Housing Cash Flow and Rental Yields
Posted Wednesday, September 15 2010
I've been following the recent debate on the future trajectory of home prices pretty closely. The focus on value is of particular interest to me, and the home affordability metrics I've been publishing are an attempt to define value from the perspective of a current or potential home owner who plans to occupy the home as their primary residence. But how do investors value these home prices? Felix argues that we need more landlords, but in order to get more landlords (i.e. investors), it needs to be a profitable venture for them. Well what does profitable mean? It means positive cash flow and attractive rental yields.
In the table below I've calculated the cash flow for 100% financing and 80% financing scenarios using NAR 2Q 2010 median home sales prices and 2008 ACS adjusted median contract rent. These two cash flow measures tell you the amount of money a rented house will produce in the case of a 0% down payment an 20% down payment respectively. The cash flow is expressed as a percentage of the mortgage payment (e.g. 10% cash flow on a $1,000 mortgage payment is $100 and means you are getting $1,100 in rent).
The last column is an attempt to calculate a rental yield on your investment by accounting for the price you pay for the cash flow. Obviously, if you put zero down you get an infinite yield. It's unlikely that you'll find many zero money down loans at prevailing 30-year fixed rates, however. These days you'll probably have to put down something around 20% to buy the house and have a chance at claiming the expected cash flow. Assuming a 20% down payment, the yield is calculated by taking your annual rent receipts and subtracting your annual mortgage payments then dividing by the money used for a down payment. I've shown the nation wide calculations for the US below the table for those who want to see the math. I have a few comments below the table as well. By the way, all these calculations completely ignore tax considerations.
Cash Flow and Rental Yields
| Metro | Cash Flow (100% Financing) |
Cash Flow (80% Financing) |
Rental Yield (ROI) (80% Financing) |
|---|---|---|---|
| Akron, Ohio | 8.41% | 35.51% | 8.88% |
Albany, New York  |
-12.68% | 9.15% | 2.29% |
| Albuquerque, New Mexico |
-23.77% | -4.72% | -1.18% |
| Allentown, Pennsylvania |
-31.59% | -14.49% | -3.62% |
| Amarillo, Texas |
-2.91% | 21.37% | 5.34% |
| Atlanta, Georgia |
25.46% | 56.83% | 14.21% |
| Atlantic City, New Jersey | -22.94% | -3.68% | -0.92% |
| Austin, Texas |
-12.81% | 8.99% | 2.25% |
| Baltimore, Maryland | -27.26% | -9.08% | -2.27% |
| Barnstable Town, Massachusetts | -37.95% | -22.44% | -5.61% |
| Baton Rouge, Louisiana |
-31.51% | -14.38% | -3.60% |
| Beaumont, Texas |
-11.17% | 11.03% | 2.76% |
| Binghamton, New York |
10.65% | 38.31% | 9.58% |
| Birmingham, Alabama |
-22.44% | -3.06% | -0.76% |
| Bismarck, North Dakota |
-22.19% | -2.73% | -0.68% |
| Bloomington, Illinois |
-19.36% | 0.80% | 0.20% |
| Boise City, Idaho |
-1.12% | 23.60% | 5.90% |
| Boston, Massachusetts |
-33.58% | -16.98% | -4.25% |
| Boulder, Colorado | -45.91% | -32.39% | -8.10% |
| Bridgeport, Connecticut | -49.37% | -36.72% | -9.18% |
| Buffalo, New York |
1.14% | 26.42% | 6.61% |
| Canton, Ohio |
-4.55% | 19.31% | 4.83% |
| Cape Coral, Florida | 62.70% | 103.37% | 25.85% |
| Cedar Rapids, Iowa |
-9.45% | 13.18% | 3.30% |
| Champaign, Illinois |
-1.47% | 23.16% | 5.79% |
| Charleston, South Carolina |
-31.09% | -13.87% | -3.47% |
| Charleston, West Virginia |
-28.93% | -11.16% | -2.79% |
| Charlotte, North Carolina |
-32.20% | -15.25% | -3.81% |
| Chattanooga, Tennessee |
-8.20% | 14.75% | 3.69% |
| Chicago, Illinois |
-15.53% | 5.59% | 1.40% |
| Cincinnati, Ohio |
-2.98% | 21.27% | 5.32% |
| Cleveland, Ohio |
14.40% | 43.00% | 10.76% |
| Colorado Springs, Colorado |
