An Analysis of Rental Market Trends: Here’s How Typical BiggerPockets Investors May Be Impacted in a Recession

by | BiggerPockets.com

It seems that every week, there is a new thread topping the BiggerPockets forums that discusses the probability (inevitability?) that we’re nearing the top of the real estate market cycle.

As much as we all talk about how difficult it is to time the market or to predict market crashes, it’s incredibly tempting to try. The other day, I finally caved. I decided to go ahead and try my hand at predicting what’s in store for real estate investors over the next few years.

I am NOT going to give specifics—I don’t actually know what’s going to happen, and I’m not recommending a course of action or giving any guarantees. I don’t know whether the market will go up or down, how much the market will go up or down, or how that will affect specific properties in specific areas.

But I do hope that this article will give you some things to think about and will help you make new observations. I hope that it gets a discussion going that isn’t just pointing out weird ratios about median incomes to prices or whatnot. And I hope that you point out some flaws in my thinking in the comments, so that my perspective on the market can evolve.

I’m simply putting on my economist hat and doing a good, old-fashioned supply-and-demand analysis of the rental real estate market—and then guessing at the future.

The study that will follow contains data from a variety of sources. Zillow is most heavily relied on for market-level data. The goal here is to provide a summary understanding of the rental real estate market as applicable to the market that BiggerPockets serves and then to provide commentary for discussion about the possible ramifications for the medium-term future of the rental real estate market.

Key Takeaways From My Research

What’s currently going on in the SFR (single-family rental) market?

Who is buying SFRs?

How is the single-family rental boom impacting home-buying?

  • The share of single-family homes being rented out jumped from about 13% in 2006 to 19% in 2016.
  • Landlords compete at the lower-end of the market, for less expensive homes. This creates competition with first-time homebuyers. According to Zillow, “Almost 40 percent of rented single-family homes bought since 2012 are among the most affordable compared to 34% of single-family rental homes that were bought before the market crash.” This is forcing homebuyers out and creating more rental demand, perhaps correlating with the increase in supply.
  • Said Zillow senior economist Aaron Terrazas, “The combination of foreclosures and growing rental demand following the housing crash was an attractive opportunity for investors—large and small—who were able to buy foreclosed homes and use them to meet the rental demand. At the same time, many long-time owners have opted to hold onto their homes as rentals even after they decide to move somewhere else.”


Related: How to Make Millions by Escaping Mr. Market’s Devious Spell

What’s happening in the tenant marketplace?

  • In 2006, 31% of US households rented; today, over 36% of households rent; in 2000, prior to the housing boom, 33% of households were renters.
  • Nationally, median rent for houses rose 1.3% from 2016-2017, while median rent for multifamily rose just 0.5%. Through the first half of 2018, median rent for SFRs rose 1.8% compared to 1.3% for multifamily compared to the first half of 2017 (I computed this manually right from Zillow’s database).

What’s driving tenant demand for single-family rentals?

  • RENTCafe commentary:
    • A little over half of the total number of single-family home rentals on the U.S. market are occupied by families—they offer space for families, privacy, and the kind of neighborhood desired.
    • Houses are also the rental of choice for single people who want to share the cost of rent with other single roommates. This accounts for almost half of the renters living in single-family houses today.
  • 45% of those who rent would prefer to rent a single-family rental, but only 28% can actually find a single-family home to rent (According to Zillow).

My Thoughts

Single-Family Rental Market

There is a large and growing demand for detached single-family rentals, and while there is not nearly as much data on this, I suspect that town-home, duplex, triplex, and quadplex rental demand is growing at a pace somewhere between multifamily and single-family rental demand. Supply is not keeping up with this demand, which is why rents and prices have been growing quickly for the past several years.

Unlike other asset classes, much of the supply in the single-family rental space is owned and is being purchased by ordinary Americans—folks with less than 10 units owned make up more than 87% of the marketplace in buying single-family rentals. It’s likely that people like you and I—here on BiggerPockets—are a significant and growing share of this marketplace.

We here at BiggerPockets like to think that we are continuing to give the advantage to small-time landlords like us—advantages that are difficult for institutional investors to replicate, like the ability to network with local wholesalers, understand the qualitative and subjective decisions that go into buying in specific neighborhoods within specific markets, and make specific tenant management calls.

I believe that the factors driving tenant demand for detached rentals (better neighborhoods, more square footage, bigger yards, etc.) will remain in place, even as fewer people might be able to purchase homes in a recessionary environment. This might lead to still greater demand for single-family rentals and continued strong returns for rental real estate investors.

While overall demand for homes and rental units may contract in a recessionary environment (as people move in with relatives or move in with roommates), I suspect that the price of homes is likely to bear the brunt of this impact. While fewer people will be able to buy homes, folks have to live somewhere, so the total number of renters is likely to either increase or remain flat relative to the number of homebuyers, which will likely decline.

A similar story is likely to unfold in an environment of rising interest rates. Rising interest rates will make mortgage payments more expensive, putting downward pressure on home price growth, but upward pressure on rents. Rising interest rates will not change the qualitative factors that currently make single-family rentals more appealing than multifamily rentals to tenants, but they will make it harder for your typical owner-occupant to make payments and actually purchase a home.

