Landlords are seeing higher returns on their single-family rentals. A new report from CoreLogic shows that rents increased at the fastest rate this February since September of 2016. SFRs with the fastest rate of rent growth are also at the low-end of the spectrum.
Single-Family Rental Index
The firm’s Single-Family Rental Index tracks rents in 20 metros, and shows an average 2.9% increase in February of this year compared to 2.7% last year. Looking at the past year, rent growth was 3% for all rentals from low-end to high-end.
At the low-end are single-family rentals with rents that are less than 75% of the local median. For those units, the year-over-year growth is 3.7% as of February. That’s compared to 3.6% last year.
If you’re more interested in high-end rentals — which have rent prices that are 125% or more of the local median rate — those rents are seeing a 2.4% year-over-year rate of growth. That’s also slightly higher than a year ago.
CoreLogic economist Molly Boesel says that demand is being driven by the formation of younger households and a tight supply of rentals. She says, “As with the for-sale market, supply of single-family rentals saw very low levels in February, putting upward pressure on the cost of both for-sale and for-rent homes.” (1)
Top Metros for Rent Growth
Top metros for rent growth are Phoenix, Tucson, and Las Vegas. Orlando and Atlanta rents are also rising substantially along with several other areas. Places that are seeing the best rent growth have less new construction, strong job growth, and a lower vacancy rate. For example, CoreLogic reports that high rent growth in Orlando is fueled by employment growth of 3.9%. The national average is just 2%.
Boesel says of the rental market, “Demand for single-family rents has remained brisk, and while employment growth has played a role in rental demand, demographics have as well. Households headed by someone under the age of 35 are more likely to rent than own, and with nearly a quarter of the U.S. population between the ages of 18 and 35, this age group continues to feed the demand for single-family rentals.”
Rent Growth Will Continue
Capital Economics also sees rents going higher in the months ahead for all types of rentals, but a new report says they will probably pull back, somewhat, as the economy and wage growth decline. The report that shows a year-over-year rent growth of 3.5% in February and a drop to 3.2% by early next year.
That will still produce higher gross rental yields but they just won’t be rising as quickly. The firm expects rental yields to rise from 6% today to around 6.3% by the middle of 2021.
The Capital Economics report attributes higher rents to earnings growth. The year-over-year rise in earnings was 3.4% in February. The report says, “Landlords have been able to capture much of the rise in earnings from existing rental households.” As the economy cools, wage growth will also decline, which will impact rent growth. But Capital Economics says the decline will be modest. (2)
As for the GDP, the company is predicting it will fall to about 2% this year and 1.4% next year. It expects that interest rate cuts will boost the GDP back up to 2% in 2021.
This is all positive news for landlords or potential landlords worried about current market conditions. Bottom line: There are still great cash-flowing rental properties out there if you know where to look! Check our website, www.realwealthnetwork.com, for more information on how you can expand your portfolio to some of these great income-producing markets.