If ever there was a good time to be a landlord now seems to be the moment. Vacancy rates are at their lowest level in years while rental rates have been soaring.
Real estate investors who have held property over the long-term have seen a substantial revenue increase. Figures from the Census Bureau show that asking rentals rose from $438 in 1995 to a record $735 in the second quarter of 2013. Meanwhile, the latest vacancy rate is 8.2 percent, the tightest market for rental properties going back to at least 2005.
Rising rental rates for landlords reflect two trends:
First, there is a massive amount of pent-up demand. Part of it comes from people who simply do not have the dollars to buy, individuals who have faced uncertain economic times or have only been able to find part-time or low-wage employment. Double-up or triple-up and rental housing becomes affordable without the need for a down payment.
Second, there are fewer household formations than used to be the case. Jeb Kolko, the chief economist with Trulia, explains that we are seeing fewer household formations — about 2.4 million less than ought to be the case. The increase in adults who live with their parents is one result of this trend. Another is that such individuals are a potent pool of future renters.
Meanwhile, while rental demand has been soaring, long-term owners have enjoyed substantial benefits.
The typical existing home today is priced at $214,700. That compares with $114,600 in 1995.
But why go back so long?
A lot of attention is given to short-term real estate ownership, in some cases what is known as flipping. As an investment strategy, flipping makes sense when home prices are rapidly rising or property values can be substantially enhanced through upgrades and repairs. However, short-term approaches are not the only way to go: Many investors are long-term owners and by long term I mean a decade or more.
The long-term ownership has two goals: First, to create more equity through mortgage amortization and price appreciation. Second, creating an ongoing cash-flow stream through rising rental rates, refinancing to lower interest levels and continued depreciation and other tax write-offs.
Think of it this way: A child born in 1995 would be 18 this year. Had the parents bought the typical home back then they would have paid $114,600. Today the property is perhaps worth $100,000 more — a nice start toward reducing college bills if sold.
Or, back in 1995 the typical annual rent was $5,256 ($438 x 12). Today the same property is likely to have a gross income of $8,820. Yes, taxes and insurance went up, and yes there were likely repairs and vacancies, but as an alternative who would want yummy one-year CDs which now pay .7 percent?
Of course, as with any investment option, there are risks. The most obvious is that neither prices nor rental rates always go up.
Do others see rental opportunities? Today some of the largest investors in the world are buying single-family homes by the bunch. Roughly $17 billion has already been spent by institutional investors including Blackstone, Waypoint, and American Homes to acquire single-family properties for rent. In fact — according to a new housing report from Morgan Stanley — institutional investors will likely increase their purchases to $100 billion during the next several years.
That’s a lot of buying. Maybe these folks know something….