Rental Property Investors Shocked By New Building Trend
By JD Esajian on March 30, 2015
This new building trend is shocking. So what is it? How will it impact real estate investors? What does it mean for renters and home buyers?
Bloomberg Business just leaked new data highlighting the size of the latest real estate trend. America’s second largest home builder is now moving into the rental property business – in a big way. The $5.5 billion building firm just launched a new single-family rental home community in Nevada. This follows the precedent set in recent developments on the Southern California coastline. That’s on top of over 500,000 single-family homes owned by big funds. This is just the figure from 2011 to 2015. It doesn’t include individual rental property investments, and acquisitions by smaller investment firms.
So what are the pros and cons of this trend? What smart money moves should individual investors be making now?
Why the Big Shift to Rental Homes?
The overarching driver behind this trend is a demand for investment income and yield. Real estate remains the safest and most profitable asset type. Whether you need a shelter for wealth, tax breaks, passive income, or higher returns, real estate has it.
Institutional investment funds and individuals need deal flow and consistent income. Rental properties provide it. This just isn’t found elsewhere.
Homeownership in America is at 20 year low. Leading analysts have predicted this could drop even further. That means lots of renters in the market. And lots of demand for rentals. This in turn is pushing up the profitability of rental properties.
Real estate blogs and news sites have been hyping up millennials as a major buying force. But, many aren’t buying homes. Many aren’t mentally ready for year round homeownership. Others aren’t prepared. Many don’t have the credit. To make things worse, mortgage lending remains tight. You know it’s bad when the fed chairman and CEOs of AAA credit national corporations can’t get home loans.
A new surge in mortgage defaults and foreclosures is adding to the pool of those that can’t get loans too. That means more renters dumped on the market.
It appears that investors are finally paying attention to home buyer demands. A brave effort has been unleashed to influence consumers to move to dense urban centers and micro-lofts. Yet, this propaganda contradicts home buyer surveys. Buyers have shown they prefer single family homes and their features. They want views, full sized kitchens, and outdoor space. When looking at macro trends there is little to support any pivot in these desires either. Remote working, healthier living and eating all support more suburban home buying.
So what does it all mean for renters, home buyers and investors?
It’s making it Harder to:
Find a Place to Buy: With so much of the country turned into rentals there are fewer choices for those that want to buy homes. On the bright side this is boosting the value and price of homes for sale. And they’re selling faster in high demand areas.
Get Approved to Rent: The huge demand for rentals making many landlords pickier. Often it is now far easier to qualify to buy a home, than to rent one. Unfortunately; many are getting pushed out of housing altogether.
Afford a Place to Rent: Rents are skyrocketing. Zillow says it’s twice as cheap to buy a home versus renting one. Unless wages rise this could impact life in some of today’s most popular cities. If great teachers, chefs, and law enforcement officers can’t afford to live there, there is going to be trouble.
On the Bright Side:
The institutional invasion of the rental market is creating opportunity for individual investors. Providing easier approval terms and affordable rentals can be a great niche. It’s the apex of sound investing and doing good.
It’s a great time to sell property where inventory is low. It’s a great time to hold property for income too.
Investing in rentals has never been easier or more profitable. Low interest rates and asset prices, combined with high yields are all working in the investor’s favor. Conditions won’t be this good again for decades.
Many may now find it more appealing to invest in income property than buying their own homes. This is definitely true for many millennials and the expanding pool of freelance workers. Go travel the world. But find balance with a brick and mortar income producing investment.
Summary
Don’t build rentals. It isn’t as profitable as most think. And it’s getting crowded. A new house is often worth more for sale than a used rental! But do invest in great looking rentals. Find your niche. Help others take advantage of current opportunities, and enjoy more income, and wealth.