LOS ANGELES—The economy may not be doing that well, given a still sluggish job market and continuing troubles in many sectors. But one thing is bucking the trend – the real estate market and more particularly, the rental market.
And it’s not surprising as many investors realize that the positive cash flow of rental properties is one of the few bright spots of a tough economy. It’s especially so when it comes to apartment buildings and multiplexes which can provide much-needed cash flow in a slow economy. Having tenants consistently paying rent, provides a steady income that few other investments can match.
Although rental occupancy rates dipped during the early part of the recession as people moved out of apartments to live with their parents or other family, many are now moving back into apartments as things have improved. This is not lost on investors who have been increasingly buying up rental properties.
And it’s no wonder. According to the National Association of Realtors, rent prices were higher than expected in the first quarter of 2013. The cost of renting a home may still go up slightly in the near future, but not by much. Landlords have been enjoying rent increases, in recent months as the market continues to surge.
Thanks to the collapse of the housing and mortgage markets the rental market is on the upswing. It benefited from borrowers defaulting on their mortgages and also from nervous potential home buyers who postponed their purchase plans out of fear of a declining housing market. Not surprisingly, the resulting demand for apartments and rental properties gave landlords a chance to raise rents.
According to real estate analytics firm Reis Inc., the vacancy rate in the U.S. for rental properties was a meager 4.3 percent at the end of 2012, well below the 8 percent at the peak of the housing bubble. Moreover, the average monthly rent payment in the U.S. grew by 3.4 percent since 2012, or the lowest annual increase of the last few years.
All this is good news for investors. With rental occupancy rates improving and the inventory of apartment buildings growing, the rental market is one of the best investments available today. But be sure to do the fundamentals when considering a property. Run a cash flow model, figure out maintenance and associated costs, research property rents in the area by going online, and figure out your annual revenue and buy based on the current conditions, not on what you think the conditions will be in the future.
Remember, there are three ways to get return on your rental property investment so be mindful of what your goals are. One way is, of course, when the property is sold and it has increased in value. Another is by collecting rent from your tenants, while a third way is through tax savings, like the deduction of your mortgage interest on the property.
The rental market is back and many are taking advantage of it with an eye toward the future.
David Rosenfeld is a Real Estate broker and president of Advantage Real Estate, a Real Estate and investment firm in Santa Monica, and a Rotary Club member. He has more than 20 years experience in commercial and residential property investments and financial counseling. He can be reached at 310 450-4488, at email@example.com at www.advantage-realestate.com.
By David Rosenfeld