Sizes of Rental Units in the US

I previously talked about ownership of rental properties.    A lot of the single family home rentals are owned by individuals and most large complexes are owned by some sort of business entity.   

I decided to look at how the rental housing in the US is made up as far as the size of the rental units.  Do most people live in large complexes, single homes or duplexes or a mixture?

I got the data from 2015 Rental Housing Finance Survey

Here's the graphic :

And the figures in a table :

Number of Units on Property1	47,543
1 unit	19,283
2 to 4 units	6,523
5 to 24 units	4,938
25 to 49 units	4,081
50 to 99 units	3,249
100 to 149 units	1,908
150 units or more	7,561

A large % of rentals at 40% are single family homes.      The majority of rental units, 54%, are in 1-4 unit buildings.    20% of rental units are in large buildings and complexes of 100 units or more.


--This article may contain referral links which pay this site a commission for purchases made at the sites.

Institutional vs Individual Ownership of Rental Properties

Most single family and 2-4 unit rentals are owned by individuals rather than businesses.

I found the New York Times article "Mom and Pop Own Fewer Rental Units" from last summer and they had data for 2001 and 2015.    Here's a graphic from that article :

Source: New York Times

The chart shows the % of each rental size category that is owned by an "institutional investor".   
They list the 2015 Rental Housing Finance Survey as their source for the numbers.    Looking further into that data I find that they break down ownership into categories of "Individual Investor" and several different kind of business entities.   The lists includes : Trustee for estate,    LLP, LP or LLC ,    Tenant in common,    General partnership,    Real Estate Investment Trust (REIT), Real estate corporation,   Housing cooperative organization, Nonprofit organization,Other and Not reported.     I'm not sure how they split it up.    Its unclear how they decided which of those categories are "institutional investors" and which aren't.    For example an LLC might be some big hedge fund or it might be an individual.   In any case if we just look at the "Individual Investors" and then assume that anything else isn't an individual we still see that most properties in the  1-4 unit size are owned by individuals.


--This article may contain referral links which pay this site a commission for purchases made at the sites.

How Many Bedrooms Do Homes Have?

Most homes in America have two or three bedrooms.       What are the exact figures?   The American Housing Survey has data on the number of bedrooms in homes.     The data below is for 2015.

Here's a chart showing the distribution:

And a table with the raw #'s

None	924
1	12,912
2	29,915
3	48,122
4 or more	26,417

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Millenials Aren't Abandoning Homeownership

Take a look at this chart from the Census.gov site:

Look at that purple line at the bottom plummet at slightly faster rate than some of the other color lines!!!  Kids these days.    Sorry for the sarcasm, but I think the graphic should illustrate that the homeownership trend for young people isn't really much different than the population in general.   People in the 45-54 and 55-64 age groups dropped at just about the same pace as people under 35.  


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Foreigners With Giant Piles of Cash Are Not Buying All The Homes

In certain hot real estate markets I see people claiming that rich foreigners are coming in with millions of dollars and buying up homes and thus driving up the market.    Now I'm sure this happens some but when I saw these claims I couldn't find much solid data on the amount of foreign cash purchases of homes in specific markets.

I did however just find a report showing the total % of homes that are not owned by citizens per major city.
From Bloomberg: Most Non-citizen Homeowners

The % values range from 2-7% mostly in the 2-5% range.  

Now, they say "non-citizen" which Im' going to hazard a guess includes some "non-legal" residents.    I'm not sure on that point but I think its feasible.   Also notice the largest % figures are in Southern cities in TX and AZ.  

San Jose, CA is one city where there are a lot of expensive homes and I've heard there are cash buyers from China.   San Jose is at #4 on the list at 5.8%.    Now thats a significant % really in a market but its not exactly some sort of flood of foreign money.  

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Rental Sale Tax Calculator

I found a calculator that figures your tax bill between capital gains, depreciation recapture and medicare tax :

Capital Gain Tax Calculation

Use it for estimation purposes only.

The calculator is hosted by Asset Preservation Inc. who handles 1031 exchanges.     I am not a CPA or anything and I can't attest to the 100% accuracy of the calculator but it looks correct to me.    


We've got a rental property for which my initial investment was about $50,000.   If I sold that property today for $55,000  then my tax bill would be about $4750.   Huh?    Yeah.   Taxes would eat up almost my entire gain.   If our income was significantly higher we'd get hit with the new 3.8% Medicare tax and the bill would be $5548.    I could theoretically have a tax bill that eats up over 100% of our gains.   Yikes!     Well almost all of that is due to depreciation recapture.   I've owned that property for over a decade and would have to repay the depreciation at 25%.   That alone accounts for ~$4500 in taxes.   Remember folks that depreciation on rentals is really just tax deferral.

