Buying Rental Properties...Is Now The Time?

Though it might not always feel like it, the economy is recovering. That's what the Federal Reserve tells us anyway (and we agree). The Fed’s recent reading of regional economies for the February and March period suggest continued economic growth, albeit at a moderate pace.

As for housing, the Fed says it continues to lag other sectors, but housing is showing signs of improvement. Realtor.com reports that inventory currently sits 9.8 percent above March 2010 levels. At the same time, the number of households searching for homes is growing, suggesting that demand may be strengthening in relationship to overall supply.

Freddie Mac also thinks demand is picking up heading into the spring home-buying season. Its data show that the rate of inventory growth is slowing: the median age of housing inventory in March sits at 160 days, down 2.4 percent from February.

We don't expect a miraculous turnaround in housing, just a steady, plodding improvement that is drawn along, hand-in-hand, with the overall economy.

Small business is always a reliable compass on the direction of the economy. On that front, the Federal Reserve reports that small businesses are more optimistic about their sales prospects and their ability to secure financing on more favorable terms. More sales, in turn, mean more investment in plants and inventory and more employee hires. As we are quick to say: as the economy goes, so will go housing.

A big concern remains, though. Will rising interest rates be the monkey wrench that grinds the recovery gears to a screeching halt? We don't think so, because as long as the economy continues to grow and more people continued to be hired, interest in housing will grow.

That said, rising mortgage rates are in our future, because more inflation is in our future. In fact, inflation is already here. Producer price inflation is running at a 5.7-percent annual clip. We expect the rate at which producers will pass their higher costs onto consumers will accelerate in coming months, and we are not alone in that sentiment: Wal-Mart CEO Bill Simon recently stated, “Inflation is going to be serious. We are seeing cost increases starting to come through at a pretty rapid rate.”

For now, mortgage rates remain subdued; namely due to economic and political uncertainties in other parts of the world. Events in the foreign debt markets, the disaster in Japan and the upheaval in the Middle East have helped keep rates low over the past few weeks. However, today's upheaval will be short lived and pressure for higher rates will continue to rise.

Is Rental Real Estate the Next Big Opportunity?
It could very well be. Residential r ental vacancy rates are below the 10-percent mark, where they had been lodged for most of the past three years. Peggy Alford, president of Rent.com, predicts that by 2012 the vacancy rate will hover at a mere 5 percent.

Since 2002, rental rates have been flat, and down of late (inflation-adjusted). If Rent.com projections are anywhere close to expectations, we could see a rise in rents of 15 percent over the next two years. That would be a significant reversal of fortune: rent hikes have averaged less than 1 percent annually over the past decade, according to Commerce Department statistics.

Pent up demand appears real: More than 1.2 million young adults moved back with their parents from 2005 to 2010, according to John Burns Real Estate Consulting. Many others doubled up together. Now that the recession is over, many of these young people are ready to find new living quarters, mostly as renters. Where there are renters, there must be property owners (even if they are not occupants). As rental rates increase, the capitalized market value of property increases too – that means rising real estate prices.

We've frequently noted that opportunities always abound, regardless of the perceived direness of current circumstances. The outlook in the rentals is another reason we think they abound in the residential real estate market.