By: Dennis Norman
For the past year the media has been flooded with reports and stories of how bad the real estate market is. Falling prices, an oversupply of homes for sale, a meltdown of the mortgage industry and now the banks are even in trouble! So what’s the silver lining? Perhaps it is the opportunity to expand, or start, your rental portfolio.
I believe many of the housing industry statistics as well as industry forecasts and projections show that now is a good time to buy rental property. The National Association of REALTORS(R) (NAR) is projecting existing home sales for 2008 to come in at 5.2 million homes sold down from 5.7 million for 2007, 6.5 million for 2006 and 7.1 million for 2005. On a positive note, sales increased from August to September by over 5% and sales for 2008 through September are up over 1% from the same time last year. NAR is also reporting a 9% decline in the median home prices nationwide for the past year.
These statistics could be indicating that perhaps the market has bottomed out or is close to bottoming out. Prices have finally decreased to the point where sales are increasing slightly. If this is correct then the opportunity to buy homes at good prices may not get any better than it is right now. Obviously there are many factors that could affect this; the change in the leadership of our country, the tremendous amount of debt our country has taken on and the volatile economy. However it is my belief that for many markets in the country now is a great time to buy property for rental as even if the prices decline slightly more in the short term, in the long term you will be in good shape as the market stabilizes and returns to normal.
Part of the problem with the housing market is that it was overbuilt. The number of new homes being built kept increasing during the real estate boom but as demand slowed inventories grew out of control driving prices down. This is changing too…the National Association of Homebuilders recently reported that new and Existing home supply dropped from August to September. While the inventory of new & existing homes for sale is the lowest it has been all year, the number of months of inventory that exists is still high in both categories and in fact roughly double what it was in 2004 and 2005. Granted those years were during the boom so inventories were low, but I think what this is showing us is things are moving in the right direction to indicate maybe prices won’t drop much more from their present levels, however there is plenty of inventory to assure you should still find plenty of opportunities to buy right.
The National Association of Homebuilders (NAHB) also reported that builders confidence was at an all time low for both for sale as well as rental multi-famlies. This, along with the crisis in the captial markets, assures that there will be limited inventories of new rental housing which strengthens the market for existing rental units.
I think I have shown the opportunity is out there to buy property at good prices. The next question is how is the rental market doing and is there a demand for more rentals? Harvard’s Joint Center for Housing Study recently released a study on America’s Rental Housing. This report discusses the large number of foreclosures and the number of people as a result that have been forced into the rental market. The ironic thing is a lot of these foreclosures are the result of the massive number of subprime loans that were done in 2004-2006 that turned many renters into homeowners….it is now turning them back to renters. This is creating a big demand for rentals, specifically AFFORDABLE rentals. For this reason I would suggest that you focus your attnention on those markets and property that is affordable. In addition I would suggest pricing your rents slightly below the market…this will attract more tenants as they wil see the value and will give you the opportunity to have a good pool of tenants to select from.
Earlier in the 2000′s many apartments and other rental units were converted to condominiums to keep up with sales demand. In 2005 USA today published a story about this trend and the hardship it was causing for renters. There were a lot of rental units taken out of the market at a result. One thing to be cautious of though is now the reverse is happening in many areas. There are many metropolitan areas such as the one I live in, St. Louis, that during the real estate boom saw hundreds if not thousands of condominiums developed in old warehouses and other historic buildings in their downtown areas. As the market softened many of the developers have been forced to rent units they can’t sell thereby flooding pockets of the market with rentals. I would caution yuo to avoid this type of investment and stick with homes in established neighborhoods.
For those of you that do plan to take advantage of the current market I would strongly suggest that unless you are highly proficient in this area and up to date on the local market conditions that you work with or engage the services of a qualified professional to help you. There are many pitfalls out there in the rental business including the impact of local ordinances, difficutly with financing in many markets, poor property management, etc. Getting assistance from someone that is familiar with these issues in your market will be invaluable. I know many people all over the country that can help you with this so feel free to request that information.
In closing, I want to be clear that I’m not saying this is a no-brainer. The market is still very tricky….I would suggest that you take a very conservative approach to your acquistions…if you can’t buy a property for what you feel is a good price then move on…there will be more opportunities. Also, don’t kid yourself on the numbers…take a very realistic (conservative) approach on what it is going to cost you to get the house ready to rent, be conservative on the rent you are shooting for and aim below the market to assure you get your units rented quickly to good tenants.
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