In fact, a recessionary environment in the U.S. housing market may actually increase the number of mom-and-pop rental property investors, as prices may fall or flatten, but rents may continue to rise or remain flat. This means that while folks may lose equity, their cash flow might be reasonably secure. And, of course, it may be easier to find rental properties that produce satisfactory cash flow at a great price in a recessionary environment.

I suspect that it is your typical homeowner, not your typical buy-and-hold rental property investor, who is at more risk of losing property to foreclosure in a recessionary environment when their primary or only source of income (their job) is no longer there.

Furthermore, assuming that rents remain at least relatively flat, many of those current investors with fewer than 10 properties (remember, these folks make up 87% of the single-family rental market) will have 30-year fixed-rate conventional mortgages. With a fixed-rate mortgage, small-time investors of single-family and small multifamily rental properties have reasonable odds of sustaining satisfactory cash flow in an environment of rising interest rates. About 90% of homebuyers chose fixed-rate mortgages in 2016.

While I don’t have the data to back this claim up, I suspect folks continue to largely opt for fixed-rate 30-year mortgages through the present and that a large majority of investors who have the option in the single-family and small multifamily space are choosing 30-year fixed-rate mortgages as well.

In short, I think that your typical buy-and-hold rental property investor on BiggerPockets is producing reasonable cash flow from his or her rental properties right now. I expect that rents are not likely to drop drastically and that even if they do, single-family rental property rents will not be hit as hard as rents in other parts of the market.

And even if rents are hit hard, I think that the peolpe like us here on BiggerPockets, usually with fixed-rate 30-year mortgages, are likely to be at less risk of actually losing our properties to foreclosure than our friends in the commercial market, where financing is much more exposed to interest rate risk.

So, what could crush single-family rental investors?

While there are plenty of scenarios that could crush individual investors, I believe that one of the few market conditions that would systematically put a majority of BiggerPockets’ investors at risk would be a period of heavy deflation, coupled with rising interest rates.

This would put downward pressure on rents and increase financing costs. This is one possible scenario where real estate investors may lose categorically—if rents fall, they lose equity, and their financing costs remain high. I believe this is an unlikely future scenario, looking at recent monetary policy. But you always have to be aware of what can kill your portfolio.

I invest in real estate personally because I believe that inflation is more likely than deflation and that prices and rents will rise over time. If I did not believe that, I would not be investing in real estate. 

Commercial Real Estate

One major threat (or opportunity?) to the small-time investor—investors like those of us on BiggerPockets—is the rising supply of large multifamily units in many major metros, relative to demand. We see that rent growth for single-family rentals continues to outpace rent growth in multifamily, even as more single-family home inventory is being converted into rentals.

If single-family rentals continue to become more expensive than multifamily, then tenants may decide that renting an apartment unit is more cost-effective than a single-family home. This may keep market rental growth for single-family rentals flat or drive rates down.

Related: I Used to Think All U.S. Markets Were Too High—Until I Started Investing in This City

However, because of the advantages of single-family rentals and the clear preference of tenants for these rentals, I suspect that rent growth for single-family homes will continue to remain healthy for the foreseeable future—at least, in relation to multifamily rents. If rents fall across the board, I suspect that multifamily will be hit harder than single-family.

We’ll need either an increase in the supply of single-family rentals or a reduction in demand from renters to change the current trajectory of the marketplace of tenants.

The future of the commercial multifamily real estate market, with a particular eye towards large multifamily apartment complexes and retail, is what’s more interesting to me—and, in my opinion, more dangerous.

In the commercial multifamily space, we see continued growth that is outpacing demand, relative to single-family rentals. You can see visual representation of this in most major metros—just stroll through Denver, CO and count the cranes—and you can see it in the numbers in the studies I produced and linked to earlier.

Some of this growth presumes continuous demand for multifamily rental units, often in the luxury or higher-end space, and I wonder if that demand for apartment units and condos is actually going to materialize for many of these builders and institutional investors over the next few years.

It’s the click-bait question posed by so much media in the real estate space: Will Millennials continue to flock to cities, or are they finally going to settle down and move to the suburbs? And, when they do, will they rent or buy?

I don’t have a crystal ball, and while I’m doing my best to pretend like I do, I don’t actually have any real insight into what Millennials will end up doing. But my guess is that the least likely outcome for Millennials is that they continue to rent high-end apartments. I just don’t see that as the long-term goal for most of my peers, but I could be biased by my peer group and categorically wrong about that! Instead, I see it as much more likely that they move into homes with yards and raise families in good school districts. And I can absolutely see a large portion of them being happy to rent those homes rather than own.

housing-market

If I’m right, and continued tenant demand for luxury multifamily rentals does not materialize or does not keep up with supply, many private equity and institutional real estate investors may find themselves with cash flow problems. Market rent will be below the projections needed to produce satisfactory operational cash flow or even break even.

Compounding this is the fact that commercial multifamily often has much more interest rate exposure than your typical landlord with single-family rentals.

