Editor’s Note: Dennis Fassett is a former corporate finance executive turned real estate investing “Cash Flow Mercenary.” Dennis specializes in single-family and multi-family cash flow properties and thoroughly enjoys assisting his fellow investors with their own strategies, including how to buy your first apartment building.
As an ongoing contributor to Mogul’s “Market News Updates,” Mr. Fassett provides us with his own unique, lively, and thought-provoking commentary on the timely industry news and events of today that are impacting our industry. And be sure to check out his other super-helpful Market News Updates. For now, enjoy...
From Dennis Fassett, Cash Flow Mercenary...
I read a piece recently that argued that the U.S. has been unofficially nicknamed “Renter Nation.” It’s an interesting theory, but from where I sit it doesn’t hold a lot of water.
Why? Well if you’ve read any of my stuff, you probably know that I’m primarily a buy-and-hold investor, but that I’m also an extremely active (and profitable) wholesaler.
So I have one foot in the rental market and the other in (or close to) the retail market.
And the same as you, I’ve seen housing prices go way up over the past year or so, and even so, I can tell you we’ve had no trouble at all selling our wholesale deals for healthy five-figure fees in a day or two. Or less in most cases.
Which doesn’t square with the narrative they try to paint.
They did, however, make several pretty good points about why it makes a lot of sense to either START buying rentals this year or add to your portfolio if you’ve already got some.
The Rise of the Rental Nation
The article said that last year the United States was given the unofficial nickname of “Rental Nation.” They said that several factors influenced this title, but it’s largely a result of how eligible homebuyers view renting.
They no longer see it as a sign of weakness or financial struggle. It’s actually viewed as a prestigious form of ownership. In fact, between now and 2030, there’s expected to be a 59% growth in the number of households who choose to rent rather than buy. The homeownership stats support that projection.
Reasons to Invest in Rental Properties
That should naturally mean that investors are starting to flock toward rental property investing. And many have. Because if more people are renting, you should be buying rentals.
The article listed a few of the specific reasons why rentals make good investments. You can call this the “Captain Obvious Strikes Again” section:
Cash flow. The upfront benefit of investing in rental properties is the regular monthly cash flow. It’s not unusual for a single-family rental property to return 15% or more of your initial 25% down payment. This is a higher rate of return than most stock portfolios.
Appreciation. Remember appreciation? Well, it’s back. And while I laughed when the article called this “the biggest advantage” of owning rentals, it is nice to be seeing our old friend again. Historically speaking, housing prices tend to increase somewhere between 3%-5% per year, so in theory, when you decide to sell, you’ll be able to generate a “hefty” return.
Leverage. The third reason rental properties make good investments is that they provide you, the investor, with leverage. The author wrongly stated that the leverage should be used for a personal home loan or business loans. No. The best use of leverage is to buy more income-producing assets, a.k.a. rentals.
The author then went on to point out the three biggest markets to watch in terms or rental ROI in 2016. I think she had her dog point to places on the map. I have no clue how she came up with them.
Markets to Watch in 2016
While all cities have a handful of good rental investment opportunities, certain cities are poised for more growth than others. Specifically, experts believe the following cities will offer prime rental investment opportunities in 2016 and beyond:
Detroit. Believe it or not, Detroit is actually one of the top investment markets this year. Personally, I choose NOT. She writes that the median asking price for a three-bedroom house is $44,900, while the median rent is $850. This gives investors a gross yield of 22.7%. That’s great, but the median price she quotes includes all the burned out shacks in the city that you see on the news. I can assure you that the median price for that home in the suburbs is twice that, which cuts your “gross yield” in half. Who uses that measure anyway? I don’t. It’s meaningless.
Texas. She writes - okay, Texas isn’t a city – but there are too many cities in the Lone Star State to simply mention one. Three-year home price growth projections for San Antonio, Dallas and Austin are 2%, 33% and 27%, respectively. Houston isn’t too far off, either, meaning there’s ample opportunity for investments across the state of Texas. (What, no “gross yield?”) This I agree with. Texas in general, and Austin in particular, is a spectacular rental market.
Boston. If you have the ability to purchase pricey homes in Boston, you can enjoy a pretty healthy yield. Depending on whom you ask, the gross yield should be somewhere around 10% in 2016. This is definitely a market to watch. Boston, seriously? You can say the exact same thing about San Francisco, Seattle and Chicago. She needs to get out more.
There are plenty of other rental investment opportunities spread across the country, but these represent some of the top ones.
Consider Rental Property Investing
She closes by saying that:
“…while rental property investing isn’t for everyone, it’s a great way to produce regular cash flow while enjoying gradual appreciation.”
And, she adds, you don’t want to miss out on an opportunity to be a part of the “Rental Nation.”
She’s right, and for a couple of the right reasons. All the rental owners that I know are selectively adding to their portfolios when they can find off-market properties priced right. You should be doing the same.
Are You Buying Rentals?
What do you think about this idea of a ‘Rental Nation,’ and which cities will you buy rental properties in? Share below.