Can investors find success in the rental property market in 2021?
Early last year, the property management sector was extremely unstable as COVID-19 brought about unpredictable circumstances for tenants. From renter defaults to rising vacancy rates, the market seemed to be going south. However, going into 2021, the rental market appears to be a lucrative opportunity for investors to cash in on. This guide breaks down everything you’ll need to know to navigate your way through this market:
2020 Rental Market Recap
In 2020, the pandemic triggered a mass exodus of renters from major US cities of San Francisco, New York, San Jose, Los Angeles, and Boston. While almost every large city was impacted, the movement of renters was traced to smaller suburban neighborhoods. The tides have changed– urban cities saw a decrease in rent while the opposite had happened to smaller neighboring cities.
The market began to see an extreme increase in demand for rental properties for various reasons. With housing shortages and the preference to rent rather than to buy a home, the rental market will only continue to grow.
COVID’s Impact on Rent and Its Heat Map
The pandemic’s impact on the rental market does not have a one-size-fits-all answer.
“I’m seeing rents are down 10% to 20%, with higher-end and luxury units taking the biggest hits,” said Dave Chesnosky, an agent with Compass in San Francisco. “But these drops are dependent on the location and uniqueness of a unit.”
— from CNN Report.
To break it down, expensive cities saw a decrease in rent while rent in affordable cities rose. The five top rental markets in the country each saw a ~3% drop in rent. On the flip side, all 100 of the country’s cheaper cities saw a steady increase in rent. This seesaw effect could be attributed to two things: the work-from-home order and the inability to afford to live in urban cities.
As many companies are requiring employees to work from home, people no longer have an incentive to live in urban cities to shorten their commute. This has allowed renters to look for properties in suburban areas where they can get a bigger bang for their buck. In the same vein, COVID has forced people to readjust their budgets due to financial struggles. The migration of renters has shifted the demand from metropolitan cities to suburban areas, increasing rent for the latter.
Renting vs Buying
Today, are more people looking to rent or buy homes? Rent, by a long shot.
With a shortage of housing and no money to buy homes, people will be pushed to find rental properties. The growing trend for renting is only going to increase as economists are convinced that inflation and the shortage of housing will favor rental properties. On top of this, COVID brought about a vulnerable period of employment insecurities–this plays a huge role in the choice between renting and buying.
Fundamental changes in various nuances of homeownership, once again, shift the demand towards the rental market. Homebuyers will face additional taxes, rising prices, increasing development regulations, higher mortgage qualification rules, and more. Long story short, all signs point to renting.
Hardships for Urban Multifamily Properties
In this ever-changing real estate dynamic, multifamily properties in large cities have been hit the hardest. This is in part due to a multifaceted bundle of outside forces.
Main reasons being: construction, labor, and land costs and high vacancy rates. Research done by Harvard shows that the cost to build new multifamily properties continues to skyrocket quicker than inflation. This can be contributed to the rising prices of homes, but the high vacancy rates only exacerbate the problem for construction property owners. Large amounts of new buildings are being built in areas that most people are leaving.
The final cherry on top is the fact that multifamily units in large cities are usually occupied by younger generations. When COVID-19 hit, many younger renters had lost their jobs and moved in with family. In short, investors need to be mindful of how the state of the multifamily market relies heavily on a broad spectrum of the economy.
Current Overview of Rental Market
With everything stated, it is an understatement to say that the renter market is hot and is extremely over-saturated. Over the past decade, high-income households have surprisingly been the largest growing class of renters. High-income renters, those earning over $75,000, account for 75% of new renters from 2010-2018. The definite reason for this is still unknown but could be attributed to the steep price of buying a home. In the coming years, more changes will affect this sector and increase rent prices for single-family homes.
How to Win In a Renter Market
Investors and business entrepreneurs are increasingly investing in property in smaller cities. Migration with economic shifts means that there is a new assortment of cities to invest in. With the current real estate climate, the only way to make it out to get the most out of your money is by buying to rent. Rental properties are a hot investment sector, especially with the popularity of short-term rental companies like Airbnb. The state of the market and the insufficiency of available housing makes the rental market a potential gold mine for investors.