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10 Years of Dividend Yield Ranges for VNQ

I looked at VNQ (Vanguard REIT ETF) just now and noticed the dividend yield is at 4.21% as I write this.   Thats a bit higher than I recall seeing it.   The dividends you get from VNQ will vary because the dividends of the REITS it holds vary.    The price you pay for VNQ will also vary but because its traded on the open market and its market value fluctuates.   The yield you get from VNQ will depend on what you paid and what the combined dividend of the REITs happens to be.

I pulled the high and low trading value of VNQ for the 2005 to 2015 period (all off Yahoo Finance VNQ).   I also summed up the annual dividend payment for those years.    Between these I figured the range of dividends you'd get if you bought VNQ in each year.    For example: in 2005 the ETF traded between a low of $51.12 and a low of $63.45.    The dividend total for 2005 was $3.56.    If you bought at the low or high your yield would be 5.6% or 7% respectively.

Here's the chart :

And the price  & dividend data :

	max	min	DIV
12/1/2005	63.45	51.12	3.561
12/1/2006	81.15	59.16	3.254
12/3/2007	87.44	60.01	3.111
12/1/2008	68.95	22.52	3
12/1/2009	46.64	19.95	1.964
12/1/2010	57.65	40.33	1.891
12/1/2011	63.32	47.10	2.05
12/3/2012	69.20	57.03	2.343
12/2/2013	78.86	63.40	2.791
12/1/2014	83.09	64.05	2.919
12/1/2015	89.27	71.67	3.124

The yields in 2008 and 2009 are higher for people who bought VNQ at cheap prices after the market crash.    In the past 5 years the dividend yield averaged 4%.

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Home Lot Sizes in the US

The median size of a home lot in the US is 0.25 acres.   This does not include mult-unit housing like apartment complexes, etc.

The data on home lot size is from the American Housing Survey 2013 national tables.

Here is a graph of the size distribution :

(numbers in thousands)

Percentage distributions :

Table form:

size	#
Less than 1/8 acre	16,223
1/8 up to 1/4 acre	25,008
1/4 up to 1/2 acre	16,841
1/2 up to 1 acre	10,199
1 up to 5 acres	20,593
5 up to 10 acres	3,117
10 acres or more	4,177

I live in an area with relatively small lot sizes where most lots are 1/8 acre or less.   So I'm a little surprised that most home lots are larger.   But I'm not especially surprised.   Where I grew up our neighborhood was full of lots in the 5-10 acre size range and I think a lot of people had 1/4 acre size lots in the city boundary.

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Tiny Homes Might Be a Whoooping 1% of New Homes (if that much)

An article on GoBankingRates discusses The Secret Costs to Owning a Tiny Home.     You might want to read that if you're planning to live in a small over priced shack.   But while reading that I noticed they start out saying "... tiny house movement is sweeping across the U.S ...". I'm not really sure what "sweeping" the nation means. But I tend to think this implies a lot of people are doing it, rather than just talking about it.
The American Housing Survey for 2013 has summary table data.   Looks like that data is from 2010 so its not exactly brand new.    But its the newest we've got to look at for now.  If you dig around the XLS sheet with all the tables we can find on tab C-02-AO that they give both the square footage of houses and break to down by the new construction within the past 4 years.      From there we can see that 26 thousand of the total 1,960 thousand new construction homes are under 500 sq. ft.     Therefore 1.3% of new homes built in the previous 4 years were under 500 sq.ft.    Of those, we don't know how many are just tiny studio apartments in NYC versus the small single family, cute shacks which are what we all consider to be Tiny Homes.   But it is certain that the number of very small homes of any nature are a very small portion of the total new home market.

If you look at the AHS tables for specific metropolitan areas we can see if the trend of small houses might vary based on city.    Looking at Seattle I see that 0.4 thousand out of 47 thousand units are 500 sq. ft or smaller new construction.    Thats just 0.85%.     Smaller even than the national average.     Likewise in Austin the figure is 0.2 thousand out of 30.8 thousand.    Thats 0.65%.    Even fewer.     In New York City on the other hand there were 3.7 thousand such small housing units built out of 57.8 thousand total which makes it 6.4% of the sum.      I don't know for sure but when I think of a Tiny House I'd expect to see a bunch of them in Seattle or Austin and hardly any in NYC.    The land in NYC is more expensive than anything else so building a shack trailer on super expensive land has no real benefit.    I expect that small studio apartments in NYC accounts for a lot of that and they are probably raising the national average.

