What Do Rising Rents Mean for SFR Investors?

The cost of renting has fallen slightly in the last year among the top 25 largest rental markets, according to a report from Trulia this week. However, affordable listings are on the decline in metros such as Oakland and Orange County in California and Phoenix, Arizona.

In Oakland, for example, the share of affordable listings declined by nearly 20 percentage points year-over-year in April 2016 from 66.0 percent down to 46.2 percent, according to Trulia. Meanwhile, in metros such as New York City, Miami, and San Francisco, rents remained sky high—in San Francisco, nearly 91 percent of two-bedroom homes rented for more than $3,000 per month in April, and 63 percent of two-bedrooms rented for more than $4,000.

Are rising rents prompting renters to enter the housing markets as buyers? Some recent reports say they are—but this is not necessarily the case, according to Dennis Cisterna, CRO of Investability Real Estate, Inc.

“High rents are not necessarily driving people to homeownership,” Cisterna said. “While rents are increasing in markets like San Francisco, New York and Miami, the initial down payment to become a homeowner can be cost-prohibitive in areas where home values are high. It’s a delicate balance. You may have the right monthly income to be able to pay high rent, but you don’t have the cash on hand to make a down payment on a home in those markets.”

“High rents are not necessarily driving people to homeownership.”

Dennis Cisterna, CRO, Investability Real Estate, Inc.

The rising cost of rent has not caused the demand for single-family rental homes to shrink, according to Cisterna.

“It’s no secret that the single-family rental market has experienced serious growth over the past decade, and while we will probably see a stabilizing of the market, there is still strong demand,” Cisterna said. “Today, it’s not about diversification so much as it is about evolving and innovating to improve the investor experience through technology, market intelligence and services.”

Does the high cost of rents mean good news or bad news for investors in these markets?

“It really depends on the objectives of the investor,” Cisterna said. “Most cities with high rents also have high home prices, so while your annual cash flow may be low, the investor balances out the opportunity with an asset that is appreciating over time. That being said, investors should be cautious when investing in a property based on potential appreciation. The proposition of appreciation, regardless of the likelihood, is speculative in nature and carries with it a lesser degree of certainty than a property with strong in-place cash flow. Experienced investors practice identifying properties in stable markets with consistent demand. Variables like schools, crime, and local economies are big factors that impact property demand, values and rents—and can therefore indicate how an investor will bode in specific markets. Market data and property analysis tools have improved dramatically over the past several years, giving buyers better insight and transparency into their purchases.”