Rising home prices, lower unemployment rates and growing renter population in Benton County makes the area one of the top 16 markets for real estate investment over the past year, according to new report from Irvine, Calif.,-based RealtyTrac.
RealtyTrac analyzed median sales prices for residential property and average fair market rents for three bedroom properties in 370 U.S. counties with a combined population of 186 million people — 60% of the total U.S. population. Rental returns were calculated using annual gross rental yields: the average fair market rent of three-bedroom homes in the county, annualized, and divided by the median sales price of residential properties in the county.
The 370-county analysis found that investors buying U.S. residential rental property in the second quarter of 2014 are getting an average annual return of 9.97%, down from an average annual return of 10.60% a year ago. Benton County investors had an average gross rental yield of 9.69% over the past year. This calculation was based on average median home price of $125,000, up nearly 1% year-over-year and average rents of $1,009 for a three bedroom home.
Daren Blomquist, vice president at RealtyTrac, said the low median price, relative to average rent and steady renter demand is the reason Benton County made the top 25 list for returns. He told The City Wire in a phone interview that Millennials and Baby Boomers were the major catalysts in the robust renter demand.
“We know home ownership numbers are declining but the number of home sales are increasing. This tells us that more new household formation units are choosing to rent. We see a strong rental market for the next five years to 10 years as Millennials are delaying their home purchases and more Baby Boomers downsize to rentals, capitalizing on rising home values,” Blomquist said.
He estimates that Millennials and Baby Boomers together total some 147 million consumers, more than 60% of the U.S. adult population.
Blomquist said much of the housing recovery has been attributed to active investors. Roughly 33% of sales in the U.S. this year have been to investors. He said institutional investors and hedge funds came into the market in mid 2012 gobbling up single family homes by the thousands, which they are now renting.
KNOW YOUR MARKET
Mike Maxwell, an agent and broker with Crye-Leike Real Estate, is helping individual investors that are based in California sell their properties in Northwest Arkansas. Most of them are a taking a loss.
“I have sold seven properties this year for clients in California that purchased at the market high in 2005. One just went under contract for $175,000 and the investor paid $220,000 nearly seven years ago. They are taking a loss, but it’s time for them to sell because of the 7-year interest-only loans they financed the deal with in 2005,” Maxwell said.
He said it’s crucial that individual investors know the market before they strike a deal.
“These California investors based their deals on how their own markets work, steep price increases nearly every year. That’s not the case here, not since 2005 anyway,” Maxwell said.
As a contractor, Maxwell dabbles in local real estate flips and said single family rental homes in the Bentonville school district are in big demand. He said now that prices are starting to rise again, the time is much better for investment than it was in 2005.
“There are several local folks that I am working with who want to jump in the investment market now. Single family homes will rent within 10 days of listing, if they are well maintained and in the Bentonville school district. I am seeing rents as high as $1,400 and $1,500 per month for three bedrooms in stable neighborhoods,” Maxwell said.
He said there is more risk and more reward potential with multifamily units such as duplexes and quadplexes. Duplexes and other multifamily units are tougher to move when the investor wants to sell, although they do provide more cash flow if rented.
He said a $189,000 duplex in Bentonville rents at $800 for each side, which is a little under the 1% rule of thumb used when calculating return on investment. For better cash flow, he said the more units the better. He cited an older quadplex in Rogers that recently sold for $328,000, the positive cash flow is $500 per month.
Multifamily renters tend to turn over each year, so there is more churn which can impact cash flow. Unlike a single family home, if one side of the duplex is empty there is still the other unit making the payment. If the single family unit is vacant, Maxwell said there is no cushion for the investor.