Now is the time to buy residential real estate. I have been in the real estate investing business for more than 20 years, and all the signs are there:
- The stock market is near all-time highs
- Debt market yields are still historically low
- Supply and demand factors in residential rentals strongly favor landlords and other investors
As of the middle of 2018, buying rental real estate seems like a wonderful opportunity to get a solid long-term return with low risk.
A Good Balance of Risk and Reward
“Residential real estate offers the returns of stocks with the low risks of bonds. It is the best of both worlds,” said Doug Bendt, economic consultant to real estate companies including Roofstock and Investability.
Referencing the graphic below, we can draw two important conclusions about rental (or turnkey) real estate in comparison to other, more traditional investment offerings:
1. Rental properties offer dividends as well as cash flow. This makes their list of benefits similar to that of a publicly traded stock offering, which offers growth and dividends.
What that means to me today:
Based on today’s rent rates, carrying costs, and rising home values, the return side of the rental ownership equation is very attractive.
2. Residential real estate is comparable to bond investments. Rental yields are not nearly as volatile as the stock market, which clearly exhibits dramatic swings. It is steadier, like bonds.
What that means to me today:
I do not expect major surprises for real estate returns in the near future because the fundamentals are very favorable for investors regardless of outside factors.
Watch Rental Demand Drivers Carefully
Just like we learned in Economics 101, the two main drivers of the risks and rewards of residential real estate investing are supply and demand. These fundamentals will guide you as you monitor your investments.
Factor 1: Demand
The demand for rental property is increasing because certain factors are preventing renters from becoming buyers. Dennis Cisterna, CEO of Investability, cited eight factors currently driving a rising demand for rentals even though low interest rates might lead you to expect increased home sales. They are:
- Low unemployment
- High student debt
- Low rates of personal savings
- Increasing healthcare costs
- Tight credit markets for consumers with less-than-stellar credit
- Growth in immigration
- Growth in the general population
- Increasing interest rates
What this tells me today:
Right now, demand for rentals is rising. That is good for landlords and turnkey property owners.
Factor 2: Supply
Three factors presently limit both buyers’ and renters’ options:
- Low inventory
- Low permits
- Minimal homeowner distress
These factors not only make it less likely homeowners are going to sell their homes, but it also makes it harder for potential buyers to purchase them at a price they can afford. Because our housing fundamentals remain strong, it is more likely more homeowners will stay in their current homes than sell because they are not under any pressure to do so.
What this tells me today:
The decreasing supply of residential properties and increasing cost of home purchases make renting a necessity for a growing population.
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