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Housing Stalls and Rental Investment Opportunity | International Residential Real Estate Investors Association
Monday September 25th 2017

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Housing Stalls and Rental Investment Opportunity

For the Fourth Straight Month, housing starts fell.  While the weather may have has some impact, the news shows housing inventory rising, the new home buyer tax credit opportunity approaching and end, and foreclosures are rising.

As investors, the  factors faced by the market do not support housing construction strength and new household formation.  And until employment shows momentum, household formation will remain constrained.

There are two components to new households.  The first is consumer demand.  The second is supply.  We’ve already outlined demand issues.  Supply is likely to struggle even as demand increases.  The market faces twin issues of increasing demand for commodity materials from emerging markets and rate pressures from the global government spending spree causes by the downturn that are likely to emerge.

Understanding the points above, keep in mind that the the rental market has suffered less from the downturn than most sectors.  Vacancy increased but losses were not as deep as many sectors.  Rent fell but compared to many areas not dramatically.  Overall, the rental market is relatively healthy.

Combining household formation constraints, a reasonably strong rental market, dampening rate and material pressures on new construction, a very difficult property sales market for homes of all varieties with matching selling prices, the rental investment opportunity is perhaps as strong as we are likely to see for perhaps decades.

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Caution:

Given the rate and banking environment, IRREIA recommends that investors should take certain precautions to protect their investment:

  1. Investments should yield significant cash flow immediately after all expenses.
  2. Expenses should be estimated conservatively (because of commodity price pressure).
  3. Leverage should be no greater than 60% and based on extremely conservative estimates of value.
  4. Debt should be on terms of 5 years or greater and existing debt should be replaced with new terms more than 12 months before the note will come due.
  5. Investments should operate with significant reserves on hand.

These precautions will protect investor assets and set up investors to capture unexpected opportunities.

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