Where to Get the Most Rental Income for the Least Investment

Investing in rentals is increasingly affordable. Purchases made now will reap handsome rewards when the economy rebounds

By Prashant Gopal

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Few people these days have confidence in the real estate market. Sellers are anxious, buyers are cautious, and prices across the nation are tumbling, month after month. But for a careful investor, fear and uncertainty can set the stage for opportunity.

Lower purchase prices and interest rates are making it easier—even for an individual investor—to find a single-family home, condo, or a small apartment building that brings in more than enough rent to cover mortgage, taxes, insurance, maintenance, and other expenses. And with so many properties lingering on the market, buyers can have their pick.

Of course, purchasing a rental property right now comes with a fair amount of risk, beyond the fact that property values are falling. Rents are also dropping, and vacancies are rising as layoffs across the country are becoming increasingly common. The pool of renters generally shrinks when unemployment worsens because renters tend to find roommates, or move in with friends and family.

Looking Toward 2011-15

"Even though we know rents will decline in most markets in 2009 and 2010, beyond that there will be a shortage of new supply [of apartments] coming," said Hessam Nadji, managing director of research at Marcus & Millichap, an Encino, Calif.-based commercial real estate investment brokerage firm. "And the rebound in demand, because of an improving economy, could spell healthy growth from 2011 through 2015."

BusinessWeek asked Marcus & Millichap to come up with a ranking of the markets where apartments provide the most rental income for the least amount of investment. These are metro areas that, for the most part, are affordable for folks who don't have millions to invest. Single-family homes and condos in some of these markets can sell for less than $100,000 and a 20-unit apartment building can be purchased for less than $700,000.

Topping the list was Dallas-Fort Worth, where apartment buildings sell for an average of $30,000 a unit and every $3.76 of investment (in terms of the sales price) produces $1 of rental income. By comparison, investors need to spend about $8.19 on average nationwide for $1 of rental income.

Other low-priced markets that ranked high were Cincinnati, Cleveland, Columbus, Detroit, Houston, and Kansas City. Many of these metros—like high-dividend stocks—come with the risk that both the income and the value of the property could fall off. Dallas' job market is weakening, and many new apartments are under construction, which will create more competition for landlords. Fort Lauderdale, Jacksonville, Orlando, and Tampa, which also made the list, have plenty of bargains, but you'd be competing for tenants with condo owners who are renting homes they cannot sell. And the manufacturing-heavy Midwest is in serious economic decline.

Capital Appreciation

But some major markets made the list: Boston, Chicago, Philadelphia, and Washington. These are markets that have a record of strong rent growth and appreciation. The District of Columbia, in particular, with its federal government and defense contractor jobs, could provide good opportunities, Nadji and other analysts said.

In the Boston metro area, investors are picking up low-priced foreclosures outside the city in towns like Attleboro, Framingham, and Marlborough, said Nancy McCreary, manager of the rental group at Hammond Residential Real Estate in Chestnut Hill. But prices are still too high for properties in the more upscale Boston-area neighborhoods for the rental equation to work, she said.

But investors have been finding good income-producing properties geared to the area's many college students—a factor that also applies to other big university towns such as Columbus, Jacksonville, Houston, and Orlando. One investor, for example, is buying a 760-square-foot one-bedroom unit with four rooms for $222,000 in Boston's Brighton neighborhood, near Boston College and Boston University.

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