Boomer’s Blog

While home ownership rose as the housing bubble inflated, the foreclosure epidemic and distress on Wall Street are forcing droves of Americas into the inhospitable arms of the nation’s shrinking home rental markets.

Reports Show Growing Demand for Rental Housing
According to two recent studies, the latest trend to hit the U.S. housing market is the search for affordable rental units. Real estate entrepreneurs who engage in the landlord game these days can anticipate bargains on rental housing and enjoy steady cash flow from their investments as markets stabilize and home prices limp towards a steady recovery.

While investing in rental properties is an excellent way to buy and hold properties and ensure cash flow, it is important to carefully research the full range of important decisions you’ll confront as a landlord. Among these considerations is the critical decision of where you’ll invest, going rates for rents and whether local economies support those prices. But first, here’s a little background on the facts to get you started.

Have Your Cake and Eat it Too …
In recent years, despite the emphasis on homeownership, renter households have grown to comprise more than one-third of the households in the United States. With a growing number of households currently vying for affordable  rental housing, real estate entrepreneurs should consider this investment strategy for generating immediate cash flow and building long-term wealth.

Investors, Renters Hit by Mortgage Meltdown
It is important to note however, that this strategy does carry some risks and that many investors have been burned by bad financing decisions and by miscalculating market values. The National Low Income Housing Coalition cites March data in estimating that at least 38 percent of foreclosures involve rental properties, and this has affeced more than 168,000 households. According to the same report, roughly half of the recent foreclosures in Nevada, Illinois, and New York involved rental properties.

America’s Rental Housing- The Key to a Balanced National Policy, a  report on rental housing market dynamics from Harvard University’s Joint Center for Housing Studies shows in detail how The mortgage meltdown has permeated U.S. home rental markets.

Surge in Demand for Rental Housing Escalates

Rising costs of living, mounting debt and the credit crunch are road blocks to a growing number of  renters searching for affordable housing. In today’s rental markets, competition is fierce for low-cost rentals and the threat of sudden eviction imperils droves of renters who are unwittingly living in distressed properties.

To make matters worse for renters, high foreclosure rates are adding to the number of rentals held off the market because of bad paper log jams in American financial institutions. Current and aspiring landlords can learn a great deal about tenants and emerging market opportunities by casting a gaze on the facts contained in this report.

Mortgage Crisis Impact on Rental Markets

• In 2004, some 240,000 subprime home mortgages were seriously delinquent or entering foreclosure, by 2007, that number rose to 750,000.
• Over 12 percent of all subprime loans were delinquent by the end of 2007, compared to 1.7 percent of prime loans.
• Serious mortgage delinquencies and foreclosures have been rising in Ohio, Michigan and Indiana for more than a decade.
• In 2007, nearly 20 percent of all foreclosures were on loans made to non-resident owners.
• While the weak home buying market is expanding the supply of higher-priced rentals, most renters can’t afford them and the market has limited ability to absorb the current excess supply.
• After averaging just 0.7 percent annual growth from 2003 to 2006, the number of renter households jumped by nearly 3 percent, or one million, in 2007.
• Between 2003 and 2005, nearly 2 million homeowners became renters.
• The mean debt of renters in the lowest income quartile surged 62 percent from $3,200 in 1995 to $5,200 in 2004.

Rental Production and Supply

• In 2007, completions of multifamily units for rent fell to 169,000 units—just two-thirds of the 2002 figure and only one-third of the 1986 record high.
• From 1996 through 2005, 1.2 million of the 3.2 million rentals completed were in structures with 20 or more units, and another million were in buildings with 5–19 units.
• Meanwhile, completions of rentals in structures with two to four apartments totaled only about 200,000, while site-built and manufactured single-family homes added another 733, 000 to the market.
• The median rent for newly built apartments in buildings with five or more units stood at a record high of $1,057 in 2006—well above the $766 median gross rent for all units and up more than 30 percent from mid-1990s levels. As a result, only 20,000 new unfurnished apartments renting for less than $750 were completed in 2006, despite being the types of units in greatest demand.
• The combination of record-low interest rates, rising occupancy rates, and attractive yields helped to lift sales and prices of apartment complexes starting in 2003. Hefty increases in net operating income brought in even more investors, with property prices advancing 50 percent from 2003 to 2007.
• The number of units in large multifamily properties that were converted from rentals to condos rose from a few thousand in 2003 to 235,000 in 2005—more than the total new multifamily rental completions in that year. However, conversions fell to only 60,000 units in 2006 and had virtually disappeared by 2007.

Rental Affordability

• The national median gross rent rose 2.7 percent in real terms from 2001 to 2006 while the median renter income fell by 8.4 percent.
• Nearly half of all renters paid more than 30 percent of their incomes for housing in 2006, and about a quarter spent more than 50 percent. Full-time employment is no guarantee that a household can afford rental housing. In 2006, 42.6 percent of all working families did not earn enough afford an appropriately sized housing unit.
• Seniors and others unable to work who have basic Supplemental Security Income (SSI) are especially likely to face high housing-cost burdens. Nearly 2.5 million senior renters (53 percent) pay more than 30 percent of their incomes for rent, while 1.4 million pay more than 50 percent.
• From 1995 to 2005, nearly 2.2 million (or 6 percent) of all rental units were demolished or otherwise permanently removed from the inventory, including 1.4 million units with inflation-adjusted rents of $600 or less in 1995. Loss rates of single-family and small multifamily rentals are more than three times those of units in large multifamily buildings.
• Between 1995 and 2005, two rental units were permanently removed from the inventory for every three units built. Inventory losses were highest in the Northeast, where two rental units were lost for every one built.

Research and Recommendations
To learn more about renter and market demographics in your target area, the National Low Income Housing Coalition has written “Out of Reach” a report that provides a side-by-side detailed comparison of wages and rents in counties, cities and nonmetropolitan areas throughout the United States.

For each jurisdiction, the report’s database calculates the amount of money a household must earn in order to afford a rental unit at a range of sizes  at each area’s Fair Market Rent (FMR), based on the affordability standard of paying approximately 30 percent of household income for housing. It also provides quick access to U.S. Department of Housing and Urban Development (HUD’s) data on fair market rent in these jurisdictions.

Though these reports are excellent research tools, it is important to consider the wide spectrum of responsibilities that come with being a landlord.

Though landlording is an enduring investment strategy, and can be a great way to buy and hold properties, it is not an effortless endeavor. In this arena, it’s critical that investors carefully consider costs, markets, local landlord tenant laws and potential administrative burdens associated with being a landlord. Based on experience, I also recommend that anyone considering becoming a landlord should look into the advantages of finding and hiring a good management company to minimize your potential headaches as a landlord.

The mortgage meltdown has permeated U.S. home rental markets, according to America’s Rental Housing- The Key to a Balanced National Policy, a recent report on rental housing market dynamics from Harvard University’s Joint Center for Housing Studies.

For a growing number of Americans, rising costs of living, mounting debt and poor credit plague many renters in their search for affordable housing. In today’s rental markets, competition is fierce for low-cost rentals and the threat of sudden eviction imperils droves of renters who are unwittingly living in distressed properties. To make matters worse for renters, high foreclosure rates are adding to the number of rentals held off the market because the banks don’t want to be landlords. Current and aspiring landlords can learn a great deal about tenants and emerging market opportunities by casting a gaze on the facts contained in this report.

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