February 14, 2020

Despite a slight stumble last year, the American economy is still strong. With both unemployment rates and interest rates remaining low, now seems like a great time to start looking into rental investment properties, right?

First, ask yourself this: Is it a buyer’s or seller’s market?

At the national level, the investment market looks strong, but the outlook for local real estate markets depends on local market conditions. State and city regulations, federal legislation, demographics, and local and national economic factors all vary by location and will all play a role in the rental market this year.

Here are a few factors that could affect the local markets where you may be considering for investments this year.

The Market as It Stands: A Seller’s Market

At the national level, the market is currently a seller’s one. Strong job growth, low unemployment, and falling interest rates have made many Americans think about investing their money. Experts still recommend real estate investment ¹, particularly if it generates rental income. And real estate has become the most popular investment for Millennials. ² 

A Fairly Strong Economy and Low-Interest Rates

According to Forbes,³ the 2020 economy will be in pretty much the same shape as it was last year, but they see an upturn for 2021. Margarita Ferrer, a loan officer at Camino Real Mortgage Bankers in Santa Maria, CA, does not see a crash this year, either.

“I don't think it will happen this year. I think it will happen next year or in the next two years, however not in the way we crashed in 2008.”

Overall, though, the economy has been in pretty good shape, and the unemployment rate is still very low. Those factors put Americans in a better position to buy a home or invest in rental property, and more demand for investment opportunities.

Limited Housing Supply

In urban and rural areas alike, housing is getting more and more scarce. In major metropolitan areas, particularly tech hubs, more people are moving in, attracted by job opportunities. But zoning laws that restrict multi-family development mean fewer housing and rental options. 

At the same time, renting has become an attractive option for both younger and older generations who want to live an urban lifestyle. Baby boomers, ⁴ in particular, are now trying to offload their large homes and move into smaller, more convenient rental units.

Real estate investors have caught on, and they’re buying up starter homes sight unseen, and a lot of times before they even hit the market, to either flip or rent out. That’s sucking up the housing supply on the lower end of the cost spectrum, driving up housing costs further.

And as millennials–the largest generation in history–jump into the real estate market, the number of available homes is expected to dwindle even further as prices go up.

That makes urban areas a seller’s market for owners and real estate investors alike. 

Rural areas are simply overlooked by investors and developers. Very little new housing is going up, and more people are turning to the likewise-limited rental properties. That means the few investors in this market have the advantage.

But limited housing could backfire on investors, as well. Ferrer says that in her state, developers are simply not keeping up with demand.

“California is not building enough housing. Therefore, the rents will keep going up and it will be better to buy than to rent” - Margarita Ferrer

But there could be changes afoot. New housing and rental regulations that take effect in 2020 as well as the way people are looking at homeownership could shift the market to that of a buyer’s.

Factors That Could Create a Buyer’s Market

It’s not enough to look at the factors above to determine whether or not now is the right time for investing in rental properties. The economy, interest rates, and limited housing apply to the overall real estate market in the United States, but there are localized factors that could affect your market in particular.

It’s important to take these into account before you start looking for investment opportunities.

Rent Control

New rent control regulations in New York, California, and Oregon have already passed, but their effects are only just now being assessed. 

According to CBRE ⁵, the Greater New York area experienced a 9.2 percent year-over-year drop in real estate investments last year, which, they say, was partially caused by rent control laws. 

These new laws are already making it a tough market for some investors and landlords. For example, two landlords with large portfolios, Emerald Equity Group and Sugar Hill Capital Partners have started falling behind on mortgage payments  ⁶ due to new regulations restricting their ability to raise rents high enough to cover expenses. 

Greater Los Angeles saw a 9.8 percent drop in investments. But other markets have seen an upswing in investments in the same time period. San Francisco’s year-over-year real estate investments rose 7.4 percent, while in Portland, OR, investments in multi-families rose 23.5 percent.

 

Those numbers, however, may have little or nothing to do with the rent control regulations. San Francisco has had rent control on the books since the 70s, so the market has had ample time to adjust. 

Even so, a recent study ⁷ looked back on the long-term effects of rent control in San Francisco in the 1990s. It found that rent control actually decreased the amount of available housing because tenants were less willing to give up rent-controlled apartments and investors are less willing to rent them out.

Portland, OR, on the other hand, passed rent control regulation just last year, so the effects may not be felt until this year. (The upswing in multi-family investments could also be caused by new zoning laws. More on that in a minute.)

Overall, it seems rent control can lead to a devaluing of properties, creating a buyer’s market. 

Upzoning

Revising zoning laws to allow developers to convert single-family properties into multi-family and multi-use properties has caught on as a way to create more housing in a starved market and make housing more affordable in highly desired areas.