That gives the % of new homes under 500 sq. ft. as :

National	1.30%
Seattle	0.85%
Austin	0.65%
NYC	6.40%

I don't think the Tiny Home movement is really sweeping anything other than headlines in a certain subset of blogs.

Yeah, I'm looking at old data and I suppose the trend could have developed more over the past few years, but I really doubt it.

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Performance of a Couple Old REITs Versus Inflation Over Time

How do REITs hold up versus inflation?    I'd assume they ought to do OK.    I'd think holding real estate ought to be a good hedge against inflation in general.   People gotta live somewhere.   I decided to look at the oldest REITs I could find to get a longer term picture.

REIT.com says in their timeline that the first REITs were : "The first REITs--Bradley Real Estate Investors, Continental Mortgage Investors, First Mortgage Investors, First Union Real Estate (now Winthrop Realty Trust, NYSE: FUR), Pennsylvania REIT (NYSE: PEI) and Washington REIT (NYSE: WRE)--are created. The latter three are still in existence today."

FUR and PEI have history at Yahoo finance going back to the 70's.   I pulled the historical prices from yahoo and then I averaged out the annual adjusted close prices for each year.   Those adjusted close prices include dividends and splits.

I got inflation info from US Inflation Calculator who got it from the BLS.

Here's the chart with their adjusted close average monthly prices adjusted to inflation :

What we're looking at here is the historical prices of the two REITs over time adjusted to inflation.

PEI did OK longer term.    FUR was shaky.      If you bought PEI back in the 70's you'd have spent around $2 a share in 2015 dollars and that REIT trades for over $18 as I write this.   But if you bought FUR in most of the 80's and 90's you'd be behind inflation.

The housing bubble inflated REIT values abnormally.   If you bought a REIT during the peak of the housing bubble then you'd have trouble recovering from it even now.   In hindsight, both PEI and FUR would have been poor choices if you'd bought them around 2006 or 2007.

FUR's long term performance has been really up and down.  I don't know why this is.   I haven't looked at the history of that stock to see if theres an answer.

Keep in mind that this is only two REITs here.    Thats not much of a sample size to make any broad conclusions from.   But there are only a handful of REITs that have been around since the 70's and I wanted to get a look at how REITs hold up versus inflation over a longer period.

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What is Lender Paid Mortgage Insurance (LPMI)?

I'm familiar with PMI or Private Mortgage Insurance.    Thats an extra fee you pay if you don't have a full 20% down to cover the lenders risk of you defaulting.   However I've also recently heard of Lender Paid Mortgage Insurance (LPMI) as an alternative.   The "lender paid" part sounds good, right?    But of course its not free.  

Basically LPMI is handling the same function as PMI by instead paying through an increased mortgage interest rate rather than a separate fee.    You might get a cheaper mortgage payment this way versus going with PMI.   However since PMI should drop off you may pay more in the long run with LPMI.

I'm not going to try and reinvent the wheel here, so here's 3 good articles on the topic :

Bankrate Lender-paid mortgage insurance: Pros, cons
Bigger Pockets  What Is LPMI? Lender Paid Mortgage Insurance
Wells Fargo Lender-Paid Mortgage Insurance (LPMI)

You might want to go with LPMI if you're in a higher tax bracket and you might move or refinance or pay off the loan before the full term of the loan.

PMI is likely better if you plan to stay in the home and keep the original mortgage long term.


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How Long Will It Take To Pay Off a Mortgage With Extra Payments?

Lets say you go buy a house for $200,000 and put $40,000 down and then take out a 30 year $160,000 mortgage at 4%.   You decide you'd like to pay off the mortgage faster and you put an extra $100 into your monthly payment.   How long will it take you to pay off your mortgage?  

You can find the answer by using an online calculator like the
Early Mortgage Payoff Calculator at TimeValue software

I used the calculator myself to generate some example numbers below.

For a $100,000 loan the number of years it will take to pay off an original 30 year mortgage based on making extra monthly payments  of $100 to $600 :

	4%	5%
$100	21.6	21.3
$200	17	16.75
$300	14.1	13.8
$400	12	11.8
$500	10.5	10.3
$600	9.3	9.2

Roughly speaking if you pay an extra 50% on your mortgage monthly then it will cut your loan to about 15 years.   

Doubling your payment will cut it down to about 10 years.

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Did Lower Interest Rates Cause Home Values to Go Up?

It would seem that mortgage interest rates should impact the cost of housing.    The higher the interest the higher the payment and the less affordable homes become and vice versa.   I discussed this before in the article  If Interest Rates go Up then Will House Prices Go Down? and I didn't find any direct correlation.   I think the real answer is that there are just too many variables to see a direct connection.   Or home shoppers simply don't think or act that way.

