I’m always curious when sell-side media types tout the glorious returns to be had when it comes to investing in single-family rentals. As if it weren’t bad enough that the Federal Reserve has eviscerated housing market fundamentals, there is apparently never enough of a good thing when it comes to hyping up potential real estate riches in our hyper-financialized economy.
That brings me to a gloriously entertaining piece from one Andrea Riquier at Marketwatch. The article is “Fancy being a landlord? Here are 10 metros offering double-digit rental returns.” And what a story it is! Since I happen to be selling homes in both the Dallas and Houston metro markets I thought I would run the numbers to see how bad this hot mess of regurgitated horse manure on single-family rentals from ATTOM Data Solutions really is.
Let’s start with the numbers trotted out for zip code 76140 in the Fort Worth area. The supposed median sales price of $152,857 during the third quarter of 2017 was only a few thousand lower than the actual median price of $155,500 I was able to pull for actual closed single-family sales.
Things get interesting in a hurry when you look at ATTOM’s reported “fair market rent” for a 3-bedroom home in zip code 76140 of $1620 per month. The real median price for a 3-bedroom house leased during the third quarter in this zip code was $1350. According to actual MLS closed lease data there wasn’t a single 3-bedroom home leased in this DFW zip code for more than $1611 per month during the third quarter! Even the average of the closed leases posted at $1350 per month. That means ATTOM is over-estimating rents in this area by $270 per month or roughly 20%!
Looking at the methodology from ATTOM provides more clues about why the estimated rental returns in this case are utterly ridiculous. While HUD may have a certain number on market rents that is considered “fair”, that doesn’t mean you will find a tenant willing to pay top dollar for a single-family rental in a less-than-prime neighborhood. It’s pretty easy for prospective renters in Houston and Dallas to drive a few miles down the road for better, cheaper options.
There is no shortage of third party sites looking to play up real estate prospects across the United States, even with home prices and rents inflated across the board. Apparently more is always better as long as you are playing with other people’s money, or their quality of life. This would help explain why you get a cheeky, tone-deaf intro from the Marketwatch article for starters.
But it gets better in terms of how bad ATTOM and Marketwatch are playing mom and pop investors for fools in terms of the single-family rental prospects in Dallas/Fort Worth. I also looked at the total tax rates for this zip code, 76140. This area has a high property tax rate, and of the homes I was browsing through I didn’t find a single one with a total tax rate below 3 percent. I can only assume that ATTOM’s formula/methodology has a much lower tax rate (probably 2.5% or less) if they are going by baseline averages for the state of Texas as many models do. It makes the returns look better if you under-estimate the property tax obligations.
So what does this all mean in terms of the inflated claims on rents and the likely undershoot on property taxes? In Layman’s terms you are probably looking at much lower rates of return, if not negative annual net cash flow. From what I can tell, that reported gross rental yield of 12.7 percent is a pipe dream. Again, I am basing my assumptions here on actual closed sales and leases, and REAL property tax rates. I welcome ATTOM (or any other third party purveyor of real estate “news”) to show me all of the actual baseline assumptions in their models. Most don’t provide the full methodology for a reason. They know people have short attention spans and rarely get past the headlines.
Think ATTOM’s estimates for Houston Texas are any better in terms of real estate riches for Landlords? Guess again! ATTOM lists the median price of a home in zip code 77373 at $153,714. MLS data from the Houston market shows the median value of a 3-bedroom home here during the third quarter at $145,000. Pretty affordable, and lower than the estimated sales price. So far, so good.
ATTOM shows a “fair market rent” for a three-bedroom home in this area of $1730 per month. I lived in the Houston area for nearly 20 years, and I still own rental property in Houston. I knew this estimate was really high. Turns out it is downright laughable! The real median closed lease price during the third quarter in zip code 77373 was $1295 per month! ATTOM over-estimates the rental rate in this case by $435 or 33 percent! Sometimes I just don’t have the words.
Again, it is worth noting that this zip code was also an area with some pretty high property tax rates. I did find some instances where the tax rate was below 3 percent, but many were still north of 3 percent. I would be shocked if ATTOM’s methodology accounts for a property tax rate north of 2.5 percent for either Dallas or Houston.
The point of this analysis is to show that you should always run the numbers and verify them yourself when it comes to an important decision like buying or selling a home. Becoming a landlord requires even more due diligence. As these examples show, nationwide indexes on prices, returns and lease rates can vary widely from the boots-on-the-ground data. In Layman’s terms, it’s probably not a great idea to get your real estate advice on Dallas or Houston home prices from a company based in California. Amazingly enough, ATTOM touts that it powers consumer websites designed to promote “real estate transparency”. That is pretty rich indeed!