Really high rental yields for cheaper housing - what's the catch?

36 Replies

I'm looking at some data to identify the best areas to buy and hold. I'm less familiar with buying in some of these areas - so I thought I'd reach out. These zipcodes offer really high rental yields even accounting for the vacancy stats. I'm wondering what's the catch?

Zip City State Median Home Price ($) Average Rent ($) Gross rental yied 2013 Rental vacancy rate by Zip (%)
13165 Town of Waterloo NY 79,100 1,365 20.7% 6.7
13411 Pittsfield NY 76,400 1,424 22.4% 7.4
14125 Town of Oakfield NY 87,500 1,400 19.2% 4
14437 Dansville NY 81,300 1,416 20.9% 3.7
14445 East Rochester NY 95,800 1,289 16.1% 1.4
14510 Mount Morris NY 72,600 1,399 23.1% 4.1
14517 Town of Nunda NY 78,100 1,441 22.1% 7.5
14605 Rochester NY 40,900 828 24.3% 3.6
14608 Rochester NY 51,100 866 20.3% 6.3
14611 Rochester NY 47,400 855 21.6% 4
14621 Rochester NY 44,700 848 22.8% 5.4
14715 Town of Bolivar NY 47,400 1,401 35.5% 4.6
14727 Town of Cuba NY 69,800 1,456 25.0% 4.7
14735 Granger NY 57,800 1,402 29.1% 5.9
14739 Town of Friendship NY 46,300 1,395 36.2% 6.5
14806 Town of Andover NY 49,000 1,402 34.3% 5.1
14813 Amity NY 55,100 1,433 31.2% 4.2
14891 Watkins Glen NY 106,800 1,449 16.3% 1
14895 Wellsville NY 50,300 1,392 33.2% 3.6
15045 Glassport PA 53,100 776 17.5% 2.6
15110 Duquesne PA 44,500 780 21.0% 6.4
15132 McKeesport PA 46,000 780 20.3% 2.2
15148 Wilmerding PA 46,500 806 20.8% 0.5
15210 Pittsburgh PA 54,400 876 19.3% 3.4
21521 Barton MD 66,400 1,217 22.0% 5.1
21562 Westernport MD 59,600 1,279 25.8% 4.9
44055 Lorain OH 52,500 712 16.3% 1.3
44102 Cleveland OH 48,000 821 20.5% 6.2
44104 Cleveland OH 43,200 835 23.2% 8.3
61401 Galesburg IL 64,200 1,058 19.8% 4.1
73108 Oklahoma City OK 43,900 653 17.8% 3.8
73111 Oklahoma City OK 49,200 718 17.5% 0.7

@Rahul Bhandari  I imagine it would the the quality of tenants that would be the catch.. Cheaper units are usually indicative of lower quality tenants -- or have been so in my experience.  

lower rents "can" mean more drama but not necessarily.  it can mean more mgmt needed as well.  as long as you are ready for it you will have much better returns.  

Oh yea now that I can see the chart clearly. Units in the 50k -125k typically have tenants in the +/-600 credit range. There are always outliers but mostly likely your tenant pool are going to be D  to C+ if you're lucky. 

For me the catch is the "boots on the ground" knowledge to know which areas are safe with a strong rental base.  I can only speak to PA on your list.  Certain areas of McKeesport and Glassport are fine.  I would stay way from Duquense and Wilmerding because they constantly come up in the morning news.....not for good things.  Knowing the neighborhood is everything....a few streets apart can be different worlds as it relates to drugs, crime, etc.

@Rahul Bhandari  Property taxes in NY are very high, so you really need to compare net yield, not gross.  That said, Rochester NY is one of the best places to invest in the country for cash flow.

I would invest in the north parts of the 14621 zip code, near route 104, but I don't like the 14605 or 14608 zips.  Here's an awesome site to see where the zip codes are: http://maps.huge.info/zip.htm

Thanks for all the responses everyone.

@Jared Maltbie   some of the areas have pretty high rents $1200+. What are the types of issues that would flow down from the property management company to you? Would they not take care of most of it?

 @Eddie Werner  - that makes sense - I agree local knowledge is critical. I know the areas in Oklahoma / Nor Cal but its helpful to get other people's thoughts on the other areas.

@Larry T. I have the property tax information for some of these zipcodes and calculated net yield after vacancy and property tax. Though the tax rates in NY are high the net yields are still pretty good after that. Are you an investor in the 14621 neighborhood?

It is all about boots on the ground, and picking homes in the right places.  PM is also hugely important.  I know in Cleveland some people do very well, and some people don't do well, and it normally comes down to management, and having the right system in place to give yourself the best odds of high quality tenants.  