In the past 12 months rates have dropped and so you might expect to see that impact home prices.  This presents another chance to look for correlation.   With cheap loan interest rates we can all afford to spend more on homes right?

Lets look at 30 year mortgage rate history from Fannie Mae

In the most recent month January 2015 the average rate is 3.67%.   A year before that in January 2014 the rates were 4.43%.    Rates are down 0.76%.    That may not sound like a lot but its pretty significant difference if you're looking at the mortgage payments.

Now if the assumption is that rates going up will cause home values to go down then we can also assume logically that the opposite will hold true.   That means that if rates go down then home values should go up.   With cheap interest we ought to be seeing lower payments and that would let buyers afford to spend more on homes and thus drive up market values.

Ok so what kind of impact on home values could that 12 month change in interest give us.   Lets start with a $100k mortgage in January of 2014 and figure the payment then compare to what kind of loan we'd be able to afford with a similar payment at the January 2015 interest rates.

With interest of 4.43% a $100,000 loan gives a payment of $502.53
With interest of 3.67% a $109,500 loan makes the payment $502.15

Based on the interest rate change year over year buyers should be able to afford about 9.5% more house.  

The Realtor site tracks median home prices and from 2013 Q4 to 2014 Q4 prices are up 6%.     So we certainly haven't seen the nearly 10% gains that the drop in interest might imply.


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MBA Interest Rate Forecast from 2013

Almost two years ago I wrote about a MBA Forecast on Mortgage rates for 2013 & 2014

MBA = Mortgage Bankers Association in this context

They said at the time :
"according to the MBA, by the end of 2013, the interest rate on a 30-year fixed mortgage will be at 4.4 percent. And by the end of 2014, they see the rate at 4.6 percent."


Lets see how they did and compare their forecast to the actual rates in the history of rates from Freddie Mac

The end of 2013 rates were 4.46%.   But at the end of 2014 they were down to 3.86%

So the MBA was fairly close in calling the rate at the end of 2013 but off by 0.74% for the year later 2014 forecast.


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You're (NOT) One Click Away From a 19% Return

I received a postcard  in the mail advertising an investment opportunity that would pay 19% returns.   I immediately concluded it was a scam or otherwise too good to be true.   If 19% returns were that easy then everyone would be getting them.   Clearly theres got to be some substantial risk or outright lying going on here.   The postcard in question explained with an * on that 19% figure that :

"IIR is based on investment projections of Sponsor and as provided in the PPM for the investment.  Results may vary due to a wide variety of factors."

OK so that seems fair and they're at least saying that the 19% is just their projection and its not guaranteed.    So this seems more like a relatively high risk investment and not an outright pyramid scheme style scam.   

I went to the website they listed on the page and found that its actually an investment offered through the RealCrowd site.    RealCrowd is a crowd funded real estate company.   For more on the topic see Crowdfunding Real Estate from CNBC.      

Probe a little on the Real Crowd site and I see that only accredited investors are allowed.    Thats a good thing.    It means that you have to have piles of money sitting around that you can afford to lose it.   Just kidding.  But really it means that you have to have piles of money sitting... oops, I almost said the same thing.   Accredited investors have to have a minimum income level of $200k a year / $300k if married for 2 years OR have net worth over $1M excluding your primary residence.    My wife and I don't happen to fit that description so I guess we're losers who have to sit on the benches and watch the rich people make 19% while we make due with our 0.01% savings rate.


How mean of them to tease me with this fabulous investment opportunity but then say I can't play because I'm a poor kid.  

Given that the investment is on RealCrowd this makes it seem much more legit to me than some random postcard claiming 19% returns.   But are advertisements for 19% returns really ever legit?   (at least in this current market)    Is that even possible?   I found the actual property for sale on Loopnet.com and I can use the info there to estimate the financials.    The property is actually just about a 2 mile drive away from a rental that we own and recently rented out after a vacancy so I've got some direct experience and recent with the market in question.  

Here are the basic example financials* for the property : 

Property cost $3M
37 units
Average rents = $850
Annual gross rent = $377,400
Expenses = 50% = $188,700
Gross = $188,700 

$2.4M loan and $600k down payment
Mortgage payments $137,496
Gross rent - expenses - mortgage =  $51,204 
 8.5% return

 Lets say they expect to spend an average of $10k per unit to fancy the place up then jack up rents by $200 each.    

That means the total investment is now $3.37M.    The loan is now $2.696M and the down payment is $674k.
But now the rents are up substantially at $466,200 per year total.     If we use the same 50% ratio then we're looking at gross of $233,100.   The mortgage payments are up to $154,440/yr.     This gives us a $78,660 bottom line on $674k of equity.   That gets you up to 11.7% return.    Thats getting a lot closer to 19% but not quite.    This is a realistic scenario.    $850 average rents are typical for that area of town and you could probably get up to $1050 fair enough if its nicely remodeled.   But pushing it much higher than that isn't very likely for an older building.  