-22.52% | -3.15% | -0.79% |
| Columbia, Missouri |
-13.56% | 8.05% | 2.01% |
| Columbus, Ohio |
-11.04% | 11.20% | 2.80% |
| Corpus Christi, Texas |
-7.33% | 15.83% | 3.96% |
| Cumberland, Maryland |
-8.24% | 14.70% | 3.68% |
| Dallas, Texas |
11.60% | 39.50% | 9.88% |
| Davenport, Iowa |
0.57% | 25.71% | 6.43% |
| Dayton, Ohio |
3.31% | 29.14% | 7.29% |
| Decatur, Alabama |
-15.61% | 5.48% | 1.37% |
| Deltona, Florida | 28.26% | 60.33% | 15.09% |
| Denver, Colorado |
-29.78% | -12.22% | -3.06% |
| Des Moines, Iowa |
-7.63% | 15.46% | 3.87% |
| Dover, Delaware |
-17.09% | 3.64% | 0.91% |
| Durham, North Carolina | -20.07% | -0.08% | -0.02% |
| El Paso, Texas |
-15.57% | 5.54% | 1.38% |
| Elmira, New York |
12.40% | 40.50% | 10.13% |
| Erie, Pennsylvania |
-3.95% | 20.07% | 5.02% |
| Eugene, Oregon |
-27.47% | -9.34% | -2.34% |
| Fargo, North Dakota |
2.42% | 28.03% | 7.01% |
| Farmington, New Mexico | -38.15% | -22.69% | -5.68% |
| Florence, South Carolina |
-35.50% | -19.38% | -4.85% |
| Fort Wayne, Indiana |
9.50% | 36.87% | 9.22% |
| Gainesville, Florida |
-3.68% | 20.40% | 5.10% |
| Glens Falls, New York |
-9.13% | 13.58% | 3.40% |
| Grand Rapids, Michigan |
46.39% | 82.99% | 20.76% |
| Green Bay, Wisconsin |
-5.92% | 17.60% | 4.40% |
| Greensboro, North Carolina |
-21.05% | -1.31% | -0.33% |
| Greenville, South Carolina |
-25.35% | -6.69% | -1.67% |
| Gulfport, Mississippi | 4.49% | 30.61% | 7.66% |
| Hagerstown, Maryland | -12.51% | 9.36% | 2.34% |
| Hartford, Connecticut |
-23.10% | -3.87% | -0.97% |
| Honolulu, Hawaii |
-58.67% | -48.34% | -12.09% |
| Houston, Texas |
-7.37% | 15.79% | 3.95% |
| Indianapolis, Indiana |
3.39% | 29.23% | 7.31% |
| Jackson, Mississippi |
-19.28% | 0.90% | 0.22% |
| Jacksonville, Florida |
13.87% | 42.34% | 10.59% |
| Kankakee, Illinois | 8.13% | 35.16% | 8.79% |
| Kansas City, Missouri |
-6.39% | 17.01% | 4.26% |
| Kennewick, Washington | -26.86% | -8.58% | -2.14% |
| Kingston, New York | -15.85% | 5.19% | 1.30% |
| Knoxville, Tennessee |
-15.06% | 6.18% | 1.55% |
| Lansing, Michigan |
49.62% | 87.02% | 21.76% |
| Las Vegas, Nevada |
23.98% | 54.98% | 13.75% |
| Lexington, Kentucky |
-14.32% | 7.10% | 1.78% |
| Lincoln, Nebraska |
0.16% | 25.20% | 6.30% |
| Little Rock, Arkansas |
-15.43% | 5.71% | 1.43% |
| Los Angeles, California |
-33.46% | -16.83% | -4.21% |
| Louisville, Kentucky |
-14.83% | 6.47% | 1.62% |
| Madison, Wisconsin |
-21.30% | -1.62% | -0.41% |
| Memphis, Tennessee |
-7.93% | 15.09% | 3.77% |
| Miami, Florida |
-12.51% | 9.37% | 2.34% |
| Milwaukee, Wisconsin |
-25.66% | -7.07% | -1.77% |
| Minneapolis, Minnesota |
5.64% | 32.04% | 8.01% |
| Mobile, Alabama |
-16.53% | 4.33% | 1.08% |
| Montgomery, Alabama |
-19.40% | 0.76% | 0.19% |
| New Haven, Connecticut | -18.89% | 1.39% | 0.35% |
| New Orleans, Louisiana |
-5.03% | 18.72% | 4.68% |
| New York, New York |
-44.49% | -30.61% | -7.66% |
| Norwich, Connecticut | -14.71% | 6.61% | 1.65% |
| Ocala, Florida |
21.75% | 52.19% | 13.05% |
| Oklahoma City, Oklahoma |
-26.99% | -8.74% | -2.18% |
| Omaha, Nebraska |
4.47% | 30.58% | 7.65% |
| Orlando, Florida |
18.93% | 48.67% | 12.17% |
| Palm Bay, Florida | 29.66% | 62.08% | 15.53% |
| Pensacola, Florida |
-11.19% | 11.01% | 2.75% |
| Peoria, Illinois |
-2.43% | 21.96% | 5.49% |
| Philadelphia, Pennsylvania |
-17.79% | 2.77% | 0.69% |
| Phoenix, Arizona |
4.32% | 30.41% | 7.60% |
| Pittsburgh, Pennsylvania |
-5.25% | 18.44% | 4.61% |
| Pittsfield, Massachusetts |
-23.25% | -4.07% | -1.02% |
| Portland, Oregon |
-29.16% | -11.44% | -2.86% |
| Providence, Rhode Island |
-23.38% | -4.22% | -1.06% |
| Raleigh, North Carolina |
-34.66% | -18.32% | -4.58% |
| Reading, Pennsylvania |
-14.26% | 7.17% | 1.79% |
| Reno, Nevada |
-14.16% | 7.30% | 1.83% |
| Riverside, California | 1.84% | 27.31% | 6.83% |
| Rochester, New York |
20.14% | 50.17% | 12.55% |
