Becoming a Landlord: What you can expect from the rental market in 2012-2013
Monday, November 19
With a new wave of foreclosures imminent, housing affordability at its highest level ever, and rental rates at an all-time high, one could argue that there has never been a better time to become a property investor. No matter where you are, opportunities exist all across the nation.
A recent report published by HomeVestors of America named the best 100 U.S. markets for investing in rental properties for the third quarter of 2012. It shows California taking the lead as home to 12 markets among the top 100. Florida represents itself nicely with nine markets making the list, while Texas is home to seven, and North Carolina boasts a surprising five top markets.1
“From Honolulu, Hawaii to Providence, Rhode Island, a total of 39 states and the District of Columbia are represented among the 100 hottest rental markets”. 1
Another study compiled data from consumers searching Homes.com and ForRent.com and discovered more than 31 million searches for rentals in the second quarter of this year, an increase of 20% from the beginning of 2012. The majority of these searches are for Southern cities seeing a drastic rise in employment and an economy improving at a faster rate than the rest of the country. 2
“The data shows Southern housing markets leading the way in rental searches, with seven of the top ten cities located in the South. Houston and San Antonio top the list. Rounding off the top five are Atlanta, Orlando and Chicago. Although Phoenix came up seventh on the list, the city saw more than a 55 percent increase in home searches.” 2
The rental squeeze
In spite of affordable prices coupled with record-low interest rates, tighter lending restrictions and comparatively high unemployment rates have left otherwise potential homeowners unable to enter the market. In some markets, families who have been displaced due to foreclosures or short-sales are having a difficult time finding comparable rentals. Many displaced families don’t want an apartment - they want a house. During the past two years the nation has seen a substantial exodus of families transitioning from homeownership to renting.
The nationwide homeownership rate continues to drop, a persistent trend which began in 2007, and falling to its lowest level since 1996. The need for shelter and mortgage delinquency rates point to a continued reduction in homeownership as displaced owners look to enter the rental market.
According to the Zillow Rent Index, 69.2 percent of metro areas showed increases in year-over-year rent values, compared to home price gains in only 7.3 percent of those same areas. In January, 73,767 distressed homeowners received permanent loan modifications while banks foreclosed on 78,734 homes, according to the national non-profit organization Hope Now. 3
The rental market is flourishing, and rents are on the rise.
As competition for limited rental space surges, rising rent is becoming the norm across the country.
Nationwide, median rents rose an average 3 percent from January 2011 to January 2012, but home values continued to fall, declining 4.6 percent during that period, according to Zillow’s January Real Estate Market Reports. Zillow found rents rising as much as home prices fell, including in Chicago where rents were up 9.1 percent, year-over-year, while home values fell 10.4 percent. In Minneapolis-St. Paul, MN metro, rents rose 11 percent and home values fell 8.1 percent. 4
Philadelphia, Baltimore, Washington, D.C., Portland, St. Louis, Miami, Denver and San Francisco all saw year-over-year rent increases coupled with declining home values. 4
Is now a good time to become landlord?
Signs point to yes. With houses becoming more affordable, many current landlords and those looking to enter the investment market are looking to cash in and buy properties while they are still at an all-time low.
“The flourishing rental market is the silver lining to the nation’s housing downturn. The inaugural ZRI [Zillow Rent Index] shows us a healthy and growing rental market across the majority of the country, even as home values continue to fall,” said Zillow’s chief economist Dr. Stan Humphries. 4
The slowly recovering U.S. housing market together with high inflation, despite having an adverse effect on the economy, have lead to advantageous conditions for rental real estate investing, and a more promising market for current landlords.
In fact, the rental market is so strong that even large corporations are finding ways to invest. In January of this year, GI Partners announced a $250 million investment in Waypoint Real Estate Group, an Oakland based company that buys foreclosed homes at a discount and then rents them to tenants. Although Waypoint currently operates in San Francisco and Southern California, the company plans on expanding to other markets, which may include Phoenix, Atlanta, Chicago, Las Vegas, and markets across Florida. 5
“Single-family rental investment represents the fastest growing real-estate asset class,” said Waypoint founder Colin Wiel. 5
Taking the plunge and protecting your investment
Even in a surging rental market, it’s important to remember that prospective renters are still susceptible to the economic conditions that lead to the increased demand for rentals.
“David Hicks, HomeVestor’s co-president, says while there are good investment opportunities in every one of the top 100 markets, investors would be wise to take into account other dynamics for the ideal timing to enter the market. He cites job growth as a key indicator of a market prime for investment.” 1
Choose wisely. Remember that the current market is to the advantage of landlords, giving you the option to select your tenants from a large pool of prospects. It’s also crucial to perform credit checks on applicants.
Hiring an attorney to draft a proper rental agreement, in conjunction with property and rent default insurance, can help you toward making your investment equal a positive cash flow. A new rent default insurance called Aon Rent Protect, offered by worldwide insurance broker Aon plc (www.aonrentprotect.com), offers rent recovery in the event of tenant non-payment if confronted with a tenant who becomes unemployed or stops paying rent for other reasons. The insurance also offers up to $1,000 for certain legal expenses in the event of an eviction. A number of statewide REALTOR® Associations, including the Colorado and California Associations, have backed the Aon Rent Protect product. “Aon Rent Protect is a cash flow safety net for a residential landlord,” said Robert Baily, Chairman of REBS, a subsidiary of the California Association of REALTORS®.
Take the plunge
Home prices are down, and interest rates are at historic lows. With the top 100 rental markets spanning the nation, now is a great time to get your feet wet in real estate investment. To make the proposition even more tempting, rent prices are up in a market that gives landlords the option to be selective when choosing a tenant.
If you need a more selfless motive to enter the market as a landlord, consider that experts believe that property investment may aid in the recovery of the housing market in the country’s urban areas. As investors snap up foreclosures, strong markets are showing a gradual return to pre-recession levels.
1 Bean, Brian and Hardin, Tim. California Top Market for Rental Homes. The Press- Enterprise, March 23, 2012.
2 Rentals: The Future of Real Estate in California? First Tuesday Journal Online, February 12, 2012.
3 Lazo, Alejandro. Southern California Rental Market Getting More Expensive. The Los Angeles Times, April 12, 2012.
4 Perkins, Broderick. Two-Study Mashup Reveals Rental Market Boom Towns. Realty Times, March 22, 2012.
5 Timiraos, Nick. A Market Builds for Single-Family Rentals. The Wall Street Journal, January 11, 2012.
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