OK now what if you bought the place, spruced it up and then resold it?    If you can reasonably sell a place with $850 rents for and a cap rate of 6.29% then it sells at $3M.   But if you also expect a 6.29% cap rate on an improved property then you'd expect the $1050 rents to equate to a sale price of $3.7M.   Thats about 10% gain in equity in value after doing the improvements.   So maybe what the idea here is to buy the place, spend some money fixing it up.   Jack the rents up.   And then after a year or two try and resell at a higher price based on the higher rents.    Based on that kind of strategy I think its actually feasible that they could net 19% returns.    Note I'm just guessing what kind of investment strategy they might have but I think my guess is fairly good one.   You really cant   make 19% return on a simple multifamily investment so they must be expecting to improve and flip the property and I assume they must be using fairly high leverage as well.    If their strategy fails then that high leverage could mean big losses for the investors or at least much lower rate of return, and that is where the risks come it.   I also have no idea how liquid the investment would be or if theres any other requirements involved.  







But the investment and potential 19% return is based on a lot of ifs and risks.  There is risk involved for sure but its not impossible.     I mean hey, my Dad and I bought a property $45k in 2002 and its worth $127k now.   Thats 8% appreciation.   Plus we've netted about $6k profit annually off the property.     We probably could have realistically flipped that place in a few years for nearly a 200% return and gained 25% annual investment returns.   While what my dad and I did is different than what this investment in question would do, its proof that high returns are possible on real estate given the right situation.   If my dad and I could do it then I'm sure competent real estate professionals using other peoples money can do it too.



While I think 19% might be feasible I also think you should NEVER sign up for investments that you get via mass mailings that advertise high returns and have little detail.   

Bottom Line :   A 19% return might be feasible but it would come with risks and I certainly would not trust an investment pitch advertising 19% returns received via postcard.

* I used similar but fake numbers for the examples here.     The numbers I use are similar but not exact.   --

Have US Houses Really Nearly Tripled In Size?

The Big Picture cited an info graphic from Treehugger that says that "avg. house size" of 1950 was 983 sq.ft. and in 2011 it was 2480 sq. ft.     So they're basically saying that home sizes have nearly tripled in America since the 1950's.     This is one of those examples where people say that houses have gotten bigger in the USA.  I dont' disagree with that point in general and I'm sure house sizes are bigger. But I might quibble on the details...

First, I'm not sure where claim that houses in 1950 averaged 983 sq. ft. came from.    Treehugger got the graphic from Mother Nature Network.   They cite the infographic as being courtesy of Masters in Human Resources.   I don't see any specific citation for that 983 figure for house sizes in 1950 from anyone.   And the infographic has been passed around the net and started with a site that seems to shill for online degrees.  

Now I'm not saying 983 is wrong but I just can't find a source for that number no matter how hard I search on Census or elsewhere.  I did found this paper that says :  "The average size of new houses increased from about 1,100 ft2 (100 m2) in the 1940s and 1950s..."    They talk about data from the Census and US Dept. of Housing and Urban Development.  The best I can find on the Census myself only goes back to 1973.    Median and average size of new construction.   They say the average new house was 1,660 in 1973 and 2,392 by 2010.   An NAHB paper says that the "typical" new home in 1950 was 1,000 sq.ft. or less.  This paper The U.S. Homebuilding Industry: A Half-Century of Building the American Dream has figure 5 that says the "Average Single-Family Home Size: 1,065 square feet They in turn cite the source as : US department of commerce bureau of the Census : US Department of housing and housing at the millennium facts figures and trends, a publication of The National Association of Home Builders"   They also have a chart for "Average New Single-Family Home Size, 1950 - 1972" showing the trend starting around 1,000 sq. ft in 1950 and going up to 1,634 in 1972.   They cite the US Department of Commerce Bureau of the Census as the source

I think thats enough data points to believe that the average new home size in 1950 was 1,000 to 1,100 sq. ft.  

But one thing to keep in mind that these are the stats for NEW houses built.    The size of a new house is not the same as the average size of houses in the nation.    Most people don't live in new houses and a lot of Americans still live in those 1,000 sq. ft. houses built in 1950.     Currently the median home size as of AHS 2011 data is 1,700 sq. ft.    People buying new houses are often buying bigger houses because they can afford them.   Plus if you're going to go to all the expense to build a new house then may as well make it a little bigger.   The additional cost to increase the sq. ft. is marginal compared to all the total construction costs and land.

