In the real estate world, it’s all about income. Real estate IRA veterans know that if prices get too far ahead of rents, driving gross yields down, bad things happen. You don’t want to get caught up in the next bubble, trying to sell over appreciated real estate to some greater fool. Any time your entire investment thesis for residential real estate relies on future price appreciation without regard to income generated, you are on hazardous footing.
Smart real estate investors, then, try to maximize their yields on investment – that is, the amount of cash that comes in as a percentage of the amount invested.
Of course, individual properties vary widely when it comes to the cost of repairs and renovations needed to get them to work. But we can get a good idea of the health of a rental real estate market just by looking at gross yields – that is, income divided by the total current property value.
From that perspective, the market for real estate IRA investors looks strong indeed. RealtyTrac recently published its 2015 Residential Rental Market Report, aggregating rental income and price data from hundreds of metro markets, nationwide. The report comes on the heels of another report from Zillow.com reporting that rents have been increasing strongly, even outpacing inflation and household incomes. That’s not great news for renters, unfortunately, who have seen their fraction of incomes absorbed by housing costs increase from 25 percent to 30 percent in the space of just a few years. But it’s good news for landlords, who are reporting solid returns on investment in the vast majority of markets, nationwide.
From a gross yield point of view, the top markets for real estate IRA owners are Atlanta/Marietta Georgia, Macon Georgia, Baltimore-Towson, Maryland and Richmond, Virginia, all generating rental incomes of 20 percent of median sales prices in the area or more. Wayne County, Michigan, Philadelphia, Tampa, Richmond, Syracuse, Kansas City, Ocala, Florida, and Rockford, Illinois aren’t far behind, all generating yields of 15 percent of median sales prices or more.
This isn’t a guarantee of success, of course. Individual properties do vary widely, and investors must anticipate all the other expenses that go with owning a residential property besides the mortgage cost or purchase price itself. These will compress yields. But the important thing is that real estate investors do enjoy a substantial margin of safety in most markets nationwide.
Looked at more broadly, RealtyTrac’s data suggest that as long as investors stay clear of the west coast (where yields are 5 percent or less), they should enjoy competitive yields on carefully selected properties in most markets in the country.
Meanwhile, also on the plus side, a recent Zillow panel anticipates that the residential housing market should experience about 19 percent price appreciation through the end of 2015. Combined with a modest amount of leverage – allowable within real estate IRAs – that should constitute a firm foundation for solid returns on investment, as landlords benefit simultaneously from increasing income from rents on one hand and solid price appreciation in most markets on the other.