Unlike in the single-family rental space, where about 90% of mortgage loan applications are for 30-year fixed-rate mortgages, commercial loans often have more complicated, layered structures and often come with terms like adjustable rates and balloon payments.

Why is that important? Imagine this:

You purchase a fully renovated turnkey multifamily apartment priced at $10,000,000 with financing at 75% LTV, a 6% interest note, amortized over 25 years, with a 7-year balloon payment, projecting a 7% cash flow from operating expenses and CapEx in year one. Annual rents are $1,400,000, and operating expenses + CapEx are projected at $700,000 annually. You assume 2% annual rent and expense growth.  

Here’s what your cash flow might look like in year one at the 50% Rule:

  • $1,400,000 in rental income
  • $700,000 in cash expenses
  • $578,784 in financing expense
  • $121,216 in cash flow
  • 4.85% CoC return on $2,500,000 invested

You think, “Great—I’m doing OK with this. I’m paying down the note, and rents will appreciate and make this investment into a real winner shortly! In four years, I’m generating really strong cash flow, and our firm is better than all those other idiots out there—we can make some operational improvements to bring down that OpEx.”

Oops—instead of rising by 2% per year, rents FALL 2% per year. And somehow the team never actually lowered those operating expenses—OpEx rises by 2% per year.

Your cash flow looks like this in year four: 

  • $1,291,315 in income
  • $757,703 in operating expenses
  • $578,874 in financing expenses
  • Negative $45,171 in cash flow 

Oh, and OOPS again! Your balloon comes up in three years! You need to start looking at a refinance. But interest rates have risen. That means that cash flow may be no better—and might even be WORSE—after the refinance! It’s time to sell and cut your losses. Problem is, everyone else is trying to sell at the same time!

I see this as a very real problem facing the commercial multifamily real estate space at some point in the next decade—and perhaps even within the next two or three years.

Of course, this might never happen—and those who own and hold commercial multifamily in this situation might continue to win in spite of relentless growth in multifamily supply and rising interest rates if tenant demand for luxury apartments continues to keep pace.

Conclusion

If I were betting on a future that saw a decline in the real estate market, I’d bet that we will see a strong buyer’s market in the commercial multifamily space, a market where finding a great luxury apartment or condo at a great price will be extremely easy both for investors and for tenants.

While the effects of this risk may put some downward pressure on single-family and small multifamily (duplexes, triplexes, and quadplexes) prices and rental rates, I believe the single-family rental sector will have strong enough demand and enough insulation from interest rate risk (as buyers have and will likely continue to use fixed-rate mortgages) to weather the storm more effectively than the commercial space, where investors may find themselves with much more interest rate exposure and may face continually increasing pressure to refinance or sell.

I suspect that in an environment like this, demand by tenants for single-family rentals will continue to remain strong relative to supply, but that price appreciation will flatten because of rising interest rates and strong downward pressure from the multifamily and condo markets.

If many or even several of my numerous assumptions come true, I suspect that single-family rental rates will remain one of the strongest relative areas in the real estate market, even though there will, of course, be some challenges for your average investor when facing a reduction in prices across all aspects of the market.

In a recessionary environment with rising interest rates, which is what I believe to be a probable environment at some point in the next few years, those who currently own cash-flowing rental properties may experience relatively less appreciation, but still have reasonable odds of sustaining positive cash flow.

And it might be the perfect opportunity for some of our more seasoned investors to begin scooping up larger commercial assets at a discount.

So, my conclusion is to keep doing what I’ve always done—buy good deals in good areas with good cash flow, not time the market, lock in fixed-rate mortgages, and continue to have a large cash reserve ready to handle operational problems and ready to be used to purchase more great deals when and if they come across my desk. 

Sources for this research:

Other helpful data:

Will the commercial market run into issues in the coming years? 

Weigh in with a comment!

About Author

Scott Trench

VP of Operations at BiggerPockets.com, Scott is also a licensed real estate broker/agent, real estate investor managing 8 units in Denver, CO with a partner, a house-hacker, and personal finance nerd. His book, "Set for Life" (published through BiggerPockets Publishing) thoroughly details a step-by-step journey to early financial freedom for full-time workers earning median incomes and starting with little or negative net worth. When he's not helping full-time workers move toward early financial freedom, the 26-year-old can be found playing rugby, biking, or skiing.

37 Comments

  1. Michael P. Lindekugel

    “Will the Commercial Multifamily Market Trigger the Next Recession?” highly doubtful. First, the Great Recession is only recession caused by the real estate and home loans. In past recessions housing market decline is a symptom but never the cause. Second, you should be more worried about commercial non multifamily. All the multifamily commerce is only a drop in the bucket compared to the total commerce of the commercial market. who was the biggest player by far in the commercial market? China, Chinese holding companies, Chinese investors. Most often it’s a combination of everything. Frequently, they bid up the price paying a significant premium.

    The China government pretty stopped the ability to get cash of out China. Chinese investment has dried up. China is being rattled by corporate credit problems, quakes in the shadow banking system, an Enron-type phenomenon at provincial and municipal governments called “hidden debt. Why is this important? As mentioned previously China and the Chinese were the single biggest players in commercial investment in the US. That dried up. There is serious risk China and Chinese investors face liquidity problems forcing a sell off of real property assets which amounts to dumping in the US causing a chain reaction of cheap property for sale and lease.

