These days it’s pretty common to see articles with headlines that refer to “the hot rental market“, “rental property boom” and “soaring rental rates”. And I’m thinking “oh really?”
Frankly, in my market, metro Atlanta, GA the only boom I am seeing is the number of investors from all over the world attempting to buy up vacant properties in Atlanta’s sprawling 13 county metro area. Atlanta is near the top of the foreclosure list, and as such, is also nearing the top of the investor activity list as well.
But investor buyers do not make a boom all by themselves…they need some tenants to pay rent. And it remains to be seen as to whether the tenants will materialize in the numbers needed to constitute a “boom” in rental property in Atlanta.
I’m a rental property owner myself. I am very familiar with the Atlanta market in particular, but I often consult with real estate investors in other cities around the U.S. The one question that is sticking in my gut about this whole supposed rental property boom is “where are the end users?”
In most of the high foreclosure cities, which have been magnets for investor activity, there are thousands of properties already waiting for a tenant. You may recall that the problem during the housing boom was an over supply of properties, and a supposed boom fueled by speculators buying houses for investment. There were simply not enough end-user owner occupants then, and with household formation dropping in recent years, I certainly do not see how there is a boom in rentals now. At least not a nationwide boom, as the media would have you believe.
So just what is a rental property boom? The last real boom I recall in metro Atlanta was during the 1980’s. Though I was not in real estate in the mid 1980’s, I was a tenant, and I experienced this boom first hand. It was 1986. Interest rates were around 15%. With mortgages at very expensive levels, only those with a high income could buy. And – most notably – there was no excess supply of properties available for sale or rent.
If you saw a property in the “For Rent” section of the paper, you had about one hour to get there and put in your application. Otherwise, you’d surely lose out to another tenant who was faster than you. And it was standard procedure to raise rent rates by around 10% per year in those days. Once interest rates fell however, investor activity grew exponentially and the rental rates began dropping as the supply of rentals exceeded demand.
Investors are rushing into cities like Las Vegas, NV, Phoenix, AZ and Atlanta, GA to snap up those foreclosed homes at what appear to be bargain basement prices. But they will be no bargain if there are not enough tenants to rent them to.
Presently, according to Zillow.com the city of Atlanta has 1584 properties available for rent. Of those, 771 are houses. The Atlanta Housing Authority website has a total of 939 properties listed for rent, and that is only the list up to $1,100 per month. There are plenty more if you expand the rent up to $2000 a month. This site also indicates that there are dozens of properties that have been on the market for over a year, waiting for a tenant. And this is ONLY inside the city limits. There are 12 other counties in metro Atlanta, with a few thousand properties currently available for rent.
On average, rental rates in the Atlanta metro market are down about 25% from 10 years ago. Many landlords that I know personally have told me that they’ve either lowered rents to get tenants, or have worked with delinquent tenants to help them stay in a property. This is hardly what I would consider to be a “rental property boom”.
Las Vegas, Nevada has 4362 properties for rent today, according to Zillow. Phoenix, Arizona has 1833 properties available for rent. Boston, Massachusetts has 7307 properties for rent. Maybe Zillow just does not update their files, and these numbers are way off, but I doubt that.
I would advise real estate investors to be especially cautious about investing in the cities that were ground zero for the foreclosure crisis. Those deals may not be as good as they seem to be. It pays to know your market well. A lot of remote investors who are buying through third parties may be in for a rude surprise.
This goes for builders and wall-streeters as well. We are all aware that builders seeking ways to make up for poor sales and a surplus of inventory are actively planning to get into the rental business themselves. But builders are amateurs when it comes to rentals. So is the wall street crowd.
As my mother might say, “they have more money than sense”. If they’d had more sense, they would have picked up on the housing crisis well before it exploded in 2008. The market fundamentals were indicating major problems in housing well before the market tanked. If they had been paying attention to the housing fundamentals in 2005, the crisis might have been avoided. So now we have a rental property “boom” that is growing even faster than the original building boom did. In terms of market fundamentals, location will be crucial to insure good results. But I can also assure you that bidding on foreclosure packages from Fannie or HUD is not going to leave you with good location.
So, Where Is The REAL Rental Property Boom?
Yes, there is one, and like any real “boom”, these areas have solid fundamentals in place to support it.
Oklahoma City, Oklahoma – Only 93 properties for rent. Rent rates higher than much larger cities.
Casper, Wyoming – Only one property for rent. Yes Casper is a relatively small town, but hey, the guy with that one rental has to feel pretty good about his chances.
And finally, the grand prize winner, with ZERO homes for rent, and only 11 properties for sale on Zillow, the real place where there undoubtedly is a true rental property boom, Williston, North Dakota. The entryway to the Bakken oil field, currently under development. Williston has been transformed from a sleepy, isolated town into a bustling metropolis in just a few short years.
The fundamentals don’t lie. Energy is the driver of this rental property boom. All three of the cities listed above are growing quickly due to jobs in the energy sector. Fundamentally you must have an underlying driver for boom times, or else they fade quickly. Witness the abandoned towns from the gold rush days out west. As long as the energy holds out, and prices for oil remain high, these cities and their landlords will have little to worry about.
Donna S. Robinson is a 16 year veteran of the real estate industry. She is a residential market analyst and real estate investing coach. Her website is www.RealtyBizConsulting.com