Brooklyn NYC DUMBO

Photo: Robert Clark

In many of the largest housing markets in the US, most homes could be purchased by a small investor and rented out for a profit. However, high home prices in New York City means that homeownership costs are likely not to be covered by rental revenue, according to a report released yesterday by the listing site Zillow.

Less than 40 percent of New York’s homes can be purchased and rented out for a profit, Zillow says. Despite commanding high monthly rents, the majority of New York’s properties are just too expensive, generating larger fixed monthly expenses. This makes the city less than ideal for hopeful investors looking for steady income.

Additionally, the city was recently ranked first with the highest “hidden” homeownership costs. These expenses can easily add up fixed monthly costs to exceed rental income.

Nationally, it takes 11 years on average of paying the median rent to equal the full purchase price of an average home. But in New York, where the median home value is $411,000, that rises to 13.33 years, according to the Zillow Home Value Index. Worse yet, in some pricey West Coast markets, it can take 20 years — or longer.

“If expected home and rent price appreciation were projected to be the same across all markets, we would expect all markets to have a similar price-to-rent ratio. But that’s not what happens: In more expensive markets, home values are a higher multiple of annual rental payments,” writes Zillow.

But in 25 of the largest 35 US housing markets, Zillow found that rental income on a purchased home would exceed fixed monthly homeownership costs. These costs include mortgage payments, taxes and insurance.

At least 70 percent of homes can be bought and rented out for more than their monthly fixed expenses in 25 markets, according to Zillow’s data. While in 17 markets, 90 percent or more of homes can generate rental income that exceeds monthly fixed expenses.

Still, New York City finds itself in good company. Other markets that didn’t make the list of good markets for the small investor include: Portland, OR, Seattle, WA, Boston, MA, as well as five California markets — Sacramento, San Diego, Los Angeles, San Francisco and San Jose.

One obvious trait these markets share: they are among the country’s most expensive housing markets. Not only are home prices elevated in these markets, but so are rents. In these 9 markets, the percentage of homes that can be rented out for more than their fixed monthly expenses range between 5 percent (San Jose) and 48.4 percent (Portland).

In these ultra-hot markets, mom and pop investors still could conceivably charge higher rent to break even, but that can be risky.

“’Landlords should be careful not to overprice the rentals. Rents overall are slowing and concessions are becoming more common, so landlords need to know their market to price their rentals competitively,” Dr. Svenja Gudell, Zillow’s Chief Economist, tells BuzzBuzzNews.

Zillow noted that even in these ultra-pricey markets, there were small patches where homes could be purchased and rented out for profit. In NYC, there were a few neighborhoods on Staten Island and in the Bronx where homes were affordable enough to buy and rent out. However, the best affordability remained outside of the five boroughs, where renters generally pay less as a trade off for a longer commute on mass transit.

On the flip side, the top markets that were favorable for small investors included: Indianapolis, IN, Kansas City, MO, Cincinnati, OH, Cleveland, OH, and San Antonio, TX. In each of these markets, over 97 percent of homes were able to be rented out for profit, according to Zillow.

Click here to read the entire report.

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