[REN #773] Real Estate Investing: Soaring Demand for Rentals

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Picture of plant in window for Real Estate News for Investors Podcast Episode #773

Rental demand is soaring among renters who feel it’s more affordable to rent than to own. Freddie Mac says that attitudes about homeownership are changing due to the high cost of housing, and that 82% of those surveyed feel that renting is less expensive. (1)

Some 4,000 households contributed to the Freddie Mac survey called “Profile of Today’s Renter and Owner.” One of the key findings it that a majority of renters don’t ever see themselves as homeowners. Just 24% expressed confidence in being able to buy a home some day. That’s an 11% drop from a similar survey question four years ago. The number of people who feel that renting is less expensive also surged 15% since February of last year to the current 82%.

This perception of homeownership is pushing demand for rentals much higher. According to real estate analytics company RealPage, apartment demand surged 11% in the second quarter of this year. The company’s chief economist, Greg Willett, says in a CNBC story, “Demand is proving especially strong in this year’s primary leasing season.” He says, “Solid economic growth is encouraging new household formation, and rentals are capturing a sizable share of the resulting housing demand.” He also says the number of renters who transition into homeowners is “low” compared to historical levels. (2)

Biggest Obstacles to Homeownership

The survey also shows that saving for a down payment and closing costs are the two biggest obstacles to homeownership. That’s especially true among millennials who are struggling with student debt. 51% of the renters who are 23 to 29 years old, said they made housing decisions based on their student loan obligations. 44% of renters also took childcare costs into consideration.

So what did they do to keep their housing situation affordable?
According to Freddie Mac, many renters, and owners, have been making compromises when it comes to housing choices. Among those compromises are less expensive homes or rental units, delayed home-buying plans, and living in a lower-cost neighborhood or real estate market.

Freddie Mac CEO, David Brickman, says, “Affordability remains the essential factor when it comes to determining whether to rent or purchase a home, and the cost of housing is having a significant impact on households of every age, size and location.” He says, for millennials and many Gen Xers, it isn’t just the cost of housing. As the survey shows, these two generations are facing increasing pressure from student loan debt and the cost of childcare.

Growing Demand for Rentals

Even though rents continue to move higher, demand for rentals is strong. In fact, one apartment developer told CNBC that 2019 rental demand is off the charts. Bozzuto Group CEO, Toby Bozzuto, says of homeownership among millennials, “I think it’s still the American dream, but I call it the dream deferred because of student loans, and the lack of a large amount of equity.” He says, they also enjoy flexibility as renters and are not necessarily in a rush to buy homes.

The Freddie Mac survey didn’t analyze renter demand for apartments versus single-family rentals, but other data shows that apartment construction is booming to keep up with demand, while the opposite is true for single-family rentals. Builders are not building enough homes for buyers or rentals, so demand and prices keep rising.

Multi-family investor, Grant Cardone, made headlines recently by saying, “The housing market is done in America.” It happened during an interview with Yahoo Business in response to the latest report on home sales. (3) They were down 7.8% in June.

The 60-year-old Cardone says he’s a renter himself and told Yahoo, “I buy real estate that produces income. I rent where I live and I own property that pays me money. I will only buy a piece of real estate if it produces cash flow for me.”

I strongly believe that homeownership provides a foundation for wealth because the homeowner is able to accumulate equity. It’s money in the bank, although it may not make you wealthy. But you could make use of that equity as seed money for cash flowing rental properties. Or you could monetize your home by setting it up for home-sharing, potentially renting it out when you are not using it, and doing something more “mobile.”

Whether you rent or own your primary residence may also depend on things other than mobility issues — like raising a family. Homeownership also gives you the freedom to do what you want with your property, which you won’t have as a renter.

But that’s a digression. The big take-away from the Freddie Mac survey is that many renters are doing so because they have to or by choice. And, demand is strong, especially for single-family rentals. As CNBC points out, apartment construction is “booming” but single-family home construction is not. That will keep demand high for rental homes, especially when millennials put their family plans into high gear.

You’ll find information on the best U.S. markets for single-family rentals here.

Links:

(1) Freddie Mac Survey

(2) CNBC Article

(3) Yahoo Finance Article

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