When Investment Opportunity Knocks
It is no surprise that the law of supply and demand drives costs upward or downward depending on the trajectory of the major component. The same principle holds true in the rental market.
The recent high number of foreclosures has resulted in an increased number of displaced homeowners. These displaced homeowners need a place to live resulting in increased demand for rental property.
Additionally, the increased number of foreclosed properties has resulted in a drop in price for residential homes. Wise investors will take advantage of the declining prices of residential homes and turn them into income generating rental properties.
Currently, approximately 45% of all tenants are renting traditional apartments with the remaining 55% renting single family dwellings. As the level of owner-occupied properties continues to dwindle, the need for rental property is growing proportionately and is creating a surge in rental prices.
The median housing cost burden for rent and utilities is 30%; however, since the beginning of the economic downturn, rent increases for tenants continues to outpace any income gains year after year. This creates a negative impact to the tenants’ cost burden by about 8%.
The Center for Housing Policy, a nonprofit organization, claims that approximately one of every four tenants spend at least half of their income on housing and utilities which is causing a “severe housing cost burden”
The rental housing boom is growing to 4.5 million tenants in single family dwellings with a net increase of 1.4 million in 2012 alone. According to Census data, the number of tenants has risen steadily for six consecutive years, resulting in a 4% rise in the number of tenants. Fannie Mae predicts that average rental prices will increase between 2% and 3% across the country in the coming year.
Certain regional rental markets will undoubtedly see larger increases, including San Francisco with a predicted increase of 14.8% and Miami which is predicted to increase by 5.6%.
Approximately 70% of all Metropolitan Statistical Areas in the country experienced rent increases over the last year, while only 7% showed an increase in single family home values.
Core Logic analysis shows that converting REO’s to rentals will become more than a $100 billion business for the next few years. But, as in all supply and demand scenarios, the REO to rental conversion will have a limited life span before the market reacts - investors need to act fast because as the inventory of REO’s decline the bidding wars will increase.
Cheryl Lang is the president and CEO of Integrated Mortgage Solutions, Houston, TX