Here are the Southwest’s hidden hot rental investment markets where you can still find good deals and tenants.

HouseCanary, a data analytics company for real estate professionals, recently released its fourth quarter HouseCanary Rental Investment (HCRI) Index.

Data from the HCRI points to five Southwest cities — Phoenix, Tucson, Las Vegas, El Paso and Albuquerque — with good potential for single-family rental property investment.

Here’s what you need to know from HouseCanary. While the national Effective Gross Yield (EGY) for U.S. single-family rentals remained steady at 7.3%, Southwest metro areas including Phoenix, Tucson, Las Vegas, El Paso, and Albuquerque all reported average or below-average EGY.

Why you should take note: “The markets where rental yield is either unusually high or unusually low haven’t changed significantly in the past quarter, but our analysis shows that even in markets where EGY is average or middle-of-the-road, rental investors can still find hidden gems that will generate better-than-average returns,” said Alex Villacorta, HouseCanary’s executive vice president of analytics.

“The HCRI Index is meant as a guide to single-family rental home investors, lenders, and renters to benchmark the health of the single-family for-lease market by individual state, ZIP code, and block,” he added.

Villacorta provides further insights into the HouseCanary Rental Investment Index. “In this new normal of the housing market activity all market participants will have to be vigilant for these micro opportunities. “For example, we examined five Southwest metro areas with average or below-average EGY — Phoenix, Tucson, Las Vegas, El Paso, and Albuquerque — which are markets where new opportunities exist for any investors who know exactly where to look.”

HouseCanary examined those specific geographic regions to see what those relatively low yields might mean for investors. “What we found in all five cities was that even though they might not have the same high average EGY as metros in the Southeast, certain hyperlocal areas and blocks will have more opportunities than others. Rental investors or other buyers who know where those blocks are located can use that knowledge to get a jump on any new listings in those areas,” Villacorta explains.

I asked Villacorta why these new opportunities exist despite average or below national EGY?  “An average or below-average EGY in a metro area typically means that a preponderance of homes in that area is showing average or below-average EGY,” he continued, “ but there are also many homes in that area where rental investors could potentially generate higher-than-average EGY.”

Here are key characteristic investors should consider. “Homes located near good schools and public transportation, homes located near significant local landmarks or attractions, and homes with attractive attributes and features are often able to rent (or sell) for above the local average fair market value. That’s why even in areas with low EGY relative to the national average, you can almost always find homes that have higher-than-average EGY, Villacorta said.

Michael Bond, senior lecturer in finance, Eller College of Management at The University of Arizona in Tucson, points to fundamentals in Tucson and Phoenix that signal hot investment potential. “The population is growing faster here than nationally and that combined with a housing market that has still not totally recovered offers the opportunity for people to pick up some good properties if they know where to look,” said Bond. “In Tucson, we have over 40,000 students and they all have to live somewhere. So anywhere around the University looks good to me.” According to Zillow, Tucson’s median home value is $172,500. “I see similar investment and rental market dynamics in Tempe around Arizona State,” Bond adds.

Understanding the neighborhoods and the local landscape, wherever you are looking for homes, is critical. Buying a home in a larger metro area can be especially challenging because there might be streets, blocks, and neighborhoods that simply aren’t on your radar — but should be.

If you are working with a real estate professional, use that person as a resource; ask them to explain why one home is listed at one price when another home across the street is going for five figures more or less. The background knowledge will help you make an intelligent and competitive offer.

As always do your due diligence and remember if it sounds too good to be true, it probably is.

Courtesy of  forbes.com and  credit to Ellen

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