    • Scott Trench

      Hi Michael – I can tell from this comment that the title of my article is getting in the way of the discussion that I was hoping to have regarding whether my research and thinking are directionally correct. I changed the title in light of your comment to better match the points I try to make in the article.
      Your points here are great, and while I know next to nothing about the commercial real estate market for other types of real estate (like retail), I can surmise that the prospects there are being hit hard by long-term trends in consumer behavior (consumers buying online rather than in-store). Thank you!

      • Michael P. Lindekugel

        again, i dont think commercial multifamily will trigger a recession as mentioned above. the total dollars of commercial multifamily commerce are a small fraction compared to the total dollars of commerce in the non multifamily commercial. i think the risk of consumer spending behavior impacting the commercial market is small compared to the risk of China dumping commercial property. they acquired 65% of all commercial assets by dollar volume. that is scary.

  2. Melvin Plummer

    Balloon mortgages are probably the most dangerous mortgages on the planet. If you choose a balloon note, you should really make sure you know what you are doing. In the long term, I think you should set up your business so that you no longer need a bank because you have become your own bank. That way you can say goodbye to finance charges, points and other ridiculous fees that banks charge to increase their bottom line. In this way you will get a taste of sustainable financial freedom.

    • Michael P. Lindekugel

      all commercial mortgages have balloon payments or adjustable interest rates at the end of the promissory note term. paying cash would significantly degrade the IRR. the question to ask is……is the after tax cost of borrowing higher than the after tax ROI (IRR)? to figure that you need to calculate the after tax effective interest rate and compare it to the after tax IRR. as long as the after tax effective interest rate < after tax IRR, then it makes sense to borrow and acquire multiple assets instead of paying all cash. if the reverse is true, then it make sense to pay down mortgage as fast as possible or pay potentially pay cash.

    • Scott Trench

      Thanks for the comment Melvin – I think that the problem that many here on BiggerPockets will have with your suggestion is the practical reality and timeline associated with paying cash for properties and paying off the debt on a meaningful portfolio. Most of our users earn between $50,000 and $200,000 per year, so for them, paying off what are likely to be hundreds of thousands of dollars in debt within a few years is impractical, if they want to buy meaningful real estate assets.
      And, institutional investors are often beholden to shareholders. As Micahel notes, debt significantly increases your IRR under most common real estate holding assumptions. It’s hard to overdeliver to shareholders if you are buying assets at low cap rates with purely cash.
      But, for those who have the means and are beholden to no one, I think that absolutely there are huge benefits to being completely debt free!

  3. Melvin Plummer

    The vast majority of people who have mortgages don’t even make additional principal payments toward the note. So if you take out a 30-year mortgage in 2018, no one knows what’s going to happen between now and 2048. A person can go through three divorces in a 30-year period. However, having three, five, or seven-year balloon notes, is like having a noose around your neck. No bank is obligated to refinance these notes at the end of the term! So guess what happens if the property values sink?

    I think one should strive very hard to get their mortgages paid in full because that’s like sitting at the beach drinking lemonade and watching the sunset. The moral of the story is, to the best of your ability, become debt free as soon as you can. I guarantee you will love it and so will your spouse.

    • Scott Trench

      Hi Melvin – I too share the distate for balloon payments, and this is something that I believe will significantly delay my entry into the commercial real estate space. I am quite happy with my ability to get 30-year mortgages at fixed-rates, and, as my portfolio grows, may absolutely begin to pay them down more aggressively.

    • Michael P. Lindekugel

      debt free on real property investment only makes sense when the after tax cost of borrowing > after tax IRR. with all cash your investment IRR can decrease as much as 75%. if you worried about debt serving with a pending recession, then balance the investment portfolio with 60% debt/40% equity 50%/50%. i own large buildings. to put in perspective here i would rather own 2 4 unit buildings with debt than 1 building debt free.

  4. Cindy Larsen

    Scott,

    Great article. I really hope most of your assumptions are correct, because they are a pretty close match for my assumptions, and I have invested heavily this year, based on those assumptions. I am in the demographic of 4 units were significantly higher than interest rates on 1-4 unit multifamily.

    So, I reexamined my investment strategy. In my market, the deals that cash flowed best were 1-4 unit multifamily, duplexes to 4 plexes. SFR did not cash flow as well because they didn’t rent for that much more than duplexes, and a duplex cost about 60% of the price of two similarly sized houses.

    The duplexes I found that were good deals all also had below market rents and needed some remodeling, but, the banks loaning on 1-4 unit properties didn’t care nearly as much about cash flow, they didn’t even factor in maintenance, capex, or vacancy. If current rents were higher than projected PITI, the banks seemed happy to give me loans. I was frankly supprised at the total I was able to borrow this year: nearly 1.5M. My last deal was two contiguous tax parcels with 4 units on one, and two units on the other: total price $955,000 total loans $650,000. The banks would have loaned me more, but that was what I was comfortable with. That was loans number 4 and 5 this year.

