The crisis in rental housing is creating a scenario for investors where investing in Single Family rental properties could be the best investment to make right now and for the foreseeable future.
When you compare the returns from investing in rental properties, along with the looming rent crisis in affordable housing you see a clear picture of how appealing investing in single family rental properties can be.
Rental property returns are astoundingly high. Especially when you compare the return on single family rentals to investing in the uncertainty of a volatile stock market or bonds where the interest rates are the lowest they have ever been in U.S. history.
According to a RealtyTrac first quarter 2015 report, the best markets for buying residential rental properties were in Atlanta (25.83 % return) Baltimore (20.99% return) Richmond City (20.2% return) and Detroit (19.34%). For this report, RealtyTrac took median market prices for a 3 bedroom single family home and median market rents for a similar 3 bedroom home.
There are many markets with an average annual gross rental yield of above 12% in the U.S. Take a look at some of the counties below and their annual gross rental yield. Gross rental yield is calculated by taking the gross annual rent on a 3 bedroom house and dividing that into the median purchase price of a 3 bedroom house in that county.
Annual Gross Rental Yields:
- Broward County Florida 13.1%
- St Lucie County, Florida 12.39%
- Montgomery County, Alabama 14.45%
- Hernando County, Florida 17.86%
- Cumberland County, New Jersey 14.17%
- Mobile County, Alabama 15.3%
- Hernando County Florida 17.86%
- Wayne County Michigan 19.34%
- Wyandotte County Missouri 17.6%
- Marion County, Florida 16.88%
- Citrus County Florida 15.3%
Are these returns high? Absolutely! especially compared to the absurdly low interest rates that checking accounts, CD’s and bonds are paying right now. As of this writing, the 30 year Treasury Bond is paying only 2.87%. If you are okay with locking your money up for 30 years for only 2.87% well then you my friend, are not a very savvy investor. Do you know what would happen to your investment if interest rates went up? You would lose a lot of money. Your principal would probably go down by 25% or more. That is not a very good bet.
I would much rather be sitting with a portfolio of single family rental properties than have my money in bonds, CD’s, checking accounts or the stock market. Especially if interest rates go up and inflation rises. I invest in single family rental properties because quite frankly there is no other investment out there that can compete with the returns.
And that is before taking into consideration the tax advantages of investing in real estate like amortization, depreciation and tax deductions. After the tax advantages returns are taken into account the returns are even higher.
So, why are the returns so high in rental properties right now? The reason is actually quite simple. Prices came down a lot in the housing crisis. In some areas you can buy a house today for less than 50% of what that same house was worth just a few years ago. A lot of people that were homeowners lost their homes to foreclosure. Since their credit was ruined and the dream of home ownership failed them, many of these people became renters. And all of those renters are looking for houses to rent. And unfortunately there are simply not enough houses to go around.
Currently 64% of all people in the U.S. rent their home. That is the lowest percentage on record in 20 years. The dream of home ownership for many people with bad credit or not enough cash saved up is simply out of reach. And they are forced to rent. They don’t have any other choice. And where the crisis in rental properties is the most prevalent is in low income housing. For this reason I believe that investing in low income single family rental properties is the best place to be for the foreseeable future. Duplexes, and multi families have great returns too. But I have always preferred single family rental homes because there are a lot less available single family rental homes available for rent than there are multi family properties in any given market.
This may be one of the best times in your life time to buy a rental property. Low prices along with high rental returns and high rental demand are creating a great investment return.
As investors clamor for alternative investments to a volatile stock market and low rates from bonds and CD’s, single family rental properties make a lot of sense. The returns are high, the tax advantages are numerous and if inflation picks up then things will get a lot better for landlords and a lot worse for tenants since rents will rise even more. And this will especially be the case in lower income housing.
In a sense this is a perfect storm for landlords investing in rental properties. And it is a nightmare for tenants especially low income housing tenants.
Let’s look at some of the data from a September 2015 Harvard University study from Harvard’s Joint Center on Housing studies.
According to this recently released report:
- The number of households that are severely cost burdened (defined as spending at least 50% of their income on rent will increase by 25% over the next decade to 14.8 million people.
- Rents are rising much faster than wages across the board in all U.S. markets.
- In New York and Los Angeles more than 1/3 of all middle income renters are severely rent burdened and this is happening in most major U.S Cities.
- The private sector cannot supply anywhere near enough new homes for low income renters.
- Demand for rentals is increasing at a rapid rate and rents are rising along with this demand.
If you are a landlord like I am, then you are already seeing this happening every day on the ground. The traditional rule of thumb is that families cannot afford to spend more than 30% of their gross income on housing. However as rents rise and wages don’t rise these low income renters are simply being priced out of the market.
and that is causing rents to now rise to 50% of their income. This is a sad state of affairs for renters. But it is a boom for landlords since competition is fierce among tenants looking for a good affordable house to rent.
Real estate investors that purchase single family homes and rent these homes are finding that rents are rising and that there is no supply – especially in the affordable housing market. The resulting effect is high returns and no problem securing tenants since demand is so high for rentals and landlords can be very selective on who they rent to.
And for this reason I believe that investing in single family rental properties in the U.S is hands down right now the best investment you could make.