a house with
a white picket fence is a quintessential part of the
American dream. But an increasing number of
Americans are deciding that renting a home is a
better fit for their families than buying one. "Over
the next 15 years, new renters will outnumber new
homeowners — causing a sustained surge of rental
housing demand," concludes a recent study by the
Urban Institute entitled "Headship and
Homeownership: What Does the Future Hold?"
This trend could create lucrative investment
opportunities in certain geographic markets. Here's
a closer look at what's driving the shift and where
investors can earn the highest potential return on
Study Predicts a Hot Residential Rental Market
Although homeowners will continue to outnumber
renters, homeownership rates are expected to decline
in the coming decades. The Urban Institute study
estimates that 22 million new households will need
homes to rent or buy in the next 15 years, but only
9 million of these households will choose
homeownership. By 2030, the homeownership rate is
expected to drop to 61.3% from 65.1% in 2010. The
increase in demand for rental properties is expected
to drive up lease rates in markets with a limited
supply of rental properties.
Why are more people choosing to rent? Many are
skeptical about whether homeownership is a smart
investment, after factoring in all of the
costs of owning a home. (See "Rent or Buy? A Tough
Financial Decision" at right.) Following many years
of strong appreciation in the housing market,
homeowners received a harsh wake-up call. During the
recession that persisted from 2007 through 2009,
home values plummeted. Although some markets are
recovering, property values generally haven't
recovered from their pre-recession peaks.
In addition to having cold feet, some renters simply
can't afford to buy a home, especially as interest
rates rise. The Freddie Mac Weekly Mortgage Survey
shows that the average fixed interest rate on a
30-year mortgage has increased from 3.73% for the
first week of 2015 to 3.89% for the week ended
September 3. And, the mortgage rate is likely to
increase even more if the Federal Reserve increases
the Fed Funds rate later this year, as many analysts
expect will happen.
Saving for a down payment will also be harder for
first-time homebuyers if rents rise due to a short
supply of rental properties. Even if they have the
cash to put down, Millennials with high student
loans and people with poor credit may not qualify
for affordable mortgages given today's tougher
underwriting standards. Individuals who are forced
to delay their homebuying plans will likely rent
until they can afford to buy their dream homes.
Opportunities Emerge for Investors
Regardless of whether the choice to rent is
voluntary or involuntary, the trend is good news for
investors. Housing research firm RealtyTrac
estimates that the annual gross rental yield
averaged 8.94% in the first five months of 2015,
based on its buy-to-rent analysis. The rental market
also is becoming more stable and predictable as the
real estate market improves.
RealtyTrac reports that the low supply of rental
properties has caused average rental rates on
3-bedroom properties to increase 3% from last
summer. "Buying rentals continues to be a brilliant
strategy that allows investors to hedge their bets
in a real estate market shifting away from
homeownership and toward a shared economy,"
concluded Daren Blomquist, vice president of
Location, Location, Location
When investing in real estate, location is
everything. So rental property buyers need to choose
their markets carefully. According to RealtyTrac,
the top five counties in which rental rate growth is
outpacing home price growth, providing investors
with increasing rent-to-buy returns, include:
Orange County, Calif. (Los Angeles metro area)
King County, Wash. (Seattle metro area)
Santa Clara County, Calif. (San Jose metro area)
Philadelphia County, Pa.
Suffolk County, N.Y. (Long Island)
Other cities with hot rental markets include:
Cincinnati, Cleveland and Columbus, Ohio,
Charlotte and Raleigh, N.C.,
Jacksonville, Fla., and
When deciding where to buy, it's important to
consider both rental rates and property values.
Ideally, you want to buy the property at a low price
and then rent it out for as much money as possible.
You want to buy in a market where the supply of
rental properties is low and the demand for rentals
is high, based on demographic trends and property
How to Become a Real Estate Mogul
The stage is set for a strong residential rental
market for the next 15 years. That may be bad news
for people with unfulfilled dreams of homeownership.
But it's good news for investors with extra cash to
purchase single or multi-family rental units. If
you're interested in hearing more about rental
property investment options, talk to your financial
adviser about the tax rules, mortgage alternatives
and most advantageous places to invest. Together,
you can devise a prudent strategy to minimize your
risk and maximize your return.
For additional information on how we can help,
Robert Puerto, CPA,
at 516-248-7361, or
click here to email Robert.
In a brief consultation he can assess your situation
and offer guidance for your specific circumstances.