    So, with loans available, this year I bought duplexes as fast as I could find properties that cash flowed, trying to get my 30yr fixed rate mortgages before interest rates rose even higher, until I ran out of downpayment funds. It took 9 months of continuous effort to buy and manage 6 tax parcels with 16 units.

    I am assuming interest rates will continue to rise slowly. I think property prices in my market have come close to a peak, and may remain steady or go up just slightly next year. I don’t expect rapid growth in prooerty prices as long as interest rates continue to rise. I don’t expect either property prices or rents to go down as long as the economy remains good. Even if the economy does not do well, I do not expect my rents to drop, because I am targeting the 50-80% rent range, not the luxury rentals.

    The units I have turned over, so far, had below market rents when I bought them. I have been able to raise rents, on the ones I have turned over, about 20% above the previous rents. Remodeling is going slower than expected due to difficulty finding competent contractors. So, we are doing the work ourselves. Major difference in contractors between CA and WA. In CA they must have years of experience working for a GC and then pass tests to be licensed. In WA, all they have to do is get insurance and post a $12,000 bond to declare themselves a GC. Scarry. Only plumbers and electricians have to actually know what they are doing in WA. Sorry for the digression, but finding competent contractors is my biggest challenge this year, when I really need them.

    I am finding that millenial couples with dogs are the demographic most interested in my 2 bedroom duplexes. I’d guess that as their families grow, they will be either buying or renting SFHs. But for now, they really prefer a duplex with a yard to an apartment. Families with kids seem to be looking at my duplexes in a nice area, then renting a SFH in a less nice area. Evidently $/sqft is more important to them than location or schools. Not what I expected.

    I am getting between $1.56/sqft to $1.77/sqft on my duplexes, with the smaller duplexes demanding a higher price per sqft: because they are still cheaper than the larger units, and so more people can afford them.

    So, who knows what the future holds, but, I am Assuming that, if a property cash flows when I buy it, it will cash flow better after it is fixed up, and even better as rents (hopefully) continue to rise. And I will not care if interest rates go up, because I am locked in to 30 year fixed mortages 🙂

    I really hope my assumptions are right. If not, there goes my retirement plan.

    Cindy

    • Scott Trench

      Cindy – this is great feedback and perspective. I think you have a well thought out approach and are not afraid to get your hands dirty to make your real estate portfolio work. I think that this is going to be a theme in the next 10 years if prices stop appreciating at their historical rates, and that folks like you can still get good returns with value-add and hard work.
      But, it sounds like you are also aware of what could hurt your portfolio, and are assessing that practically.

  5. Rob Cook

    Good article Scott. I would like to mention that even if I did not expect rents or property valuations to increase, I would STILL be an long term rental property operator. Because as long as the rents are producing a positive cash flow after all expenses properly accounted for, and I mean even $1 CF above my 40% expense allowances plus debt service and property taxes and insurance, I would benefit long term by having valuable cash producing investments creating a perpetual retirement income once paid off. One that you cannot outlive. Appreciation and increases in rent are bonuses. Just another very conservative perspective from an old guy in the rental game.

    • Scott Trench

      Thanks for the comment Rob – I agree, but with a twist – if I did not expect long-term appreciation from rents and property value, I might NOT invest in real estate – I invest in real estate because I believe that it offers me the opportunity to earn larger long-term returns than equal investments in the stock market or other passive assets.
      If I felt that real estate would not produce outsize returns relative to more passive investments over a long time horizon, I would invest elsewhere.
      So, while I invest conservatively, and plan to still NOT LOSE in the case of no rent or price appreciation for a very long time, I invest in such a manner as to have a shot at appreciation and rent/cash flow growth.

  6. Rob Cook

    Your last paragraph summed it all up well for small investors like us. Buying right, is always the key to having resilience in the face of future uncertainty. I really try never to buy a rental for more than 70% of current, as-is, fair market value. I sometimes get them at 50% of value. I could be “wrong” or unlucky in all of the future areas of potential risk/sensitivity you mentioned, and still be at least sustainable in my investments. And cash reserves always permit you to weather market storms that would otherwise sink your boat. As we approach or appear to be nearing a “top” in a market, which I sense is the case for sure in rentals of all kinds, being more selective, demanding and conservative in purchases is ever more important. Now is not a time to “chase” high priced deals in other words.

  7. Costin I.

    Scott, here is a scenario I see possible in the SFR arena:
    1. A bunch of wanna be investors and landlord purchased properties barely cash flowing, breaking even or with small negative cash flow counting on appreciation, with little due dilligence and/or property management experience.
    2. The years after, the taxes adjust to non-owner occupied (all the exemptions the previous owner disappear) and jump substantially to reflect that and the increased price in the market.
    3. The lack of management experience, many running rentals OOS, causes longer vacancies than expected. Because of that, leasing standards will be lowered and placing of unverified tenants that will cause damages, evictions, etc. will increase. Couple that with…
    4. The increased competition, due to everybody and their cousin being a landlord, causes stagnant rents, if not downright decline. This in an environment of raising taxes and, maintenance costs.
    5. Most of these drive-by landlords, not being good at evaluating the investment initially, will not be very good at tracking it either. After a couple years of activity, when they finally realize the investment that was supposed to bring them cash flow is actually costing them $$$$ every year and the promises of getting rich fast are nowhere near realizing, and eager to cash out the appreciation and get out of landlording, they will start selling, starting a fire sale downward spiral.
    My time frame for this scenario to play, especially in the markets with high appreciation recent years and high taxes: 2019-2020.

