So you’ve decided you’re ready to buy a rental property, and you’ve decided you aren’t going to limit yourself to one area as far as where to buy said rental property, and now you need to figure out where to buy it. If you are looking outside of your local market to buy in, chances are you are doing so in hopes of gaining the best returns you can get on a property.
If you didn’t care about returns, you’d probably just buy in your own backyard. Maybe you aren’t even looking for the best returns; maybe you just want good returns (assuming your local market can’t give them to you). Regardless, if you are deciding on a market to buy in that is other than your local market, I’m betting it’s the returns that matter.
Assuming it is the returns that matter, the most important thing you can do while analyzing rental markets and properties is understand what factors impact returns. Factors like income and expenses, property condition, vacancy factors, tenant quality, market growth and desirability. Some of these things are obvious, and some of the others may be less obvious to the inexperienced investor — or maybe to experienced investors, too!
A million articles could be written as to how these factors can impact returns, and most of these factors are at least mentioned somewhere in various articles I’ve read, but there is one factor that I’ve never seen written or talked about anywhere that every rental property owner should be aware of.
What is over-saturation exactly? Well, it’s easy. In the case of rental properties, it means that a particular market or area is over-saturated with available rental properties — not rental properties available for investors to buy, but rental properties available for tenants to rent. Well what does that cause? If a market has a considerable number of rental properties available to tenants, tenants will have a ton of properties to choose from when trying to find a place to live. Call it a “tenants’ market” if you will. I just made that up, unless the term already exists and I just haven’t heard it, but either way that’s exactly what it is.
Tenants have gobs and gobs of rental properties to choose from! The problem for the rental property owner? You have major competition! Potential tenants for your property — and especially good tenants — have so many rental properties to choose from when looking for somewhere to park their families that you may find yourself having a really tough time getting your property filled. And the problem with this? Vacancy is one of the most costly expenses to a rental property owner.
My Real-Life Example of Over-saturation
A Rental Market’s Heyday
I can give you an example of over-saturation from personal experience (unfortunately). If you’ve followed a lot of my blogs, you know that my rental properties are in Atlanta. I bought my properties when Atlanta was in its absolute heyday. I mean, hedge funds were scooping up properties left and right, big-time buyers were fighting the hedge funds and taking what they could, every little guy was fighting their way through the crowds to get properties, and it was literally probably the top best city to buy investment properties in. This was just a few years ago.
Atlanta became the big hot spot for investors to buy in right after Memphis and Phoenix had topped the charts, and right before Houston and Dallas were making their way into the game. Atlanta was it, man. There was no better place to buy if you wanted the best houses for the cheapest prices and the highest rents. The price-to-rent ratios were insane! Hence why the market was so desirable for so many investors.
A lot of people get tripped up though thinking that Atlanta is still the best market to buy in like it was a few years ago. Atlanta is still an okay market to buy in — you can still get properties for decent prices and decent returns. Some could argue that Atlanta has already seen the bulk of its growth though, so buying there now isn’t going yield near as much in appreciation as it would have had you bought there four years ago.
Others could argue that for what you have to pay in Atlanta for a property now, you can pay the same price in other markets and get much higher returns and an overall better deal. Okay, maybe it’s not other people arguing it as much as it’s actually me telling you that. I think Atlanta is still a good market, but I think it’s had its moments, and there are just better markets out there to buy in now. I personally wouldn’t buy in Atlanta right now. It wouldn’t even be one of my top choices.
If you want to read more about how a market can shift in investing dynamics, check out “Warning: The Market You Should Be Buying in Has CHANGED!.”
People all the time tell me they are interested in Atlanta as the market they want to buy in (and I totally understand why they think they want to buy or should buy there). Up until recently, my main arguments to them as to why I don’t personally encourage Atlanta anymore have been those I just mentioned — the major growth in Atlanta has already happened, and there is better bang for your buck in other markets. I also usually throw in a mention or two about Atlanta having just general chaos with investing due to the feeding frenzy that took place and notoriously bad appraisals.
How I Learned About Market Over-Saturation
Just recently, I’ve added a new deterrent to my list: over-saturation. I didn’t even know over-saturation was a thing until I ran into it myself last summer with one of my properties.
Probably one of my favorite properties that I own in Atlanta became vacant last April. No big deal — I have a great property manager who was doing everything he needed to for this property to be rent-ready as fast as possible, and I had never had an issue getting this house rented in the past. It’s adorable! It’s in a B to B+ neighborhood, it’s an A- house (if I were to give personal ratings), and it’s just a really cute nice property. Don’t get me wrong, it’s not in a high-class area by any means, but it’s not a horrible area either. Very standard middle-of-the-road type. In the past, this house has always gotten a ton of action when it’s been advertised for rent. People love it, it’s great for any size family, and it’s just always been fairly desirable.
Until last year.
This house has rarely ever gone more than 30 days without having a fairly solid rental application on it. It hasn’t always been rented in 30 days, but it’s at least been very close to being occupied in that timeframe. This past time, however, I’m not kidding you when I tell you three months had gone by with barely an application on it. I called my property manager one day and asked him what in the world was going on. Was he not advertising it, what was happening here? He said — and this was the first time I learned of over-saturation — “Well, the problem is, tenants right now have so many properties to choose from, getting anyone in the door is just really hard right now. It’s not just your property, it’s all the properties.”
Right then it hit me that there was a major repercussion that came from the recent feeding frenzy there — now there were too many rental properties in Atlanta! How can I even compete with that and get more tenants interested in my property? Well, not easily, and quite frankly, I didn’t. Luckily I ended up with some good tenants in the property, but all in all it was about five months of lost rent due to vacancy before my property manager found them.
The point is, a perfectly good rental property that normally only took one month to fill had now just taken five months. Do you know how costly that was to my bottom line? Man almighty. And how does one compete against that type of situation? I don’t even know that answer yet.
Now when people ask my opinion of Atlanta as a market to buy in, I immediately introduce this concept of over-saturation to them and warn them of the repercussions. I think just about every other factor about a market can be researched in some way, or at least asked about, but I for one never even knew over-saturation was a thing, much less to ask about it!
There are two major takeaways I want you to get out of reading this article:
- The hot markets at any given time are hot for a reason, and likely worth buying in yourself. But always think a few years down the line, and think through any possible repercussions for jumping in with the big boys.
- If you are considering a rental property in any area, down to the specific city or neighborhood you are looking in, always call a good property manager and ask their take on the current rental situation. Ask about rentability: are there a lot of renters who want that area, how are the current vacancy rates, how long is it typically taking to place tenants, and is there any level of saturation happening?
Don’t get me wrong, I wouldn’t trade my Atlanta properties for the world. I definitely consider this a hiccup for now, and luckily the margins on my properties are so high that I’ll be able to make up for the lost months in not too long, but I also have no idea how long this over-saturation may last. Maybe it is only a thing at this tail end of Atlanta being so popular, or maybe it’s an ongoing issue. I have no idea, but I’ll find out! I also don’t see any of the current popular markets experiencing this level of over-saturation because none of them have experienced the level of feeding frenzy that Atlanta did.
Has anyone else ever run into over-saturation issues? If so, where was it and what was the result?
Leave your comments, stories and experiences below!
Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.