Investor Real Estate Accounts

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Rentals Performance Review by State for Year 2016

first posted: 2017-02-18 12:05:38.086151

Here is some actual performance data on rental real estate by state.

Profit from Rental and Capital Gains

I show annual capital gains (estimates) since purchase and actual rental net returns. The net returns exclude depreciation or interest income.

  • State: annualized appreciation, rental yield 2016, 2015, 2014
  • AZ: 3%, 6%, 3%, 4%
  • FL: 20%, 8%
  • GA: 9%, 7%, 8% 9%
  • IN: N/A, 11%
  • MO: N/A
  • NC: 15%, 7%
  • TX: 13%, 4%, 6%, 5%

Performance Review

Properties in the US have performed well since 2014. Investors have been rewarded by:

  • a stronger dollar (USD appreciated by 30% over the last 3 year)
  • rental yields between 9% and 4% whereas 10Y treasury yields 2.3%
  • price appreciation all over the country at levels comparable to stock market gains of 12% for 2016

A housing boom eventually rises from the ashes of a housing bust. From our experience, appreciation can continue until well after rental yields are below mortgage rates.

This is still far from being the case in the US, so there is a case to keep those rentals until yields go below conforming mortgage rates as markets are unlikely to downturn before that.

We now review results state by state with a word on vendor performance. Every vendor has his strength and weaknesses when it comes to execute a business plan. A vendor role is mainly to keep properties occupied as they should be when managed well, act with integrity as agent, and provide service at a fair and competitive price. Performance of the strategy lies beyond that, driven by the macro performance of a given market (location and price segment).

In these favorable markets, vacancy was very low, and all properties did both as rentals and as capital gains investment. They should continue so long as interest rates are propitious compared to yields.

Arizona: low appreciation on a triplex

For Mesa AZ, the property under consideration is a triplex located in a community for people aged over 50. The snowbirds (older citizen from colder states in winter) coming to this place do not seem well feathered. Despite strong price appreciation in Mesa, the triplex has not gained much value.

The triplex had a difficult start since 2014: It was bought in 2014 fully occupied. Rent is low $550 to $725 despite the triplex being nicely renovated. One tenant not only could not manage to pay rent, but started to intimidate a lady and her daughter in the other unit. A double vacancy, eviction, and extensive repairs on that unit followed that depressed returns in 2014/2015, and brought average tenancy duration on the property to 21 month. Property required a few expensive repairs.

The net yield has now risen to 6%, and there is little appreciation. Depreciation of 3% needs to be factored in, as the 3 kitchens with appliances, toilets and washroom can trigger expenditures far beyond what the modest rents can absorb in a year, so unless we can raise rent, this triplex may not yield more than a bond.

Florida: the rise of property tax

Florida saw excellent rental yield at the lower end of the market and good capital appreciation. While the yield proforma was above 10% or higher, the lower yields may have been predicted: insurance in Florida is double the price of insurance in other states. A worrying trend: some properties saw their local tax increase from 1 month of rent to 2 month or more of rent. Meaning that 3 month of rent go in local tax and insurance. Those expenses continue to accrue even if the property is vacant.

Florida appears to be the most profitable state, but additional reserves were not made given that hurricane insurance has a $15,000 franchise or would cost several month of rent. Also, there is no end to rise of property tax: this state does not levy income tax.

Tenants are all section 8 and property manager is doing well managing them.

Georgia: solid rental yield thanks to low expenses

Solid performance in GA where we managed rental yields of 8% on average, while appreciation stayed below 10%. The yield went down in 2016 as one of the tenants could not pay his December rent in 2016. This tenant seems to be struggling to pay every month, though he eventually always paid for the last 3 years.

The manager is managing very well to keep properties fully occuped, and sending pictures of the properties every quarter. Last property was purchased in 2015. Properties considered for purchase in 2016 had lower yield than those in FL and NC.

Indiana: high yield investment with vendor keeping management

Indianapolis investment is in a partnership that invest in a small diversified set of 10 low cost SFH (rent of $700, 40k investment per property). Minimum investment is 10k only. Managing partners manage the properties, and make renovation and asset purchase and disposition decisions. Their interest is aligned to the general partners as they keep a substantial portion of profit 30% to themselves while general partners just sit back and receive K1.

This partnership produced yield in excess of 10% for 2016 and the partners are quite transparent about sharing accounting information. They launched several more similar partnerships last year as the business model appears to be working well for now despite the profit taking from general partners.

Missouri: higher yield in an investor market

As the whole country becomes more expensive, we think it is a good idea to have contact and vet a vendor located in an investor market such as Kansas City, where yield is high, and city demographics are up. Vendor was selected on subjective criteria of character and quality of repairs done.

Kansas City properties were purchased in October and it is too early to get performance numbers for these. Properties have low rent $750 to $800, and very low market value. This means that some of the yield must be kept for later capital expenses.

A tenant had problems paying their rent on time, and had payment bounced, which is a concern on their credit worthiness. Some expensive repair needed to be done shortly after tenant moved in. We will get more data as time passes and more rents are received.

North Carolina: appreciation, good yield and low expenses

NC investment had very good yield, boosted by investment in more difficult areas. Here again, we saw a tenant struggling to pay rents.

The appreciation potential for this city is very good, and both insurance and local taxes are much cheaper than in FL or TX. Due to lower exposure to natural disaster, and a state tax being levied in this state.

Some tenants were late several time on paying rent. Some expensive repair needed to be done shortly after tenant moved in on one of the older 70s property. A property with slightly lower rental yield was purchased to increase tenant quality and appreciation potential.

Texas: great appreciation but yield has gone

Yield on Texas properties continues to diminish as property taxes increase, to a cost greater than 3 month of rent. Rents were not reevaluated anywhere as fast. Another source of difference in comparison with other states is that insurance is also 1.5x more expensive in Texas than in other states. Policies this year increased while hail exclusions were required by the insurers. We had to shop for other insurance due to the rise of the costs in this state.

Tenants seemed high quality here, as they all paid on time. Similar to Florida, this seems to be a state where capital appreciation causes property tax to eat away the rental yield.

A contribution to the lower yield and higher appreciation: one property was purchased in late 2015 despite its relative poor build quality because it is in a very good area: Keller ISD. This property seems to carries more repairs (2k per year) than others. As it rents for $1700 per month, it took as much as 4 month to find a tenant.

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