Most of the people I have been working with are buying in the suburbs of Cleveland or over in Lorain County. 

@James Wise  is 100% correct the quality of tenant, honestly I only have 1 rental in a below average area and I got lucky she is a nice girl with a daughter and dog who pays on time a has been great so far "knocks on wood"

Overall I like to play in the middle income areas you normally get 1-1.5% or 12-15% ROI but less problems, I can get you rentals in the 3-4% with 25+% ROI but you are rolling the dice on rent payments every month lol.

Medium 3Ian Hoover, Deacon Hoover Real Estate Advisors | [email protected] | 724‑492‑8312 | PA Agent # RM423721

@Ian Hoover I don't have experience with below average renters. Does the property management company not help deal with issues with rent not being on time?

@James Wise  thanks for the welcome! Excited to be part of the community.

Originally posted by @Jared Maltbie :

Oh yea now that I can see the chart clearly. Units in the 50k -125k typically have tenants in the +/-600 credit range. There are always outliers but mostly likely your tenant pool are going to be D  to C+ if you're lucky. 

I wasn't aware of a correlation between tenant credit and FMV of a rental property. Do you have data for that? A $125K house is middle class in some parts, and would have corresponding buyer and tenant incomes and credit.

I do see a correlation in my areas when it comes to rents $600/mo (and under) and tenant pool quality.  A family of 4 that is spending $600 for housing is spending the recommended 1/3 of income for housing.  But $1800/mo for a family of 4 is poverty level, according the feds definition of poverty.  Way too close to the edge, very month to month. Those applicants will rarely have good credit or consistent income.  Take a look at a federal or state website and their suggested budgets for this income level.  It's pretty much not do-able for most people.  That's why so many landlords look to SSDI and Sec8 .  

I would also second the higher price higher quality of tenants but also more expensive properties tend to appreciate better. Not that you should bank on that but its always nice when a few years down the road you can 1031 into a even nicer property or refi for cash out and use the cash out for a down payment on a new investment.

Originally posted by @Rahul Bhandari :

@Ian Hoover  I don't have experience with below average renters. Does the property management company not help deal with issues with rent not being on time?

@James Wise  thanks for the welcome! Excited to be part of the community.

This question made me smile.  The PM company doesn't really help "deal with issues" of rent not being paid.  They request rent, and if the tenant doesn't pay, then they file for eviction....on your dime.  Then they deal with repair issues and making the unit rent-ready, again on your dime.  Since they are usually paid from rents, it's in their best interest to get and keep the units rented. But they aren't absorbing any of the costs.  Don't sign up with any PM until you've found one with real live satisfied property owners.

i agree on tenant quality.

I just got of the phone with such a landlord. It the same call everytime

1. No rent paid

2. Tenant trashing the place

3. Tenant wants repairs

4. Tenant or municipalotu giving him/her a headache.

 Professional tenants.

Originally posted by Kristine Marie Poe:
Originally posted by @Jared Maltbie:

Oh yea now that I can see the chart clearly. Units in the 50k -125k typically have tenants in the +/-600 credit range. There are always outliers but mostly likely your tenant pool are going to be D  to C+ if you're lucky. 

I wasn't aware of a correlation between tenant credit and FMV of a rental property. Do you have data for that? A $125K house is middle class in some parts, and would have corresponding buyer and tenant incomes and credit.

I do see a correlation in my areas when it comes to rents $600/mo (and under) and tenant pool quality.  A family of 4 that is spending $600 for housing is spending the recommended 1/3 of income for housing.  But $1800/mo for a family of 4 is poverty level, according the feds definition of poverty.  Way too close to the edge, very month to month. Those applicants will rarely have good credit or consistent income.  Take a look at a federal or state website and their suggested budgets for this income level.  It's pretty much not do-able for most people.  That's why so many landlords look to SSDI and Sec8 .  

I think in general areas with low property values do tend to attract lower income residents and it may over index on lower credit residents as well. I don't have data on credit ratings at a zipcode levels but it does seem right if you sample this http://www.equifax.com/places/#url

You can get quality tenants in a bad area, but it's going to take a lot of time and rejected applications. One such place that i have is a very nice house in a "bad" neighborhood which took me 3 months to rent. The place is a cash cow now, but it was a huge stone around my neck prior. But we must have standards and vacancy is the tradeoff for good tenants in bad neighborhoods.

