Demand for single family rental homes remains strong. So does the amount of rent being collected. According to Morningstar, annual rents are up another six percent. A dependable income that you can’t expect from the stock market.
This is according to an analysis of approximately 90,000 rental homes in 100 metropolitan areas. Much of this increase is coming from large institutional owners. Smaller landlords don’t have as much data or resources to understand the rental value of their properties.
Summer Rent Increases
The majority of people tend to move during the summer when school is out of session. That creates vacancies. Most rent increases occur when a new tenant moves in. On the other hand, most tenants that renew contracts tend to do so in the fall. School districts have a lot to do with rent increases. Those that move during the summer are often seeking out a better school district for their children. Those that accept a rent increase at renewal time often want to keep children in the school district they are in.
If you are looking to invest in rental homes, investing in the better school districts is your best move. In urban areas it can be about younger people without children but in suburban areas where single family homes tend to be located, it should be about the school districts.
Changes in Institutional Contracts
Institutional investors that bought up most of the foreclosures are starting to change rental contracts. Instead of annual rental contracts, some are going to multiyear contracts. Additionally, these have built in rent increases on an annual basis. Going forward, it’s difficult to predict if tenants or landlords will benefit more. On one hand, tenants know exactly what they are signing into. Institutional owners on the other hand may not build in rent increases that will match the future market. Or they could build in rent increases that exceed the future market.
If you’re investing in these institutional owners, there is one thing you need to be aware of. Because they know these rent increases are built into multiyear contracts, they tend to report them as profit before it occurs. It’s known as an accrued accounting system. Most people think in terms of a cash accounting system. In a cash accounting system, you only count the money after it is received. In accrued accounting, you count money that is owed in the future.
The Morningstar numbers mentioned previously only counted current rent rates and ignored future rent increases. Only time will tell if rents will continue increasing at the same high rates of the past few years. Peoples’ income hasn’t been increasing at the same rate. There has to be a limit to how much income can be spent on rent. It’s typically about 30 percent.
Please leave a comment if this article was helpful or if you have a question.
Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for 10 years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. With the Pacific Ocean a couple of miles in the opposite direction.