Despite the challenges, single-family rentals remain a popular investment among Americans, according to MyPerfectMortgage.com, which recently released a study that determined the 101 best cities for single-family rental cash flow in 2023.
The analysis looked at data on home prices, property tax rates, typical rents, vacancy rates, and more to determine where single-family rental investors have the best chance of making a profit.
Potential Monthly Cash Flow in the Top 10 Cities:
- Detroit: $722
- Jackson, MS: $690
- Cleveland: $645
- Birmingham, AL: $609
- Lehigh Acres, FL: $580
- Baltimore: $578
- Philadelphia: $475
- Montgomery, AL: $380
- Toledo, Ohio: $375
- Memphis, TN: $375
Achieving positive cash flow with a single-family rental can be challenging due to several factors:
- One renter covering the mortgage: Unlike multi-family properties or apartment buildings, you rely on a single renter to cover the mortgage payment plus all other costs, which may not always be enough.
- Higher risk of vacancy: With only one renter, the risk of vacancy is higher. If your tenant moves out, you’ll need to find a new one quickly to avoid losing income.
- Higher per-unit property taxes and insurance: Single-family homes typically have higher per-unit property taxes and insurance costs compared to multi-family properties or apartment buildings. These expenses eat into your cash flow.
- Home prices outpacing rents: In many markets, home prices have increased faster than rental rates. This makes mortgage payments higher than potential rents.
- Maintenance and repair costs: As the landlord, the responsibility for maintaining the property and handling any necessary repairs can be heavy. These expenses can be unpredictable and add strain to your cash flow.
- Tenant management: Managing a single-family rental requires time and effort to screen tenants, collect rent, and address any issues that arise. This can be challenging, especially if you own multiple properties spread across a region.
"Single-family rental investors have a tough job," said Tim Lucas, Senior Editor at MyPerfectMortgage.com. "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."
Lucas continued, "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."
Cleveland, Ohio, number three on the list, boasted typical rents of $1,273 per month, low taxes, and a typical home price of just $97,805, yielding monthly cash flow of $645. But not all cities fared as well.
For example, an investor buying a single-family home in Sunnyvale, CA, might lose $6,862 per month thanks to low relative rents, nearly $900-per-month property taxes, and a typical home price close to $2 million.
Not surprisingly, some eight of the 10 worst single-family rental markets were in California. The top cities for investors were concentrated in the Midwest and Southeast.
Overall, the top 101 cities had the most advantageous combination of high rents, low home prices, lower-than-average property taxes, and low vacancy rates.
To read the full report, including more data, charts, and methodology, click here.