“The U.S. apartment sector is still the best and the brightest of all property types.” This is according to Peter Muoio PhD, chief economist for Maximus Advisors. Dr. Muoio goes on to say, “If the apartment sector were a train, it would be moving down the tracks at a good speed with plenty of continuing momentum. From an owner’s perspective, this is a very solid place to be. The current conditions allow owners to not only increase rental ranges but also improve the profile of their tenant base because there’s not a lot of choice for renters.”
Reis (provides data and services to the commercial real estate market) data shows nearly 39,000 units of absorption over the past 12 quarters. It has also forecast vacancies to hit a bottom of 3.8 percent by the end of 2016.
There are more units being rented (higher demand) which in turn increases rents. In fact, according to Dr. Muoio, effective rents are now nearly 10 percent above their pre-recession peak.
Where is the demand coming from? It’s coming from slowly increasing household formation. We continue to see improvement in the job market and consumer confidence increasing. This leads to household formation. The demand is coming mostly from the Millennials and Generation Y (Millennials and Generation Y are children of baby boomers). This segment is around 80 million people with most in their 20’s and early 30’s, the prime time for establishing households.
“We continue to view this large cohort of young adults as a key source of demand for apartments over coming years…” Muoio says.
So, you may not be in the position to invest in units right now, but there are several ways for you to capitalize on this rental boom. One of them may be as simple as renting out your current home.
Here is the scenario– you are considering moving up to a larger home or downsizing and you have equity and a down payment for your next home. So, you retain your current home as a rental and purchase the new one as your residence. Why would you considering doing this?
- To move into the rental market slowly
- The loan on your existing home will remain an owner occupied loan which is financially the most advantageous
- Continue to build equity in the existing home and a new home
This strategy will also benefit you from a tax perspective. What was your home will now be an investment which means that now the interest on the loan is deductible, improvements will be deductible and you can depreciate the property. You need to check with you tax accountant about the legality of the deductions for your individual case.
You may also consider starting a partnership to purchase rental units. It is the perfect storm – prices on units are still reasonable, interest rates are low, rents are increasing and demand is high.
Want to know where the best places to purchase rentals are? According to Realty Trac these are the top 10 rental markets:
10. Hernando County, Florida • Annual gross rental yield: 17.29% • Vacancy Rate: 5.1%
9. Pasco County, Florida • Annual gross rental yield: 17.30% • Vacancy Rate: 8.9%
8. Columbia County, Florida • Annual gross rental yield: 18.42% • Vacancy Rate: 11.3%
7. Wayne County, Michigan • Annual gross rental yield: 19.88% • Vacancy Rate: 8.9%
6. Spalding County, Georgia • Annual gross rental yield: 20.35% • Vacancy Rate: 12.3%
5. Putnam County, Florida • Annual gross rental yield: 22.63% • Vacancy Rate: 6.3%
4. Howard County, Indiana • Annual gross rental yield: 24% • Vacancy Rate: 6.6%
3. Duplin County, North Carolina • Annual gross rental yield: 24.4% • Vacancy Rate: 8.8%
2. Clayton County, Georgia • Annual gross rental yield: 26.88% • Vacancy Rate: 16.9%
1. Edgecombe County, North Carolina • Annual gross rental yield: 41.57% • Vacancy Rate: 11.1%