    • Scott Trench

      Hi Costin – great points here, and I’ll allow our bay area friends to provide much more knowledgeable feedback on this. But, I wonder if San Francisco isn’t facing such a massive supply backlog due to lack of construction that there’s really going to be a long period of time before prices fall. As I understand it, it’s really tough to get financing on properties over certain price points, so I understand that lending is much more strict on Bay Area housing than it is on housing in markets with price points closer to the median, implying more sophisticated buyers, or at least buyers with financial positions capable of maintaining their investments. But I could be completely wrong on that!

  8. James Pierce

    I cringe – as a Realtor, and as a rental property investor – every time I read an article where the author relies so heavily on Zillow / Trulia as the source for data. Based on my experience with them, my question to you is: Why don’t you talk to Realtors and investors in local markets INSTEAD to get a truly accurate idea of market conditions?

    Also, “So, what would crush single-family rental investments?” Answer: local and statewide political interference – first and foremost. Example: Portland, Oregon currently. Specifically the City and their bogus Rental Services Commission (Portland Housing Bureau) which seeks to impose ridiculous and illegal new regulations on property owners (landlords) to “make housing more affordable and available to more low income wage earners”. All while ignoring the economics of owning investment rental properties

    • Scott Trench

      Zillow is hands down the best publicly available source for nationwide data on single family, condo, and small multifamily data, and it is quite reasonable to extrapolate macro trends from their data.
      I agree – if you are looking for micro trends, go to local realtors. But, please understand that the point of this article to examine the nationwide outlook on supply, demand, etc. Zillow’s got a good approximation of that as anyone in their free, publicly available database.

      Zillow has it’s flaws, yes, but I suspect that it may be to your disadvantage to place so little value in a data source that is highly relevant to certain research. It may put you at a disadvantage when looking at high-level data trends and isolates you and your clients to information that is solely in the Bay area. I certainly wouldn’t pull Zillow data and claim to have a better outlook on the San Francisco market than a San Francisco Realtor like yourself. I would, however, feel comfortable going toe to toe with a Bay area Realtor about macro, nationwide trends while relying on Zillow aggregate data for parts of my research, and particularly relying heavily on it for aggregate rent and price growth by asset type nationwide.

      I do, however, completely agree that local and state political interference can have a huge impact on local markets, and broadly applied, nationwide. Look at San Francisco! The city is not and for years has not provided zoning that would allow supply to come close to catching up with demand. This certainly preserves certain neighborhoods, but in my estimataion (you probably have a much better one than I!) this practice has sent prices soaring there for decades, and is perhaps on par with the tech industry in terms of influencing the current housing prices.

  9. James Pierce

    True story – Trulia Rentals: In doing Corporate Relocation, one of my clients expressed a wish to live within walking distance of work in the SF neighborhood known as SOMA (South Of Market Area). Doing my due diligence work, I went to an address in SOMA that was listed on Trulia as a Rental. “No”, the front desk Concierge said, “these are all condos in this building and there are NO rentals allowed”. Guess where this was? Right around the corner from the building where Trulia’s office is located! They allow scammers to post bogus rental ads, then don’t even check them out. Skewing the very data you think is accurate! So, I then went upstairs to Trulia. Turns out you have to have a badge to get in. So, I waited until an employee was coming back from break and walked in behind him, when the door was opened. Startled, the woman at the desk asked what I wanted. I gave her my Realtor business card and asked for their head of Security, then told her about the scam listing (on their website). “Oh you’ll have to talk to ___ in Seattle” was the reply. Guess what? They never did anything about it! Later, talking to other Realtors at my SF office, I heard the same thing from all of them: 99.9% of the rentals on Trulia were bogus at that time (right when they were acquired by Zillow). BAD DATA. Just like Zillow “Zestimates” which so many Sellers and Buyers of property think is “the gospel”.

  10. Pedro Martins

    Scott, the main question/issue I have with this article is when you say that the majority of landlords have 30-year fixed mortgages. Because to get those mortgages you have to have the properties in your own name and I value my liability coverage a lot so I place everything (and most investors I know do the same) under LLCs which unfortunately can only get 5 to 10 year fixed rates (commercial notes). Am I wrong on this?

    • Scott Trench

      Pedro – I could absolutely be wrong on that assumption. I surmised that, and do not have data to back it up. Perhaps I should poll the community on this one.

      My guess:
      About 50% of investors on BiggerPockets who own 1-4 unit residential real estate own property outright in their own name.
      About 50% of investors on BiggerPockets own property through an entity.

      I suspect that of those who invest in their own name – that the vast majority (85%+) use conventional, fixed-rate, 30-year mortgages, or a product that is simiilar.
      I suspect that of those who invest through an entity, that a slim majority (50%+) use conventional, fixed-rate mortgages, with the remaining owning outright, or using portfolio loans like yourself. I suspect that many of these folks finance and buy the property in their own name, and then quit-claim the property into an LLC. Yes, technically in violation of their due on sale clause.

