“If I was going to flip the property I might be able to pay $80,000 for it, but if it was a rental, I might be able to pay $90,000,” said Paul Lizell, a Philadelphia area real estate investor focused on buying more houses to rent.
Why? Renovate-to-rent investors pay more because potential returns are tied to steadily increasing rental rates while fix-and-flip returns are tied to price appreciation. And price appreciation, as we know, is slowing in an increasing number of markets around the country.
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Homeownership rates dropped for the second consecutive quarter in Q2 2019 following 10 consecutive quarters of homeownership rates either slightly increasing or remaining flat, according to the US Census.
Lower homeownership rates translate into more demand on rentals, more upward demand on rental rates, more downward demand on vacancies and more favorable trends for rental property owners. Just looking at the statistics on rental vacancy rates, Q2 2019 saw a rental vacancy rate of 6.8%, down from 7.0% in Q1 2019 and unchanged from one year ago.
These are the same market conditions that prompted CNBC to say that the build-to-rent market was “exploding.” Some developers, such as Kinlock Partners in the Southeast, are building entire, self-contained subdivisions of build-to-rent houses.
Digesting the data on single-family rental housing, it’s no wonder that rental rates are also “exploding.” In Phoenix, rental growth has increased +6.7% annually; rental growth in Las Vegas has increased +5.8% annually; and in Seattle, rental growth has increased +5.5% annually. Miami’s single-family rental growth, however, has only increased 1% annually, all according to CoreLogic.
But, according to Auction.com, the renovate-to-rent market is much larger than the build-to rent market. Take a look at these statistics compiled by Auction.com from the US Census Bureau and ATTOM Data Solutions:
2016 – 893,150 houses 2016 – 34,000 houses
2017 – 888,800 houses 2017 – 37,000 houses
2018 – 974,000 houses 2018 – 43,000 houses
1st ½ of 2019 – 380,731 houses 1st ½ 2019 – 18,000 houses
Thanks to CNBC, Auction.com, CoreLogic, ATTOM Data Solutions and US Census Bureau for source data.