Maybe its something unique to the city I grew up in but I recall a lot of older houses that were fairly big.   A relative of mine owned a house built in the 19th century and that was a really big old farm house that had 2 stories and 4 bedrooms.   That house is 2300 sq.ft.    Of course thats just anecdotal and maybe big old farm houses aren't at all the norm.     We also have an 1940's house that is a rental which is only about 830 sq. ft.   

I did a search of my home on Zillow for homes in one specific ZIP code.    I looked at only homes built in 1940's and homes built after 2000.   Just to compare those two specific timeframes.    This is what I found :

	1940's	2000+
total	72	141
under 1000	6	1
1000 to 1500	24	42
1500 to 2000	23	45
over 2000	19	53
Median	1630	1770

This is just a small sample and very anecdotal.   Plus it ignores all the homes that were demolished in the past 75 years and the homes that were built in the 40's but then later expanded in size.    But in my small sample the difference in size is clearly not as stark as just saying houses are 2-3 times as big.    Houses are bigger.    There is a higher % of homes built in the 40's that are under 1000 and a higher % from the 2000 and later years that are over 2000.  But the median size is only a big larger.

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How Much Are Peoples Homes Worth? - Looking At Some Demographics.

I previously looked at the values of homes in How Much Are Peoples Homes Worth?

The American Housing Survey that I got that data from also breaks down home values into some specific demographics.   Lets look at how home values break down for those demographic groups.

I got the data from the AHS site specifically the document :
Value, Purchase Price, and Source of Down Payment  Table 3-14. Owner Occupied Units

First let us look at home values by the large geographic regions :

Homes are generally lower value in the South.    The highest value homes are normally found in the West.   The Midwest and Northeast are more often in the middle.


Next, New construction : 

 Not too surprising there.   The values skew higher and theres very few new construction homes worth less than $80k.  

Manufactured & mobile homes : 

 I'm a bit surprised that there are homes in the >$200k level.   And while you can't see it on the chart theres 1-2 homes in the highest price ranges as well.   Thats kind of odd.  However I"m guessing these very high value homes are manufactured structures in the sense that they were primarily built off site then transported to the lot.   Or maybe someone parked a trailer on 5th avenue in Manhattan?

Home values of the elderly, aged 65 and over : 

There isn't much difference between the values of homes and the general population.  

People below the poverty line : 

 Here we see something interesting.   Theres more homes in the low value levels but there are still plenty of homes in the medium and high end.   Of course income and assets are not really equivalent.  You could feasibly have someone living in a $1M house in California that they bought in 1960 and only living off a $1000 social security check.   Also you can have relatively wealthy people showing low income in a given year simply because they didn't have earnings, but maybe they're just living off the giant pile of cash in their bank account.  Of course theres also some people committing fraud of various sorts.   A bet one or two of those people in >$750k homes are committing tax evasion and fraudulently reporting a very low income.



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You Should Buy a House, (Unless you Live in San Jose, San Francisco, New York City, Boston or Seattle)

I'm going to make a broad generalization here :  You're probably better buying a house than renting in most of America.   Only a handful of cities with very expensive real estate are exceptions.   I'd also assume you're going to stay in a home for a reasonable period of time and assume generally average costs otherwise.

I will support this conclusion by looking at cost of housing vs rent in each city from my old article
Estimating Rental Investment Returns per Major Metropolitain Areas  And then I can take those and figure which cities favor renting vs buying.    The New York Times has a nice buy vs rent calculator to help you figure if buying or renting is a good idea.    So I simply take the figures for median home values and rents from my article and plug them into the NYT calculator.   To make it easy I started with the cities where being a landlord is worse deal which means that housing costs are high compared to rents.   I can do that by looking at the sorted list of lowest return for rent/housing cost.   San Jose is at the top of the list and the NYT calculator says for the $570,000 home cost there you are better off renting if rent is $2,066 or less.   But the average rents are $1,460 so yes in that city you're generally better off renting.   I went down the list and had similar results for San Francisco, NYC, Boston and Seattle.     #6 on the list is Providence, RI, where the houses cost $217,000.   The NYT calculator says you're better off renting if rent is $847 or less and the average rents are just a hair more at $849. 

So based on general numbers only the top 5 most renter friendly metros are better places to rent than to buy.   San Jose, San Francisco, New York, Boston and Seattle.   In those 5 cities its generally cheaper long run to rent.  The other 43 cities on the list are all better places to buy than rent.   I would also then make the assumption that the smaller cities and rural areas in the US are generally going to be better to buy than rent as well as generally housing is lower in small towns and rural areas.   Of course there will be exceptions out there.

