Buying a rental property offers with it a wide range of benefits. While it provides an easy source of income, it also enables you to build equity over time. Before you buy a rental property, however, it is important to assess the housing market. Characterized by high volatility, the real estate market is always changing. There are times when it is a seller’s market and other times when it is a buyer’s one. In a buyer’s market, the property inventory is in excess. You can easily land yourself a suitable investment property, if you are looking to buy. In a seller’s market, on the other hand, the inventory is short; the demand has far exceeded the supply of real estate properties. Property prices are going up, but home sales are still growing. Today, the US is a seller’s market. Thus, buying a rental property now may not be a good idea. Before we delve into the debate whether or not you should be buying a rental property any time soon, let’s look at the definition.
What is a seller’s market?
A shortage of goods available for sale characterizes a seller’s market. In this market the property seller is benefiting from the scarcity of real estate properties. The following characteristic provide signs of a seller’s market condition:
- Low inventory when compared to previous months and/or years
- Homes are selling faster
- Less than six months of inventory on the market
- More homes are selling
- Median sales prices are growing
- Less information in real estate ads – just the bare details
Now that we have defined a seller’s market, are you still assessing whether or not you should be buying a rental property right now? You may be tempted. The job market has far developed and recovered since the recession. The unemployment rate dropped to 4.3% and is expected to go further down in the upcoming years. The healthcare and construction sectors, in particular, will witness the most growth in technical and professional occupations. And because job growth is directly proportional to developments in the housing market, an increase in demand for properties is expected. The country will need to accommodate to the housing needs of the population in order to catch up with the demand. This is encouraging for builders and sellers.
Additionally, the rising average pay and low mortgage rates have further incentivized real estate investors and potential homeowners to explore the housing market. However, the problem remains in finding a rental property.
Beware of the factors that manipulate and shape the economy. If you are a property buyer, you might need to do more research and planning than anticipated. How is this a seller’s market? And how would this affect a real estate investor buying a rental property? The following are factors that are conducive for the market to be a seller’s one. Explore to understand the relevancy in buying a rental property.
Short in inventory
The market is a seller’s market because it has been characterized by very short inventory of homes for sale. Homes that are most affordable to first time homebuyers are typically the ones that are short in supply. One reason why the market is lagging in the supply of homes is the high tenure rate. People are holding onto their houses longer than was the case in previous years. Because the recession has made mortgages more accessible by offering lower interest rates, people are not favoring an upgrade fearing the rising rates. Estimates have shown the average time a homeowner remains in a house is almost 8 years, about 4 years longer than the average before the recession (2000 through 2007). People owe more than the house is worth and therefore prefer to hold on to it.
Another reason behind the slow supply of housing is the slow construction. Builders are building homes now at 65% of what they have historically done. Regardless of how fast builders are building, they yet ought to catch up on all the many years in which construction was lethargic. The housing bust has resulted in a sluggish construction growth. Builders further complain and express the lack of ready-to-build land, shortage in skilled labor, and the rising and stricter regulations enforced as other important factors contributing to the slowdown in construction.
The high tenure and low construction rates have attributed to the low supply of housing; finding a house far exceeds one’s choice. People are competing against each other for homes and even waiving some of their property ownership rights. Furthermore, if you plan on buying a rental property, you ought to make an offer immediately. Expect to put more cash down to secure a home fast.
The shortage of housing has further helped push up prices
The low supply of housing has helped push up property prices to create competitive markets. 13% higher than a year ago, the median home price in the second quarter of 2017 reached $225,000. Competition is fierce, especially if you are looking for an affordable rental property. There’s a strong demand for lower- and mid-priced homes. This is not good for rental property investors since they are more concerned about finding the cheapest property that will yield them the highest profit margins.
In a seller’s market, a real estate investor should give the due diligence its own weight. Because there are not many choices available, people tend to pay more than the asking price. We recommend that you hire a real estate agent to help you negotiate the price and lift off some of the burden.
Demand is influencing investors buying a rental property
With the economy almost recovered, the job market has grown and salaries have risen. People are either relocating to locations with high job growth or looking for an upgrade on their real estate property. Unfortunately, given the short inventory, demand has intensified. The increasing demand is causing more competition and thus hindering people from finding an affordable home to purchase. Bidding price wars and fierce competition are mostly observed within the lower end of the housing market.
Because demand is outstripping supply, property prices have consequently shot up disabling many from finding a home to purchase. The current economy has stymied especially entry-level buyers. Entry-level buyers who are usually millennials are opting out from buying a house in this time and choosing to rent. This could be advantageous to real estate investors who are looking forward to buying a rental property. Assess the costs and determine whether or not buying a rental property now will yield a positive cash flow.
Indeed it is true that owning a home can be more advantageous to renting, if you are looking to settle in a certain area. According to data collected this year, on average, US homeowners can expect to pay 33% less than renters. 33% takes into account costs such as payments on a 30-year mortgage, home maintenance, insurance, and taxes. Yet, given the hurdles of rising prices, low supply, and high demand for properties, buying a rental property may not sound like a good investment today. However, there are still ways out of this situation for passionate real estate investors. For example, you could look for certain local housing markets within the US which offer good conditions for investors. Or you could try to negotiate a good price and equip a property to specifically rent out to millennials.
Make sure to visit Mashvisor to get more insights on the market!