnyvale-Santa Clara: 3.2%

San Francisco-Oakland-Fremont: 4.1%

Los Angeles-Long Beach-Anaheim: 4.2%

Salt Lake City-Murray: 4.3%

San Diego-Chula Vista-Carlsbad: 4.4%

Big picture: Single-family investors are finding fewer cash-flowing opportunities in high-cost Western housing markets and boomtowns like Nashville, Salt Lake City, and Austin. Instead, the best cash-flowing opportunities/returns are found in lower-cost Midwest and Northeast markets. That finding explains why investors are pulling back in housing markets such as San Jose, San Diego, and Los Angeles, as indicated by Parcl Labs' data we shared last week, and buying up more properties than they are selling in housing markets like Indianapolis and Cleveland.

Earlier this month, the National Association of REALTORS (NAR) reached an agreed settlement in the commission lawsuit. The proposed settlement, which is still subject to court approval, involves a payment of $418 million in damages and amendments to several rules. According to NAR, as part of the agreement, “NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS.”

To better understand how this could impact the residential real estate industry heading forward, ResiClub is running a series of opinions from insiders across the industry. (Sharing the commentary doesn't mean ResiClub endorses the commentary).

Today, we’re featuring commentary from Amanda Orson, CEO and founder of Galleon. Galleon is a recently launched platform where homeowners can "name their number." By allowing homeowners to specify the price at which they would be willing to sell their homes, this platform seeks to unlock housing inventory.

Orson’s take 👇

“The first-order effect will be to agent income and the number of agents, in particular those who can be dedicated to the buy side. Brokerages that anticipated this change and already amended their contract have seen a 50-75 bps reduction/ tx. In gross dollars, the impact is likely to be larger to dual agency commission than dedicated buyer’s agency alone. Some agents have already begun to notice “0%” buyers agent listings on the MLS this year. And have so far avoided it by ignoring listings that offer low/no broker compensation. So this settlement change will meaningfully shouldn't be overlooked, and will undermine this from happening: “NAR has agreed to put in place a new MLS rule prohibiting offers of broker compensation on the MLS. This would mean that offers of broker compensation could not be communicated via the MLS, but they could continue to be an option consumers can pursue off-MLS through negotiation and consultation with real estate professionals.”

Orson added that: “The second order impact will be to brokerage margins. With fewer agents and thinner margins there will be consolidation and wind downs among the 106,548 brokerages. (NAR statistic). The third order effects will be where we see the most change over the next few years. The universe of real estate agent ad dollars for ad-dependent aggregators will necessarily shrink as the number of real estate agents, and their relative compensation, does. This will force non-broker aggregators into different business models: 1. Aggregators will offer their own MLS (there are 600-700 multiple listing services in the US. This would fundamentally threaten that business.). One aggregator will be the category king. 2. Charging money to list, or to make your listing premium, which is common in overseas aggregators. 3. Consumer subscription models, ala Scout24 in Germany (who offers "property buyers and renters early access to listings and priority messaging, for a monthly fee.”).”