Vacancy Rates Still Hover Around Record Highs; How to Protect Yourself

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The Commerce Department recently announced that the number of vacant homes eclipsed a record 19million units in the first quarter of 2010.  This shows that despite the stabilization taking place in the housing market, there is still a long way to go before we reach normal market conditions.  More concerning than the near record 10.6% vacancy rate, is the raw number of approximately 4.4million homes available for rent and sitting vacant.

The last time vacancy rates were near a “normal” 8% was just before the 2001 recession.  That 2.6% difference yields an excess rental inventory of roughly 1million units.  Excess rental inventories have been largely out of the national spotlight while excess home-for-sale inventory catches the majority of the headlines.  Rental vacancy remains a serious problem though, keeping pressure on rents in most cities and regions.

Take a look at the below chart:

The vacancy rate has improved slightly but is still hovering around the record of 11.1%.  This certainly doesn’t bode well if while reading this, you own one of the 4.4million vacant units on the market.  This holds particularly true if you’ve been sitting on a vacant home for 90 days or longer proving you might have bought a home in the wrong area.  I personally am feeling the effects of the recession by owning a couple properties in areas hit hard by high unemployment and ultimately vacancy.  These were purchases made when I first got started investing and I was buying primarily off of price.  The numbers looked good on paper, but I wasn’t factoring in the socioeconomic issues which are critical to building a recession-resistant rental portfolio.  A home of mine recently sat vacant for nearly 90 days then last week as it was starting to get good tenant traffic, it was broken into and vandalized.

The neighborhoods with high education levels, near median per capita incomes, average-to-above average education levels have not had these same issues.  I’m constantly cautioning investors who are buying based on price and “surface numbers”.  Without diving into the numbers and the neighborhoods people can run into similar issues.   I’ll often use a tool like ZipSkinny to evalute specific zip codes deeper. Another investor in my local market owned over 650 homes in areas which were below average incomes and around 50% of median home prices.  When the recession hit, his portfolio was plagued by exhoriant unemployment and drop in household incomes.  This investor lost all of the homes; a travesty for sure.

To avoid this you don’t need to avoid real estate, but you do need ensure you have the best possible product for potential tenants.  The number one thing you can do is make sure you purchase in a neighborhood that’s a sought after rental area.  If this means you pay a premium for the house, it means you’ll likely be buying the best possible insurance policy money can buy; location.

Of course I’m stating this from living over 1000 miles from my rental portfolio.  I find having nicer areas works best, yields lower maintenance, lower turnover, and overall higher profits.   Some would argue that depressed areas with section 8 tenants and vouchers provide higher returns.

For now we can probably expect to see the market absorbing more rental units and slowly coming down off the record highs.  Until job growth really takes place, expect that you’ll have plenty of competition for your rental home.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.