Recent years have proven rental homes to be lucrative investments, and the trend should continue into 2020. The national rental index has remained steady from October until now, with many millennials entering the market as both renters and landlords. Nearly all of the rental growth for 2019 occurred between March and June, where rents increased by 1.3%, and landlords will see similar rates in the upcoming year.
This is what is predicted for the rental housing market in 2020 and what landlords should know to be successful:
Rent Growth Trends
At present, rent growth is trailing the rate of inflation which stands at 1.8%. This is a welcome relief for the nation’s renters who struggle with housing affordability, but won’t have a significant effect on how landlords price their properties. There are also parts of the country seeing more intense price increases, and investors should be aware of which locations perform best when they decide to acquire a property. The cities experiencing the most rapid growth are located in regions with strong local economies and employment opportunities, two major draws for potential tenants.
Mesa, AZ tops the list for fastest rent growth, showing an increase of 5% in 2019, almost three times the national average.
Top-Performing Rental Cities
For many of the top-performing cities, rental growth has remained consistently high. The best five cities to own a rental home are Mesa, AZ; Henderson, NV; Phoenix, AZ; Colorado Springs, CO; and Tampa, FL. While core urban areas drive the majority of job growth, surrounding suburbs are seeing the most impact on rental homes as these are the spaces many millennial tenants can afford. As a real estate investor and landlord, you should determine where the ‘job hubs’ are in your city and look for a property in a surrounding area.
The number of Americans who “super commute” (travel 90 minutes or more to work each day, each way) has also been increasing and this is great news for landlords. Renters now are more willing to go further for good homes, and properties on the further outskirts of urban areas are good investment options.
This tendency to super commute is largely fueled by affordability – millennial renters, in particular, prefer the areas surrounding metro cities for lower living costs.
Rental Predictions For 2020
Rental growth has slowed somewhat during the colder months due to the seasonality of the market. In 2020, rent and home value will also slow to a more sustainable pace in line with wage and inflation increases. Annual rent appreciation has increased since June to around 2.3% and experts predict an uptick in rental growth to happen throughout 2020, meaning more tenants will be scouring the market for homes. Lower rates will encourage many renters to buy in the new year, boosting homeownership rates as millennials move from renting to buying, although landlords won’t see significant spikes in returns.
This doesn’t mean there will be a shortage of tenants either – the housing sector is still projected to see 4.7 million renters enter the market over the next decade. This is positive for landlords who will see no shortage of demand or drawn-out vacancy rates any time soon.
Exploring The Facts
For the first time, the majority of millennial renters are spending more than 30% of their income on rent which has been great for landlords. The rental market will continue to be bolstered by those who are priced out of home buying as the supply of affordable housing remains low, making rental homes a strong investment for the next year. Many institutional investors are now also exploring the value of the rental market and will continue to do so throughout 2020. These investors have been targeting multifamily properties in the hottest real estate markets, and individual investors acquiring multifamily rental properties will have the potential to get big returns.
Rental real estate will remain a lucrative investment for investors going into the new year. Investors both individual and institutional are seeing the longterm value of the rental housing market. While the pace of growth will slow somewhat at the beginning of the year, new landlords entering the market are assured good returns, whether investing in single-family or multifamily rental properties. Many individuals will continue to rent as they get priced out of local buying markets, looking for good locations near local job-hubs.