We’ve become accustomed to tales of a fiercely competitive real estate market. Although that competitiveness has eased in recent weeks as interest rates rise, properties are as expensive as ever. As a result, the competition isn’t ending with the traditional housing market.
Competitors are spilling out of the homebuying market and into rental spaces! As NPR reports, housing needs are so extreme that practices typical for buying a property are becoming more and more common for apartments and rental homes. Whether it’s an open house or calls for would-be renters to submit their best bid, the market squeeze is making itself known across the board.
So what does it mean for real estate investors?
3 Facts Concerning the Highly Competitive U.S. Rental Market
Fact #1 – Homeowners are “Switching Sides”
As the New York Times writes, homeowners are increasingly taking advantage of today’s robust seller’s market…but instead of buying another home, they’re turning to renting instead. The thought is that owners will cash out now, at the height of the market, rent for the time being, and buy a home again when prices have fallen to more reasonable levels.
As you’d expect, this is a risky strategy when rental rates are so high. While this avoids hefty down payments or the sticker shock of a modern mortgage, monthly rent is often and increasingly more than a monthly mortgage payment would be.
What this trend says, though, is that rental demand isn’t just rising among Americans who can’t afford to buy a home, but it is a strategic choice among sellers waiting for the right moment to rejoin the traditional homebuying market.
Fact #2 – Historically Low Vacancies Push Up Prices
Low inventory impacts buyers and rental residents alike. The Joint Center for Housing Studies at Harvard University presents some compelling data. By the third quarter of 2021, vacancy rates in prime urban markets hit 5.8% while suburban vacancy rates were down to under 5%: the lowest rate since the early 2000s. Urban vacancy rates (read: apartment vacancies) hit a stunning 9.7% in 2021. While that rate has improved since, it’s still remarkably higher than suburban vacancy rates, which are most tied to single-family rental properties.
Additionally, renter households increased by nearly 900,000 between the beginning of the COVID-19 pandemic and the third quarter of 2021 – reaching 44 million households in total. In the four years previous, that number remained at a steady 43 million.
And, given tight existing inventory and demand outpacing new supply, prices have predictably skyrocketed. So then, we've seen nationally listed apartments renting for 15% more – a median price above $2,000 for the first time – from just last year.
Fact #3 – Higher Costs Don’t Just Hurt Homeowners
Although it’s easy to see investors and landlords as the winners (and perhaps the villains) of the modern rental landscape, that’s an oversimplification. Even ethical investors and landlords have had to raise prices to recoup losses through the pandemic. Not only did many renter households struggle to pay in full and on time in the wake of the pandemic recession, but the prevalence of work-from-home arrangements was tougher on owner bills – heating and cooling costs, appliance repair and replacement, and other utility and maintenance costs.
And while holding real estate is a hedge against inflation, rising costs still eat away at investor earnings and emergency funds.
What It Means for Real Estate Investors
Adapt to Rising Costs
First and foremost, investors must reassess and adapt to their changing situations. That means looking at your rental rates, your ongoing costs, and your home equity. It needs to all make sense. Because the market is so tight, your calculations must be well-informed and highly accurate!
Prioritize Sustainable Investing Strategies
While there’s plenty of room to capitalize on the current rental market, that’s not your only priority as a buy-and-hold investor. Investments must be approached with a long view. Remember that because rents and inflation are higher than ever, residents are more squeezed for disposable income, less able to save, and more prone to financial emergencies.
As an owner and investor, you must be sure you’re not only being reasonable and balanced with your rates but that you’re offering a property that is safe, clean, well-maintained, and worth the cost. Retention should be your top priority. Lease renewals and avoiding vacancies are the way to maximize your passive income.
Plan Your Next Moves
Lastly, we recommend speaking to your financial or portfolio advisor. Between inflation, a rabid real estate market, and overall economic uncertainty, your financial future is on the line. Revisit investment performance, risk mitigation, investment opportunities, and your financials. Knowing where you are, where you want to be, and planning to get there in today’s market is key to long-term success!
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