Real estate professionals and AIPIS students should ready themselves to profit from the apartment rental market surge that is already underway. But first, a disclaimer. We don’t recommend that a first time income property investor jump right into buying an apartment building. This is a larger size project that works better if you get your feet wet through single family residential properties beforehand. Sort of a crawl before you walk mentality. And we certainly don’t suggest you sell out your entire portfolio of properly diversified income properties to take on the challenge of an apartment building.
Here’s an example of what we’ve seen happen with beginning property investors eager to jump into multi-unit buildings. Say that John Q. owns six single family residential properties scattered around the country. He’s had them for a few years, built up some equity and all are cash flowing as they should, but Mr. Q. has come upon an amazing apartment deal in southern California that he can’t forget about. So he decides to sell all his rental homes and plow everything into buying the apartment building.
The BIG mistake we see here is that he is no longer diversified across geographical regions. His entire real estate portfolio is one housing slump away from leaving him in a very bad financial situation. Remember, that local real estate markets around the country do not tend to move as one monolithic unit. Florida might be down while Texas is up or vice-versa, and to drill down even deeper into the matter, certain cities within a state might be quite strong while others are slumping. This is the whole point of diversifying your property holdings geographically in the first place.
If you have to sell all your other holdings to purchase an apartment building, you’re leaving yourself wide open to a world of hurt. So, why are we talking about apartments anyway? Well, eventually, at some point in your real estate investing career, multi-family units (like apartments or condos) might be a great option. Given the right situation, the economy of scale can mean more money. Big developers with last names like Trump have their fingers in apartments.
But the thing that really grabs our attention is how the rental market in general, and apartment market in particular, seems to be the happy recipient of a perfect alignment of stars in the sky. All factors, except one, point towards an energetic time of rising rents and shrinking vacancies for landlords in the near future. The one factor against? Low home prices but, in these odd economic times, few people are able to take advantage of the situation due to increased loan qualifying standards. So until something changes from the lenders’ perspective, the view is looking absolutely rosy for landlords.
Here’s what we see…
1. The number of 20-24 year olds will increase 1.2% per year through 2013. This is double the growth for that age bracket over the past five years. Infrequent stories of forty-year-olds living in their parents basement notwithstanding, this is prime rental age and is going to place an additional demand for housing rentals. When you’re a landlord, demand is good.
2. Here’s an even bigger number. 25-34 year olds are expected to increase in number by 1.3% annually through the year 2015. This is after declining by .8% per year from 1992 to 2001. This makes for yet another healthy demographic shift that will place additional demand on the rental market.
3. Last but not least, 1.2 million young adults moved back in with their parents during the recession years of 2005 to 1010. They might not return to the rental market all at once but these people are going to move out on their own some day. When they do, more demand for rent space.
Why are all these people expected to rent and not buy? One reason we’ve mentioned already – lenders burned by the sub-prime foreclosure crisis are VERY leery about loaning money these days, and have made their qualifying standards exponentially tougher. House prices are low but few can come up with the 20-25% down payment currently being required. Until that changes – rent city.
All this demand for rentals will drive prices up until, eventually, probably a few years from now, the prospect of buying a house will be more feasible for the average wage-earning American. The coming years will also, hopefully, bring a stronger employment picture, which encourages people to consider the prospect of owning again. By that time also, the foreclosure mess will have shaken out for the most part, and we will be back to some sort of normalcy.
But, for now, expect the apartment rental market and single family residential rental market to be a profitable place to drop your investment dollar. It’s looking much, much better than the speculative frenzy and sputter that seems to be the Wall Street scene these days.
The AIPIS Team
Flickr / Jorbasa