One of the most common questions I get is, “What will the real estate market do in the coming year?” Last week I shared 10 things I feel the market is likely to do in 2014. This week I would like to provide you with data that supports the idea that rental property can be a good investment in 2014.
An upward trend in values and sales should continue through 2014. Appreciation will likely not accelerate at the same level as 2013, however I said that last year and I was wrong. As I mentioned last week, one of the things that continue to drive appreciation is the lack of inventory. See the redline in the graph
Please keep in mind that real estate is extremely localized and you need to consider how your area is doing with relationship to jobs, rents and other economic factors before making a buying decision.
One of the other driving factors in the market is household formation. Household formation is increasing but not fast enough. The chart below demonstrates the number of missing households since the start of the recession:
You may be asking yourself, what does this have to do with rental property being a good investment or not? Well, the first thing to understand is that our population isn’t decreasing and creating the shortage of households. Household formation is down because young adults aren’t leaving the nest and starting their own households as quickly as they have in the past. The share of 18-34 year olds living with parents rose from approximately 27% just before the recession to 31% since the recession. As you can image, there are a couple of factors that come into play in why young adults aren’t leaving home as quickly: First and foremost is JOBs, second, the amount of student loans/debt that many have and third, how easy parents make it to live at home. This is just to name a few.
How does this affect the investor? When these young adults do move there will be a surge in demand for housing. Naturally, when the demand increases, it will be for rental housing first. This, along with the trend that young people are starting families later, bodes well for rental housing in the next decade.
Another factor that makes it attractive to buy rental property is the low interest rates. Loan costs will be fixed at today’s rates as rents increase because of pent-up demand. This means that cash flow will continue to grow. This doesn’t even take into consideration the appreciation of the property as well. Rental real estate can see growth in both the value of the asset and income.
For example: The purchase of a 6 unit building at the cost of $50,000 a door equates to a purchase price of $300,000. If the building is purchased with 20 percent down, the loan would be $ 240,000. The mortgage payment at 5 ¾% interest on a 30 year loan would be $1,400.00. Let’s say that rent increases 4 percent yearly the chart below demonstrates how quickly cash flow grows. In this example, there is a 65% growth in 6 years.
If you want to learn more about investing, make sure you register for my upcoming class in February. It is online and there will be only one class a week for 4 weeks.
Want More? See Diana’s follow-up article “Tips for Investing in Rental Property in 2014“.