Is now the right time for you to begin investing in rental properties?
Being a landlord has traditionally been a great way to build long-term wealth. The single-family rental market is big, representing 35 percent of all rented housing units in the U.S. as of 2013, according to Freddie Mac. And historically, individual investors and small partnerships that own 10 or fewer rental homes dominate.
Individual and corporate investors agree on one thing: there is substantial opportunity in single-family rental investment this year and beyond.
1. Single-Family Rental Demand is Up, Up, Up
The decline in homeownership, whether by choice or by necessity, is driving a surge in demand for single family rental homes.
The homeownership rate has fallen to a near 50-year low as potential homebuyers of all ages, challenged by low wage growth, high home prices and stringent requirements for qualifying for a home loan, look to rent instead.
Many young professionals with low savings and high student debt are steering clear of buying homes. The share of homes sold to first-time buyers in 2015 fell to 32 percent, according to the National Association of Realtors, the lowest percentage in almost three decades.
Former homeowners who lost jobs and homes in the downturn and have damaged credit also may be locked out.
2. Rents Are Rising, Too
The U.S. will see “the highest median rents ever” in 2016, the real estate website Zillow predicts.
After outpacing wage growth in a dramatic surge in the first half of 2015, the median rent nationwide has held steady at $1,381 a month since August. Median rent rose 2.9 percent in January from a year ago, according to real estate data firm Zillow.
Long-term investors still see plenty of room for rent growth. Vacancy rates for rental housing have plummeted to 30-year lows, at 7.1 percent nationally, according to Harvard’s Joint Center for Housing Studies. Meanwhile, inflation-adjusted rents have increased annually by 3.5 percent on average.
3. ‘Landlord loans’ open door to new investors
Until recently, aspiring landlords had two sources to fund a purchase: their own bank accounts or the government-backed mortgage providers Fannie Mae and Freddie Mac, longtime lenders to mom-and-pop landlords.
But so-called “landlord loans” aimed at smaller residential real estate investors are more widely available.
2020 REI Finance, the real estate investment product and services arm of in Dallas, offers landlord loans starting at $50,000. The new availability of credit provides smaller residential and real estate investors the opportunity and the means to buy more properties and capitalize on the rising demand for single-family rentals.
4. Investors see steady cash flow
Investors who purchase a home and successfully turn it into a rental can expect profits of 6 percent to 9 percent annually, according to RealtyTrac, the foreclosure listing firm.
In light of turmoil in the stock market, low-yield bonds and risky stocks, the real estate market offers an attractive alternative to traditional investments. Investors in single-family rental property have seen healthy returns in income and appreciation in 2015. With the demand for single-family rentals expected to continue, investors should find greater opportunities for entering the market or expanding their holdings.