      I could be WAY off on that assumption. But, that’s the guess I’d go with until I actually poll the community.

  11. James Pierce

    Try joining and logging into Zumper.com to get accurate rental housing data in the future. We use Zumper for all Rental applications in both the Bay Area and Portland, Oregon. They are now nationwide. Each applicant is charged $35 to apply, so there is no cost to the property owner.

    Regarding local market conditions and Zillow: in some big cities, San Francisco being one, more properties are pocket listings (non-MLS as you know) further skewing the data (and obviously Zillow has no knowledge of pocket listings, or sale prices). Again – Zillow, BAD DATA. Our answer? In SF, there is Top Agent Network (off-market Realtor community, online site). Also, as agents, we’ve developed the MyTheo app which allows Realtors / Brokers and their clients to see local MLS listings updated every 15 minutes. Not so on Zillow / Trulia and those “other sites” where you find listings still shown which SOLD 6 MONTHS AGO. I know, I get calls from Buyer clients, “Hey I saw this condo at a great price on Zillow and I want to go see it today!” My answer, “Let me check the MLS records and call the listing agent.” In every case, the “Zillow property” had already sold (for waaayyy over $$$) and anywhere from 6 to 24 months prior. With MyTheo, we Realtors “share” the app with clients and they get CURRENT VALID LISTING DATA, not moldy stuff from Zillow / Trulia and those “other sites”. MyTheo started in San Francisco (SFAR MLS) and is now in other CA areas as well. Should be in other states, too, soon – as there is a high demand for it. Completely replaces Zillow.

  12. Scott Schultz

    Good article, I do agree with much of what you said, I am having difficulty believing that 90% of SFR landlords have fix rate long term mortgages tough, I would venture to bet many like myself have 3 or 5 year commercial notes, however Im not worried about rate risk as my balances are low and even a big rate hike on renewal wont affect me much.

    I think individual markets play a big roll, in the markets I own SFR’s its actually more affordable to rent my House than it is to rent a new luxury apartment, and many of those new units are sitting, I have mid level finishes and you can get a 3 bed 1 bath house from me for $800/mo. but at the Complex equal space will be $100-$1200/mo and some places that could easily be $2500/mo or more. where I am many of the newer properties have lots of vacancies, and my SFR’s are full, Im pretty confident most generations would prefer privacy if given the option, this is where i think Grant Cardone is wrong with his huge gamble. but Im just a small time investor with 21 doors, we will see in time though.

    • Scott Trench

      Scott – you know what – I could be off in that assessment, and be presenting some bias in that assumption that a majority of SFR and 2-4 unit rental investors are using fixed-rate mortgages. I tried to make sure many of my other numbers in this analysis were backed by reputable sources, but I simply couldn’t find data on how real estate investors are financing single-family rentals and small multifamily properties. A couple of folks have already challenged that assumption, so that’s great feedback and maybe some data I can source directly from the BP community in a survey.

  13. Frankie Woods

    Rising interest rates in a deflationary or recession is one of the most unlikely courses of actions on the table. That goes in direct opposition of the Fed’s operating principles. You mentioned it’s unlikelihood, but I wanted to stress how unlikely this scenario is. I think the biggest risk to SFR investors are falling rents during a recession which no longer cover the mortgage payments.

    • Buckner Toney

      This would be my fear as well. There are a lot of mom and pop landlords out there now, many of them not on BP. A glut of vacant rentals in a downturn will absolutely drive down rental rates and hit those that did not buy right or did not budget conservatively. I cringe when I see someone talk about making $100 to $200 on a property in cashflow, those folks are going to get hit hard in a downturn. I know OOS investing is in vogue right now and can work very well when done right, but at a recent investor conference, nearly everyone I talked to was doing their current investing somewhere else instead of locally. These OOS landlords may be in for a rude awakening when their properties stop cashflowing what they were expecting. So what to do? Sharpen your pencils, budget a little more conservatively (more time to complete a rehab, more $$$) instead of leveraging to the hilt or always deploying your capital 100%, maybe start putting aside some cash in your warchest so you are postioned well to take advantage of any downturn.

  14. John Barnette

    I think you are pretty spot on in your very full analysis San Francisco newer luxury oriented large multifamily rents peaked nearly 3 years ago. And more supply keeps coming. Demand not in proportion. Meanwhile I have a portfolio of simple 50’s ranch style sfr’s in working class urban burbs (older and closer and better transit and C types) that keep going up in rents and value.
    And I would suggest a nice little niche I have been successful with. That being larger homes with multi-generational rental families. Often Latino or Asian as this is California. Work with both section 8 and non-subsidized. Have my pick of tenants and huge demand.

    My question. Would it be good strategy to sell a number of little green houses and exchange up to a red apartment building or two when the market moves as you suggest and I concur will possibly happen?

    I think there could finally be some decent cap rates along with higher interest rates. Do about 50% LTV. Then when rates do adjust down ..refi!