@Rahul Bhandari

If you search for "Rochester" you'll come across a plethora of positives and negatives.  I've listened to over 80 pod casts and have done a ton of reading, and so many times people say "Do I really need a real estate agent?  i can do the research myself, etc. etc."  I was leaning this way until I met with @Mark Updegraff over the recent holiday break.  Mark shared with me a few of his favorite investment areas within Rochester, but what really opened my eyes was his specificity of "Assessors will not use properties from the East side of this road when pulling comps for homes on the west side of the road."  It blew me away that 15 feet left or right means the difference in 20-30% value, and thousands of dollars.  

An "uneducated buyer," I quote this because they may research stats inside and out, may very well jump on a deal on the East side of the road thinking HOLY CRAP THIS IS A STEAL AND JUST LISTED, when in reality, you would not want to buy there, and you're comping against homes that are not truly comps.  Where I'm going with this is if you decide to invest in a city, whether it be Rochester, Cleveland, Oklahoma, etc. in my opinion you NEED to utilize an investor friendly agent/broker/BP member who knows the area inside and out.  Even if you decide to purchase from a wholesaler, paying an agent/broker for their time and expertise may save you thousands of dollars in the long run.  

Originally posted by @Rahul Bhandari :

@Larry T. I have the property tax information for some of these zipcodes and calculated net yield after vacancy and property tax. Though the tax rates in NY are high the net yields are still pretty good after that. Are you an investor in the 14621 neighborhood?

 Yes, I am.  Not just that area, but I do own in that area, north of 104.

I've bought in 2nd ring suburbs and I've bought downtown.  I sold downtown and am not buying again.  With the crime, the deadbeats, and the city bureaucrats it's just not worth my time, aggravation, and safety.  The returns may look better, but be sure to account for increased vacancy, non-payment of rent, higher maintenance needs, higher maintenance costs, higher permitting costs, higher real estate taxes cost, and finally the robbery and burglaries that you are likely to face in those areas.  Some or most of these can be managed.  Personally, I do well where I'm investing and I'll stay away from downtown. 

Kristine Marie Poe Yes a good management company can "help" but it doesn't matter how much vetting they do you are still going to have a higher vacancy and higher eviction rates then you will in a middle to high end client.

Medium 3Ian Hoover, Deacon Hoover Real Estate Advisors | [email protected] | 724‑492‑8312 | PA Agent # RM423721

From what I have read these high rent to price ratios areas are for locals only. Out of state guys tend to get burned in the long run. So many factors that only local investors know. I would agree a knowledgeable agent can help but if certain bad elements move into your hood there is not much you can do with that. Sure the agent could let you know to sell asap but that call might not get there in time.

If you are out of state you want to stick with the B or better stuff to mitigate risk. There are exceptions like if you find a great PM specializing in that but if something happens to the PM it is game over. You could end up with a vacant house in a crime invested area and unable to attract decent tenants. Guess what happens next.....say bye bye to your furnace, water heater and perhaps more theft, squaters and vandalism. Now you have a vacant house that is one step from being boarded up or worse is pouring more money into it only to have it happen again. On that positive note...good luck with your search!

At a lower price point you are dealing with a lower quality tenant in most cases.  There are a number of issues that come along with that which will impact you short term and long term.

The properties have the possibility to become money pits that are extremely difficult to sell on the back end.  This is why unless you are an experienced landlord and used to dealing with this grade of property it can be a real steep learning curve for a newbie.

Medium rzt hc 6483Michael Noto, SalCal Real Estate Connections | [email protected] | 860‑384‑7570 | https://www.zillow.com/profile/Mike-Noto/ | CT Agent # RES.0799665

The only thing that I can add to what's already been said is that what you may consider 'low rent' may not be low rent in that particular area.

You're in California, where everything's more expensive, so that is the standard that you go by. I live in San Pedro, below L.A. and my mother in Germany is constantly telling me that I'm paying way too much rent at $ 1750 - because the rents in Hamburg, Germany are so much lower and because I've paid less in other parts of the country. She does not want to understand that that is a good rate for my own place in the area.

So, you need to know the local areas to know if something is really a low rate there or if it's the norm.

Free eBook from BiggerPockets!

Ultimate Beginner's Guide Book Cover

Join BiggerPockets and get The Ultimate Beginner's Guide to Real Estate Investing for FREE - read by more than 100,000 people - AND get exclusive real estate investing tips, tricks and techniques delivered straight to your inbox twice weekly!

  • Actionable advice for getting started,
  • Discover the 10 Most Lucrative Real Estate Niches,
  • Learn how to get started with or without money,
  • Explore Real-Life Strategies for Building Wealth,
  • And a LOT more.

Lock We hate spam just as much as you