Signs of Overheating in the Single-Family Rental Market?

Question

I thought this article was quite interesting and kind of reflects what I see and hear these days - http://blogs.wsj.com/economics/2015/07/20/signs-of...

My understanding is that real estate like most other markets is cyclical. But I also understand that it is impossible to predict the future with certainty.

What do the experienced members here think about the current state of real estate market? Is buy and hold for cash flow currently working for you (assume > 10% cap rate) ?

Also are there any podcasts that cover such a topic?

Thanks.

John Thedford · Answer

I see no signs of an overheated market in SW Florida.

Walker Hinshaw · Answer

@Hersh M.

Unfortunately that graph wouldn't prove anything other than the fact that Bigger Pockets has become more popular due to any number of factors - potentially including an increased interest in real estate investing from the general public, but also from Bigger Pockets expanding their content, ranking higher on google searches, word of mouth, etc. All good websites tend to see exponential growth over time...

That said I would be interested in that data as well :)

Hersh M. · Answer

BTW, I was just listening to podcast 131 and it was good to hear that experts like Joshua Dorkin agree that things are getting pricey and its starting to feel like 2000.

@Brandon Turner

What would be cool from a data analysis perspective is if we could plot the number of newbies joining BP over the last 7 years or so. Very likely an exponential graph?!

Hersh M. · Answer

Thanks

@Bill S.

Bill S. · Answer

@Hersh M. I read the article and it was short on real data and quoted another source but not specific information. I'll comment on what I know. The article was focused on averages. The average SFR rental rate vs the average SFR sales price. Right now in Denver there is a shortage of SFRs especially in the urban core and prices are at all time highs. I know that in the areas where my SFR rentals are, there is no way that you can purchase the property for what an SFR is renting for (think 0.5% rule). My guess is that the devil is in the details. The concentration of sold SFR tend to by on the fringe of the metro where cheaper new housing is constructed where as the rental SFR tend to be nearer the urban core where prices are much higher. So while average rents for the Metro area mean you could/should purchase. The average renter of an SFR in the core would rather die than live in the burbs. All of my tenants renting SFR have either bought on the fringe or taken a significant down grade in the neighborhood when they purchased and moved. I'm sure, if buying was such a bargain as the article suggests, they would now be my neighbors. This is not hard data but it is my judgement based on my experience in the my market.

Walker Hinshaw · Answer

I am seeing the same things in Denver and also have reservations about investing in properties that my analysis using the BP calculator does not project to cash flow.

The standard BP mantra is don't invest for appreciation but I am not so certain that mantra is correct in every market. It seems to me that a lot of the experienced investors on the site have built their portfolios with the help of the rise in housing prices that has taken place since the crash. When they were beginning their investing careers, solid cash flow deals were much more plentiful because so many Americans were still hurting from the economic crash. Now that those deals are harder to find and inventory is tight, now may be a good time to invest in appreciation.

My worry is that if interest rates increase (they are currently being held artificially low by the Fed), it will make home ownership more expensive, increasing inventory and decreasing prices. If this happens, bets on appreciation will be losers with the bettors suddenly finding themselves underwater on a property that is losing money every month.

Because I personally am not a high volume investor, my strategy going forward is to take my time and find deals that are at least break even. This allows me to bet on appreciation without acquiring a potentially toxic asset if prices drop.

Hersh M. · Answer

@Walker Hinshaw

Thanks for your views. I think these markets that are mentioned are far far away from satisfying even the 1% rule (even with those high 3k rents), let alone the 2% rule. And I am not sure if betting on appreciation is the right thing to do since I have no idea what the future might be.

Are you seeing similar things there in Denver?

Walker Hinshaw · Answer

The interesting thing about this article is that its statistics also suggest that people who are renting should be buying - but that is also great for people with rental properties because the values of those properties will continue to be pushed higher than they already are in what most are describing as a heated market across the country.

This article seems to contradict the fears of those who think the gain in housing prices may be unsustainable and that we are due for a correction. Indeed, it sounds like if you live in one of the markets mentioned in the article, now is the perfect time to buy a single family rental property - just rent it out for outrageous amounts until potential owner-occupiers realize they are paying too much in rent, drive up demand which will drive up prices, which will result in profits from appreciation. Sounds like a can't lose proposition to me.

That said, I believe the millennial generation will be a generation that rents far longer into their life than their parents did as they are waiting longer to marry and tend to be more transient in their 20's than their parents were. Not owning a house to tie them down facilitates this lifestyle, giving renting a true value proposition. With a decline in home ownership in the millennial generation, we may never reach 70% home ownership again unless the government continues to artificially encourage it by keeping interest rates at all time lows.