| Rockford, Illinois |
13.00% | 41.25% | 10.32% |
| Sacramento, California |
-6.73% | 16.59% | 4.15% |
| Saginaw, Michigan |
75.71% | 119.64% | 29.92% |
| Salem, Oregon | -33.38% | -16.72% | -4.18% |
| Salt Lake City, Utah |
-22.90% | -3.63% | -0.91% |
| San Antonio, Texas |
-8.60% | 14.25% | 3.57% |
| San Diego, California |
-41.37% | -26.71% | -6.68% |
| San Francisco, California |
-54.15% | -42.69% | -10.68% |
| San Jose, California | -56.35% | -45.43% | -11.36% |
| Seattle, Washington |
-35.92% | -19.89% | -4.98% |
| Shreveport, Louisiana |
-29.40% | -11.75% | -2.94% |
| Sioux Falls, South Dakota |
0.15% | 25.19% | 6.30% |
| South Bend, Indiana |
32.08% | 65.10% | 16.28% |
| Spartanburg, South Carolina | -19.37% | 0.79% | 0.20% |
| Spokane, Washington |
-22.95% | -3.69% | -0.92% |
| Springfield, Illinois |
-0.95% | 23.81% | 5.96% |
| Springfield, Massachusetts |
-20.57% | -0.72% | -0.18% |
| Springfield, Missouri |
-4.01% | 19.99% | 5.00% |
| St Louis, Missouri |
-10.57% | 11.79% | 2.95% |
| Syracuse, New York |
11.96% | 39.95% | 9.99% |
| Tallahassee, Florida |
-4.52% | 19.34% | 4.84% |
| Tampa, Florida |
9.30% | 36.63% | 9.16% |
| Toledo, Ohio |
18.46% | 48.07% | 12.02% |
| Topeka, Kansas |
-3.34% | 20.83% | 5.21% |
| Trenton, New Jersey | -24.58% | -5.73% | -1.43% |
| Tucson, Arizona |
-14.05% | 7.44% | 1.86% |
| Virginia Beach, Virginia | -23.40% | -4.25% | -1.06% |
| Washington, District of Columbia |
-22.46% | -3.07% | -0.77% |
| Waterloo, Iowa |
-2.86% | 21.43% | 5.36% |
| Wichita, Kansas |
-7.64% | 15.45% | 3.86% |
| Worcester, Massachusetts | -22.02% | -2.53% | -0.63% |
| Yakima, Washington |
-31.76% | -14.70% | -3.68% |
| Youngstown, Ohio |
42.56% | 78.20% | 19.56% |
| US |
-17.52% | 3.09% | 0.77% |
This data tells me that while there are some reasonably good places to invest in rental homes, on the whole, the US still isn't looking too good. A 0.77% yield on your investment is pretty tiny. And that assumes that you have no problem getting tenants at the median rental rate. If I were to choose a place to invest, I'd look for places with high rental yields, lower than average unemployment and lower than average rental vacancy rates. Maybe Syracuse, Dallas and Minneapolis for instance (they all have nice-ish unemployment rates at least). But the big picture story here is that investors are not going to be rushing to buy rental property even with the exceptionally low mortgage rates we now have. It's just not a screaming deal yet as much safer ways of getting a yield of 0.77% exist.
Calculations
Let me walk through the calculation of these three metrics for the US. The NAR reported the median sales price for 2Q 2010 was $176,900. From the 2008 Census ACS data we know that median contract rent was $687. I'm using the adjusted median contract rent I've spoken about before, so I scale that price by the ratio of median owner household size to median renter size. This ratio happens to be 1.106 for the US. That makes the adjusted rent $760.20. Now we figure out the mortgage cost for a 100% financed 30-year fixed rate loan using July's average rate of 4.74%. That is $921.73. For 80% financing it's $737.38. 80% financing requires you put down 20% of the price, or $35,380.
Now we have all the pieces to calculate the three metrics for the US. The 100% financing cash flow percentage is calculated as (median adjusted rent / 100% financed mortgage) - 1 which is (760.20 / 921.73) - 1 = -0.1752. The cash flow for 80% financing is (median adjusted rent / 80% financed mortgage) - 1 which is (760.20 / 737.38) - 1 = 0.0309. Finally, to get the rental yield, we calculate the ROI on the 20% down payment as 12x(median adjusted rent - 80% financed mortgage) / 20% down payment. For the US this is 12x(760.20-737.38)/35,380 = 0.0077. You can multiply all these numbers by 100 to get the percentages listed in the table.
