With the economy supposedly improving — in fits and starts, anyway — buying a residential rental property could make good business sense.
Supply and demand, not to mention common sense, says people will always need a place to live, and with the balky housing market discouraging many buyers, more Americans are looking to rent these days rather than own a home.
"Reversing the long uptrend in homeownership, American households have increasingly turned to the rental market for their housing. From 31% in 2004, the renter share of all US households climbed to 35% in 2012, bringing the total number to 43 million by early 2013," says a Harvard University study.
It’s best to buy a rental property near you so you can keep better track and better respond to a renter’s needs, but an investor has rot look at buying a home where the opportunity for profit potential is highest.
That’s where RealtyTrac and its Q2 2014 Residential Property Rental Report can help potential landlords. The report checks out median sales prices for residential property and average fair market rents for "average" three-bedroom properties in 370 U.S. counties, thus representing a good cross section of the nation’s rental market (60% of the total U.S. population).
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Prospects are already good for rental property owners in 2014, with RealtyTrac estimating that, in the second quarter they earned a 9.97% return on their investments with an upswing in median home prices and monthly rental rates.
"Home prices have increased at a faster pace than fair market rents in most counties over the past year, eroding the average returns available to investors buying rental properties," says Daren Blomquist, vice president at RealtyTrac. "Even so, an average annual return of nearly 10% across all the counties we analyzed nationwide is still solid, and investors holding on to rental property for the long term will also typically benefit from home price appreciation on top of the annual returns from rental income."
A big demographic shift, in two key areas, also likely benefits rental home owners, RealtyTrac says
"Investors leveraging demographic trends will often be able to amplify rental returns and home price appreciation, particularly when it comes to trends in the baby boomer and millennial generations, which combined account for approximately 147 million people — more than 60% of the U.S. adult population," Blomquist says. "Many individuals in both of those demographic groups are in the midst of major life changes that will often involve changes in housing, something that smart real estate investors should take into consideration when deciding when and where to buy or sell."
The best places to buy a rental property right now are in U.S. counties where the unemployment rate is below 4.5%, well below the national average of 6.1%. Top markets include Anderson County, S.C. (where rental property owners earned 15% returns on their property investments); Sioux City, Iowa; Gainesville, Fla.; Washington D.C.; Columbia, S.C.; Pittsburgh; Columbus, Ohio; Charleston, S.C.; and Omaha, Neb.
If you can’t buy in those areas, at least follow the script and buy where jobs are more plentiful and income is rising. Those areas will yield the best rental customers, who are able to make their monthly payments easily.
So yes, it’s a good time to own a rental property, especially in areas where the economy is really improving. But right now, demand is high for rental properties across most of the nation, making happy investors out of rental owners and their accounts.
This article was republished with permission from TheStreet.