Learn How To Start Investing In Real Estate
Learn How To Start Investing In Real Estate

5 Promising Aspects For Investing in Rental Property

Written by Than Merrill

The first half of 2013 witnessed a house appreciation rate that surpassed even the most ambitious of expectations. Many homeowners actually feared the prospects of a subsequent housing bubble. However, as conditions have tempered, home sales have finally begun to slow down. The torrid pace that we have recently grown accustomed to appears to be at an end.

Despite recent gains, however, the homeownership rate on a national level continues to drop. Approximately 65% of households in the first half of 2013 owned their homes, marking the lowest level we have seen in 18 years. By comparison, prior to the previous housing boom, the U.S. experienced a homeownership rate of 69 percent.

While purchasing a home remains 35 percent cheaper than renting in the long term, an increasing percentage of Americans are choosing to sign a lease rather than a deed. Those familiar with the market predict the rate of homeownership to dip even further in the near future, furthering the prospects of rental property.

With rental rates continuing to increase, investors should consider the benefits of a buy and hold investment. Current conditions may facilitate large margins in almost every market. Those thinking about entering the rental market should take the following into consideration:

Lending Conditions Remain Tight

Lending restrictions continue to suffocate prospective buyers. According to a recent Zillow study, approximately one-third of Americans will fail to qualify for a mortgage under the strict guidelines that have become synonymous with today’s market. Even buyers with a relatively clean credit report, void of foreclosure, are finding it increasingly difficult to acquire a mortgage.

Investor Activity Has Reshaped the Market

The event of the housing sector downturn awarded cash-rich institutional investors the opportunity to acquire homes well below their market value. However, improving market conditions have permitted the same investors to turn their properties into rentals. Furthermore, those who were underwater on their homes became “accidental landlords,” renting out their first home so that they could move to a second.

As a result, four million more single-family homes became available for rent than there were prior to the recession. Prospective renters were given the luxury of having more units to choose from.

Boomerang Renters

Mounting student debt and disturbing unemployment rates have paved the way for more millennials to move back in with their parents after college. Parents in today’s market are seemingly more willing to allow their children to move back in with them to start saving for the future. In 2012, 36 percent of the country’s 18-to-36-year-olds lived with their parents – the highest share in at least 40 years, according to a Pew Research study released in August.

According to analysts familiar with the market, millennials are reaching the age where they are more likely to move out. However, when they do, they will not be able to purchase a home. They will seek out reasonable rental rates, essentially reducing vacancy rates on a national level.

“Those young people are probably going to rent before they buy,” says Jed Kolko, a housing economist with Trulia. That could push the homeownership rate down even further.

Increasing Mortgage Rates

According to RedFin, nearly two-thirds of prospective buyers have been unable to proceed with the acquisition of a house because of increasing mortgage rates. Subsequently, 22% of buyers acknowledged that the increase in rates forced them to temper their current search activity. Mortgage rates are about 4%, but the Mortgage Bankers Association predicts they will reach 4.9% by 2014.

Fewer Married Couples

For reasons that we can only assume, there are fewer married couples on a national level. Only 21% of households are married with children. Conversely, at the turn of the century, 24% of all households were made of married couples with at least one child. Meanwhile, the number of single households has reached 27 percent, more than double the percentage a few decades ago, according to the Census Bureau.

“There’s less of a need now for people to stay put and buy a house with space for all their kids,” says Jim Lapides, a spokesman for the National Multi-Housing Council. “They’re more interested in living close to work and being able to walk places.”