In evaluating an investment property to buy and hold, the key is determining rental income. The first question most buy and hold investors will ask is “What are comparable rents for the home?” Comparable rents, like comparable prices, are based on today’s information–a relatively known quantity and critical to determining value. But in the current market, with foreclosure news permeating the media, many are wondering about the impact that foreclosures will have on future rents.
My statistical model of determining future events usually dictates that I consider Rob’s astute predictions and then take an opposite position. I call my approach Rob Contrarianism™. Rob has told me that he expects rents will increase, at least in part, as a result of foreclosures. My typical model notwithstanding, on this point I tend to agree with Rob.
Why Rob Might Be Right This One Time
Rents like all prices are, of course, dictated by supply and demand. As foreclosures continue, many homeowners will become renters. So, demand for rental property will increase causing rents to rise. While some foreclosed homes will undoubtedly be purchased by investors and will add to the supply of rental property, they will be only a portion of the foreclosed properties. Stricter lending criteria will further add to demand for rental housing. Higher down payment requirements and credit standards will mean that some would-be new home buyers will be unable to obtain financing under the previously looser lending practices, requiring them to remain renters, at least for now.
Some Evidence It’s Started
There are some indications that rents are already on the rise. For example,
But Let’s Not Get Carried Away
Higher rents mean higher investment returns. While it appears that rents may well be on the rise for awhile, “awhile” might be the operative word. In areas like
For Rob and I, we look at this rental trend as perhaps somewhat of a reinforcement of our buy and hold investment purchase decisions. But we don’t pick those investments based on my (and especially not Rob’s) speculation as to what will happen in the future. So ultimately, we’re still looking first and foremost at sale and rental comps because today’s information carries the day.
{ 3 comments… read them below or add one }
What are the deciding factors in determining which areas will benefit from an increased demands for rental units?
Obviously a rental in the boonies will not be in high demand versus a rental in an area with a lot of labor opportunities.
For example, I lived in Denver for a couple years and it seems to me the rent were more higher toards west Denver than elsewhere which was pretty comparable. The east area of Denver was the lowest rent area. But all the jobs were either smack dab in the middle of downtown Denver or south of Denver in the Tech Center.
What struck me odd was the west Denver area did not offer as much in terms of employment opportunities but did offer quality schools, if not quality neighborhoods.
I am gathering information on how to determine where in my purchase zone of York, PA would be more ideal, whether it would be downtown or out near the high employment areas.
Does this question make sense?
Hey, Mark.
Let me tell you how I look at it. The rents, high or low, don’t matter as much as the rent/cost ratio with consideration of stability. Rob and I are buying in two particular suburban areas for several reasons, but the primary one is that they are areas where we can find deals on purchases of single-family homes while todays’ rents in the area make the deal profitable. Although I wrote about rent trends in this article, I try not to rely much on the trends or my (or especially Rob’s) ability to predict the future. I rely more on today’s comparable rents and evaluate a potential purchase based on that. I do try to be cognizant of whether the area is declining–this is a risk factor. But rather than try to predict the future of rents, I try to evaluate whether an area that already has opportunities to purchase is relatively stable. This means that I’ll stick with areas where the schools are decent, neighborhoods are decent. Conversely, I tend not to spend much time in trying to find investments in the hottest areas. Generally, in those areas there will be fewer opportunities to purchase a discount property and higher appreciating prices in hot areas often out pace rent growth, making it difficult to make a reasonable return on the investment. I’ll stop now with this: other factors include the type of investment, whether you’re looking for income or growth, and the proximity to where you live/work considering self-managing the property. Hope this helps.
This does help, Mike. Having grown up in a upper-class neighborhood of CT, just 60 miles outside of NYC, it was more of a town for families because of an excellent school system with one problem, no areas for lower income families to purchase except for condos as a rental, I can understand growth.
Having lived all over the country in hot spots such as Phoenix, and Denver as well as secondary hotspots such as Savannah, Cape Cod, and Park City, I can understand the value of stability and the demand of schools.
It is ture no one can predict the future so it is good advice to reflect on what the properties are like now when it comes to income. After all, you can always sell if the neighborhood starts to decline, right?
Gracias.