A new single-family rental (SFR) market report from Attom Data Solutions revealed that profit margins on three-bedroom SFR homes are falling across most of the country.

Attom Data evaluated SFR yields in 212 counties across the country, each with a population of at least 100,000. It divided annualized 2022 gross rental incomes by median purchase prices during the first quarter of this year to determine an average gross rental yield. The real estate analytics company found that for three-bedroom single-family homes purchased by investors this year, yields before expenses decreased in 72% of the counties assessed.

Many of these declines, at least so far, are fairly minimal. In fact, most are less than 1 percentage point behind rent yields in 2021. Also notable, however, are the segments of the market where the yield declines are occurring: Roughly three-quarters of metros where median home prices exceeded $250,000 in the first quarter saw declining rent yields. These markets already typically see smaller profit margins, with yields regularly below 7%.

In areas where median prices are at least $500,000, SFR yields are even lower, coming in at less than 6% in three-quarters of counties during the first three months of 2022. The smallest returns were found in Santa Clara County, California (San Jose), which had a yield of 3.1%; San Mateo County, California (outside San Francisco), with a yield of 3.2%; Williamson County, Tennessee (outside Nashville), with a yield of 3.9%; and San Francisco County, with a yield of 3.9%.

SFR yields are dropping in large part because the purchase prices that investors are paying for properties are rising faster than rents. Median prices for three-bedroom homes were up at least 15% year over year in half of the counties evaluated by Attom while average rents rose by that much in only one-third of these same areas.

“Investors who own single-family rental properties have seen their margins compressed over the last year as home prices have risen faster than rental rates,” said Rick Sharga, executive vice president of market intelligence at Attom Data. “The good news for these property owners is that their yields should improve as annual rental rates increase, and they should also benefit from home-price appreciation over time.”