    Thanks
    John in San Francisco

  15. Nathan G.

    This is a good article with plenty to chew on. I haven’t studied national statistics and don’t have the years under my belt to forecast the future but I do know this: times change.

    I think there’s a large segment of the investing population that are stretched thinner than they think. They jumped into REI when the market included low purchase price, low mortgage rates, and increasing rent demand. It’s hard to fail in that kind of market but it won’t last.

    In my local market, single-family homes typically rent well. That completely changed three months ago. We’re dropping the rent on single-family and still can’t even get people to look at them!

    There are forces we can’t predict or control. Investors need to understand that and be prepared for the changes or it will eat their lunch. Investors that are prepared should be able to pick up some good deals in the coming years.

  16. Rob Cook

    Agreed Nathan G.

    Many if not MOST of my rental acquisitions are from landlord sellers, often ones who got themselves in over their heads. I then buy at a significant discount which of course, comes from the sellers’ pocket. They would have been much better off had they never owned the property at all. No way to get ahead, that!

    We have enjoyed a long, good run since 2008, and like any market, corrections and changes are inevitable. Like 2008, many get caught in the transition and lose all their marbles.

    As always, betting and planning and counting on appreciation, is a dangerous, speculative game to play, even if you “win.” It is still gambling.

  17. Dani Z.

    Thank you for all of this research and commentary, Scott. Other people have made great comments already, so I’ll just mention one thing:

    “And even if rents are hit hard, I think that the guys like us here on BiggerPockets… ”

    That sentence stuck out like a humongous sore thumb to me. Not all of us on BP are guys. “People” or “folks” would have read just as smoothly. When men generalize the word “guys” to mean “guys and gals,” it sends a subtle (even if inadvertent) message that “guys” are the norm and everyone else is subordinate/secondary/not the norm.

    There is a ton of research showing how language affects our attitudes and thus, our entire culture. Especially this week with what’s happening politically, it’s so important for leaders like you to check gender-bias in language.

    I know that I risk getting hazed for mentioning this here because even my fellow women have been socialized to subordinate ourselves. In spite of this, thank you for reading/listening and for taking the words of this gal seriously, Scott.

    • Costin I.

      As a non-binary person, struggling to yet self-identify with humans, plants, and/or animals, and even aliens, I find this over simplification into “guys and gals” very offensive and my feelings were deeply hurt. My only consolation is the words of great Eleanor Roosevelt: “No One Can Make You Feel Inferior/Subordinate/Secondary Without Your Consent”. And the fact this is Real Estate website.

    • Scott Trench

      Hi team – this is a fair point. I saw your forum post today and immediately took action to update the post. I wasn’t thinking and of course, it’s a big problem to allow unintentional blunders like this to exclude or alienate people. I am sorry and I have updated the post. I will endeavor to improve my writing and think through the ramifications of my word choice in the future.

      • Dani Z.

        Thanks for listening, Scott, and for caring enough to want to take action. The world would be a much better place if everyone–myself included–regularly examined our language, our beliefs, and how our language shapes our beliefs. Also how our privilege–mine included–affects our perspectives about the world and about other people, as well as our willingness [or unwillingness] to change those perspectives.

        “The important thing is not to stop questioning; curiosity has its own reason for existing.” – Albert Einstein

        “In this world you’re either growing or you’re dying so get in motion and grow.” – Lou Holtz

        “People learn something every day, and a lot of times it’s that what they learned the day before was wrong.” – Bill Vaughan

  18. Stephanie Freed

    Very interesting article. In performing my on going continual research and education, it’s amazing how many rabbit holes you can end up finding amazing tidbits of information and wisdom when all of a sudden I realize its 3am and I need to sleep. I found a great one during last nights rabbit hole fest: http://www.Attomdata.com where the engrossing data showed: Rents Rising Faster Than Wages in 84% of Markets and Home Prices Rising Faster than Wages in 86% of Local Markets. Nation wide, the median home price of 250K in Q3 of 2018 was up 6% from a year ago, twice the annual growth of 3% in average wages. Median home prices have increased 76% since bottoming out in Q1 2012 while average weekly wages have increased 17% over the same period. Meanwhile the average 30-yr fixed mortgage rate is up 15% since Q1 2012 and up 17% just over the past year according to Freddie Mac Primary Mortgage Market Survey. This leaves home buyers able to borrow 10% less than a year ago because of interest rates. According to an article dated October 2nd 2018 Home Prices Less Affordable Than Historic Averages in 78% of local markets. 30% of population in markets requiring 100K in annual income to buy a home. Nationwide an average wage earner would need to spend 37% of their income to buy a median priced home in Q3 of 2018, above the historic avg of 34.1%. Median Home Prices Not Affordable for Average Wage Earners in 84% of local markets. An average wage earner would not qualify to buy a median-priced home nationwide and in 368 of the 440 counties analyzed, in the report 84% based on a 3% down payment and a max front end debt-to-income ratio of 28%. There were also graphs showing how during the downturn in property values post 2008, the rents continued to rise. All I can say is be careful what time you check out this data website, lest you too find yourself still poking around down that rabbit hole at 3am!

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