Of course there are major holes in my methodology here.  I used the average figures in the NYT calculator and thats not something you can assume.  Property taxes, insurance, etc vary widely across the country so to get a better result I'd have to find and plug in the averages for each city.  But thats far to much work for a lazy blogger like myself to do.


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Estimating Rental Investment Returns per Major Metropolitain Areas

The kind of return you can get from a rental property varies a lot based on the local real estate market.   I figured I could use average rents and median home values to give a crude estimate of the approximate rental returns for a given area.  This isn't precise though since the median home will have different characteristics than the average rental.   The home is likely to be larger and have more amenities, etc than a average rental.   But for my purposes of giving a rough gauge of the returns for a rental market, I think it is good enough.


To give a single data point on how the table below might compare to actual property values and rents I decided to look at Vegas.  I pulled up Zillow and searched for houses in Las Vegas from $100-$125k and found a house for $105k with 3 bed/3bath.  Zillow estimates the rent would be $1020.    I then checked Craigslist and searched for 3 bed rentals under $1200 and found a couple houses with 3 beds for $1000 and $1100.    These figures compare to the median home values of $124k and average rent of $957 in the table.  Also of course what I'm looking at on Zillow and Craigslist is in 2014 versus the data below in the tables being from 2011. 

The table below lists the median home values in $1000, monthly rental costs and then the return rate calculated based on simply 12 months of rent / median house costs.   All the figures below are from 2011 as thats the latest I found all the data available.

Metro	Home	Rent	Return
Atlanta-Sandy Springs-Marietta, GA	98.6	914	11.1%
Austin-Round Rock, TX	193.1	930	5.8%
Baltimore-Towson, MD	230.0	1073	5.6%
Birmingham-Hoover, AL	139.8	753	6.5%
Boston-Cambridge-Quincy, MA-NH	346.2	1163	4.0%
Buffalo-Niagara Falls, NY	119.2	682	6.9%
Charlotte-Gastonia-Concord, NC-SC	148.9	820	6.6%
Chicago-Naperville-Joliet, IL	176.5	928	6.3%
Cincinnati-Middletown, OH-KY-IN	122.3	711	7.0%
Cleveland-Elyria-Mentor, OH	105.1	712	8.1%
Columbus, OH	123.9	776	7.5%
Dallas-Fort Worth-Arlington, TX	148.9	863	7.0%
Denver-Aurora, CO	231.4	920	4.8%
Detroit-Warren-Livonia, MI	53.8	805	18.0%
Hartford-West Hartford-East Hartford, CT	227.6	962	5.1%
Houston-Baytown-Sugar Land, TX	155.7	849	6.5%
Indianapolis, IN	123.9	764	7.4%
Jacksonville, FL	123.6	940	9.1%
Kansas City, MO-KS	133.2	798	7.2%
Las Vegas-Paradise, NV	124.7	957	9.2%
Los Angeles-Long Beach-Santa Ana, CA	307.7	1214	4.7%
Louisville, KY-IN	130.4	696	6.4%
Memphis, TN-MS-AR	112.3	805	8.6%
Miami-Fort Lauderdale-Miami Beach, FL	181.1	1078	7.1%
Milwaukee-Waukesha-West Allis, WI	185.2	785	5.1%
Minneapolis-St. Paul-Bloomington, MN-WI	154.7	858	6.7%
Nashville-Davidson--Murfreesboro, TN	151.9	800	6.3%
New Orleans-Metairie-Kenner, LA	153.0	886	6.9%
New York-Northern New Jersey-Long Island, NY-NJ-PA	378.7	1187	3.8%
Oklahoma City, OK	141.6	731	6.2%
Orlando, FL	124.9	970	9.3%
Philadelphia-Camden-Wilmington, PA-NJ-DE-MD	210.1	957	5.5%
Phoenix-Mesa-Scottsdale, AZ	115.5	893	9.3%
Portland-Vancouver-Beaverton, OR-WA	219.5	906	5.0%
Providence-New Bedford-Fall River, RI-MA	217.2	849	4.7%
Raleigh-Cary, NC	185.2	828	5.4%
Richmond, VA	187.1	925	5.9%
Riverside-San Bernardino-Ontario, CA	172.3	1076	7.5%
Sacramento--Arden-Arcade--Roseville, CA	166.1	1004	7.3%
Saint Louis, MO-IL	121.8	776	7.6%
Salt Lake City, UT	182.2	859	5.7%
San Antonio, TX	152.5	907	7.1%
San Diego-Carlsbad-San Marcos, CA	370.3	1237	4.0%
San Francisco-Oakland-Fremont, CA	483.4	1345	3.3%
San Jose-Sunnyvale-Santa Clara, CA	570.0	1460	3.1%
Seattle-Tacoma-Bellevue, WA	285.0	1037	4.4%
Tampa-St. Petersburg-Clearwater, FL	127.8	906	8.5%
Virginia Beach-Norfolk-Newport News, VA-NC	182.9	1053	6.9%
Washington-Arlington-Alexandria, DC-VA-MD-WV	325.4	1391	5.1%

