Is the Next Great Bull Market For Rent?Friday, October 3, 2008 | Ethan Roberts |
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In real estate, the same thing is true. It's a cyclical industry and there are times when certain types of properties do better than others. I can remember times when condos were scorching, other times when it was commercial properties, or even land in certain locations that was hot.
Over the past few years, on the whole, we have had a bear market in real estate. One of the similarities between Real Estate and the stock market is that just like the stock market sectors, you can have some geographical areas where sales begin to lag, while other areas continues to do quite well. Some cities in the U.S. -- Seattle, Dallas, and Charlotte, for example -- have done fairly well in recent years, even while the overall national market was declining, and formerly bullish areas like Florida, California, and Nevada were hit really hard.
In my own area of Northeast Florida, the number of closed single family home sales reached a peak in June 2006. There were 1,985 sales that month, and we have been on a slow, but steady decline since that time. Just to give you an idea:
| Month Year | Number of Closed Sales |
| June 2006 | 1985 |
| June 2007 | 1462 |
| June 2008 | 1122 |
| August 2008 | 914 |
The peak of price and the peak of closed sales do not always correlate immediately, but over time, as sales slow, prices will fall, and that is what we have seen in the past two years. Conversely, during good times, as the number of sales rise, the prices will increase.
Similarly, the condo market in my area has shown a decline in sales since June 2006, and prices have suffered as well. Although the decline isn't straight down, and just like with bear market stocks, we get an occasional "bounce" in the market, the trend has been lower:
| Month Year | Number of Closed Sales |
| June 2006 | 334 |
| June 2007 | 210 |
| June 2008 | 161 |
| August 2008 | 95 |
But people have to live somewhere. If they can't afford the down payment and/or closing costs to buy a house, they will rent one. If they lose their home to foreclosure, they will have to rent one they can afford. If their credit is not worthy of the new tighter mortgage standards, they will have to rent. If they are afraid of falling prices, they will choose to rent.
Do you see where I'm going with this?
Rentals are the new bull market in real estate!
And who will profit from this bull market?
People who own rental properties!
Now already I hear some groaning from those who have either had bad experiences in the past with tenants or from being a landlord. When I first started to invest in real estate, I heard all of the stories too. "My uncle had a house, and the tenants trashed it. We had a rental one time, and the tenants didn't pay and we had to evict them. Oh boy, Ethan, you're going to get awakened with calls at 2 AM that the water pipes have burst."
Darn that old pipe, Just when I was having such a nice dream...
I heard them all, and then some. Even my own father tried to dissuade me with his own bad experience at it. But I bought my first rental property anyway. And then my second, and the third. And another and another. Stupid me, right? Yeah, I was stupid all the way to the bank!
Look, for every guy who says never to buy rental properties, there's another guy who will tell you not to buy stocks because their grandfather lost a million bucks in the market! And somebody else will tell you to never buy a business because your employees will only lie, cheat, and steal from you. What separates people who live to tell success stories from those who only have horror stories is learning the right way to do things.
Folks, if you all you do is listen to the "horror stories," you will never invest in anything, and guess what, you will never become wealthy!
Some light bedtime reading for those who like to stuff their cash under the mattress...
Look, I understand that people are angry as heck right now, because over the past few weeks when I tried to write anything positive about real estate, a number of people just hit me upside the head. Look back at my articles over the past nine months, and you will see plenty of times when I wrote negative pieces about real estate as well.
I could have just as easily played it safe and written my usual, "What's wrong with America" piece, where I tell you about Little Leaguers who are too good to play with their peers, or people who spend their child's college money on first birthday parties, etc. Lots of people around here, including me, get a kick out of those poignant little anecdotes and cute pictures. Gives me a big head too when people tell me they like me, or that I should run for President.
Move over boys, I may be joining you!
Nor am I going to advise you to sell all your stocks, bonds, mutual funds, ETFs, and CDs, and buy rental properties. Even if you do invest in real estate, it should only be a portion of your total portfolio, along with all of your other investments.
But I will tell you that the number of people seeking rentals in many areas is rising. Starting with the same June 2006 time period as before, the rental statistics from my local Multiple Listing Service tell a story that is almost the exact opposite of home sales:
| Month Year | Number of Closed Leases |
| June 2006 | 428 |
| June 2007 | 477 |
| June 2008 | 573 |
| August 2008 | 614 |
The statistics show a steady increase in the number of closed leases over a 26-month time period, to the point where the August 2008 total is 43% higher than the June 2006 total.
And while the number of persons seeking rentals was climbing, what was happening to the prices of homes? Right, they were declining. And that means the ratio between rents to sales price has been improving for investors. Even if the fair market value homes in your area do not yet support rental prices, the foreclosures and other distress sales will almost certainly do so.
Granted, there were some areas of the U.S. where price appreciation of rentals did not occur or was limited over the past few years. One of the reasons for that was an increase in rental units, due to a large number of people who couldn't sell their homes, trying to rent them instead. But what happened in many cases is the owners couldn't get enough in rent to cover their sky-high sub prime mortgages, and soon dropped off the market. Many of those homes have now become foreclosures as well, decreasing the inventory levels of rentals. While some apartments have struggled to get tenants, the rental homes that were priced right and in good shape have continued to fill vacancies quickly.
An increased number of tenants means a greater demand, and will result in getting one's property rented more quickly. With a larger group of tenants to choose from, landlords can become more particular, thereby decreasing the risks of getting a bad tenant who won't pay or who will not treat the property kindly.
I can honestly tell you that all of my rentals command much higher rents today than they did two years ago. If you buy in good locations and maintain your properties well, you are very likely to have similar results. It may seem strange, given all that has happened in the last three years, but over the next decade, this is one bull market you may not want to miss.
See you next week!
 Ethan Roberts Contributing Editor The Tycoon Report |
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