Seattle, New York City, Minneapolis, and Washington, DC have all passed new zoning laws with varying effects on their housing markets.

In places like Washington DC ⁸,  upzoning was used to revitalize neighborhoods. For example, they turned abandoned lots and deteriorating industrial parks around Union Station into mixed-use housing, adding valuable property for landlords to invest in. The upzoned neighborhood NoMa (north of Massachusetts Avenue) became a hot, seller’s market.

And in Chicago ⁹,  zoning laws were relaxed in 2013. But when the effects of the new laws were studied five years later, they found that no new housing had been built, but the mere potential of multi-family housing development had raised property and rent prices. 

The author of the study admits that five years may not be enough time to draw definitive conclusions on upzoning’s effects. And that’s the takeaway, here. Studying your market closely over time will determine upzonings influence.

Short-Term Rentals

When AirBnB began in 2008, they immediately shook up the rental market in metropolitan areas. Now, short-term rentals are a popular alternative to hotels in large cities and small towns alike. 

The presence of short-term rentals in residential neighborhoods is a controversial topic, with some residents and investors welcoming the increased tourism activity. Still, others bemoan their presence, citing renters with no vested interest in their community.

Cities around the country have passed laws to try to curb the impact of these high-churn apartments, but their impact is still felt. A 2015 study of AirBNB rentals in Boston ¹⁰  neighborhoods indicated that the short-term rentals drove rents up by 1.3 to 3.1 percent by limiting the supply of long-term rentals.

Fewer units available for rent means higher demand, which could increase the property value of the neighborhood.

On the flip side, over-tourism and disruptive short-term renters could devalue the property in a neighborhood.

Still, there are those who argue ¹¹ short-term rentals open up previously unknown neighborhoods to tourism and bring in money for local businesses, making the area more desirable.

There are plenty of studies looking at the effects of short-term rentals in cities across the country. When looking at neighborhoods to invest in, it’s worth taking a look at the number of short-term rentals in the area and how they may have affected market price. 

The pros and cons of short-term rentals is a heated debate from all sides, and the fees and penalties city-by-city are incredibly varied. How short-term rentals impact a property manager’s community can likewise be both positive and negative, whether the community benefits from the increased tourism or deals with disruption by a steady churn of visitors. 

Millennials

Now that the economy is strong and interest rates are down, millennials are finally entering the housing market ¹²  But instead of starter homes in urban areas, they’re opting for bigger, more luxurious dwellings in the suburbs, a move that could balance out housing and rental prices as millennials leave town.

But, Ferrer says, they’re not all jumping into the market at once.

“Millennials are getting ready to enter the housing and the investment market. Nevertheless, there are still a lot of them out there who prefer to live with their parents or to rent in order to satisfy themselves with other things, like buying a more expensive auto or going on vacations.”

Their presence in the housing and investment market is still a bit of a wild card, but investors are banking on them having at least some effect.

iBuyers 

In Arizona ¹³, it’s a buyer’s market, but not in the traditional way you think about investors buying properties. There’s a new player in the real estate market: the iBuyer. 

An iBuyer, or institutional buyer, buys properties sight unseen for about 1 to 2 percent below the market value. Then, they turn around and sell the properties after a few minor improvements. 

In Arizona, where iBuyers make up 6 percent of the market share, many of those properties are being bundled and sold to real estate investors who turn them into rentals.

The process is drying up the housing market as homes are turned into rental properties. Investors are turning a profit, but housing prices themselves have been driven up.

This may drive more people to rent, feeding into the cycle and making rental properties an attractive investment as long as the market does not become saturated.

The Takeaway

The moral of the story is this: while it is a seller’s market at the national level, factors at the state and city level may change that picture.

New rent regulations in New York may sway the market one way, while other regulations in California affect the market in an entirely different way. The number of Millennials entering the market along with the number of baby boomers selling and renting can influence the market, as well.

While interest rates are low and the economy is strong, it’s a good idea to look into rental investments. But it’s important to take into consideration everything that’s happening in your target market. Are there new regulations on the books? How are iBuyers affecting prices in our area? Is your area attracting new workers looking for rental units?

Study the market and the trends. Then you can decide whether it’s a buyer’s or seller’s market for rental investments and whether you want to jump into that market.

To see rent prices in your target neighborhood and get started on your own rental investments, check out Rentometer.

About the Author: Laurie Mega is a writer, editor and former landlord. She also specializes in content marketing and SEO. Her work has been published by HomeandGarden.com, The Economist, Buildium, and FamilyEducation, among others. She lives in the Greater Boston Area with her husband and two boys.

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