The markets with the 10 best returns :

Metro	Home	Rent	Return
Detroit-Warren-Livonia, MI	53.8	805	18.0%
Atlanta-Sandy Springs-Marietta, GA	98.6	914	11.1%
Orlando, FL	124.9	970	9.3%
Phoenix-Mesa-Scottsdale, AZ	115.5	893	9.3%
Las Vegas-Paradise, NV	124.7	957	9.2%
Jacksonville, FL	123.6	940	9.1%
Memphis, TN-MS-AR	112.3	805	8.6%
Tampa-St. Petersburg-Clearwater, FL	127.8	906	8.5%
Cleveland-Elyria-Mentor, OH	105.1	712	8.1%
Saint Louis, MO-IL	121.8	776	7.6%

And the 10 worst:

Metro	Home	Rent	Return
San Jose-Sunnyvale-Santa Clara, CA	570.0	1460	3.1%
San Francisco-Oakland-Fremont, CA	483.4	1345	3.3%
New York-Northern New Jersey-Long Island, NY-NJ-PA	378.7	1187	3.8%
San Diego-Carlsbad-San Marcos, CA	370.3	1237	4.0%
Boston-Cambridge-Quincy, MA-NH	346.2	1163	4.0%
Seattle-Tacoma-Bellevue, WA	285.0	1037	4.4%
Providence-New Bedford-Fall River, RI-MA	217.2	849	4.7%
Los Angeles-Long Beach-Santa Ana, CA	307.7	1214	4.7%
Denver-Aurora, CO	231.4	920	4.8%
Portland-Vancouver-Beaverton, OR-WA	219.5	906	5.0%

I was going to add in the property tax rates and figure the return after accounting for average property taxes.  However I can't account for the impact of homestead exemptions so that would make that calculation kind of worthless. 

This does not account for the expenses which vary as well.  
Sources of information :
Rent  rates from the Census
Median home prices from the Realtor association

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The 1% Rental Investment Rule - Is it Still Valid?

The 1% rule for rental properties basically states that for a property to be a 'good' investment as a rental the rent should be at least 1% of the property cost.   For example if a property costs $100,000 then the rent should be $1,000 a month or more for the numbers to work in your favor.

I would have thought I would have written about this more than I have.   I mentioned it in a way in a post back in 2008 How to value rental property prices.   But then I referred to a 100 x rent price rule, rather than calling it the "1% rule".


I can't seem to find any detail on the origins of the 1% rule.  I don't know who came up with the rule of thumb or how they figured the 1% number.   When I search the net I see lots of references to the rule but nothing about its origins.   I remember the 1% rule being cited by my father decades ago.   That must have been in the 80's or 90's, so I know its been around a long time.  

One thing that has made me wonder if the 1% rule still holds as well is the interest rate changes over the years.   Mortgage interest rates have dropped considerably over the past couple decades.   Todays rates are significantly lower than they were just 10 or 20 years ago.    If the 1% rule was designed when typical interest on a mortgage was 7% then they assumed larger carrying costs than you'd have today.   For example if you're paying 7% interest on a $100,000 mortgage then that is $7000 a year but today you can get a rental mortgage at 4.5% so you'd pay $4,500.   Thats a $2,500 difference in cost to the owner.   With such an interest change, else equal, you could get the same end resulting profit out of a rental with 80% as much rent compared to paying that 7% rate.  

On the other hand I'm not sure if the 1% rule actually assumes you have a mortgage.  It might just be based on getting a return on capital without any consideration of carrying a mortgage.   Since I don't know the origin of the 1% rule I don't know what it assumes or how they came to the 1% figure.   Maybe they assumed you were buying the rental with cash and then just looked for a basic 8% return on your money and assumed 33% expenses.   That would end up with the 1% rule.    But they might have targeted an 8% return on the money based on relatively low appreciation of the property or maybe they thought 8% was good compared to 12% annual stock market returns.    I don't know.

Unfortunately since I can't find any detail on how the 1% rule was originally devised I can't tell if its assumptions hold up over time.   Its just a rule of thumb and should be treated as such.   As rules of thumb goes it works well enough.  What you really want to do is run all the numbers and decide if the investment is a good one or not based on the specifics.    You can't universally apply the 1% rule to all properties and expect to get the same results.


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