Rental Crisis in the US?

Is there a Rental Crisis in the US? It depends on how you look at it!

In this episode I look at the U.S. rental “crisis” and what it means for tenants and landlords. What are the trends? Are opportunities getting better or worse? Where do we go from here?

Whether you’re starting out, or a seasoned real estate investor, this is a question worth investigating.

If you missed our last episode, be sure to listen to How to Self-Manage Your Properties.

Enjoy the show!

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I want to begin by thanking all of you for making the show the success it is. We’re now heard in 110 countries around the world. That is just mindboggling that we can actually have that much of a reach. I want to mix up the topics a little bit. Sometimes, we’re going to talk about housing. Sometimes, we’re going to talk about economics. Sometimes, we’re going to talk about tactics such as asset protection or maybe tax strategies or market spotlights. Today, I want to talk about the so-called rental crisis. Do we have a rental crisis here in the United States? It depends on how you look at it. What side of the equation are you on? For most of us, at least the people listening to this show, it might be a huge benefit because we are effectively real estate investors and landlords. Our service is to provide tenants who need housing with clean, safe, and affordable housing that they can live in and be happy and pay their monthly rent. That rent pays off our mortgage and our expenses and hopefully there’s some left over at the end of the month, which becomes positive cashflow for us. That pool of tenants has been increasing quite rapidly over the years.

PREI 28 | Rental Crisis — Rental Crisis: Today, we’re at a situation where home ownership in the US is at a 48-year low.

Today, we’re at a situation where home ownership in the US is at a 48-year low. It’s the lowest since 1967. That trend is continuing. Even though the government has tried to step in and interject with introducing more lenient qualification criteria in terms of mortgage financing, I don’t think that’s going to stand the tide. This is a trend that’s going to continue for years to come. The other issue too is that we’re seeing real incomes declining. In other words, for a long time now, real income has declined in terms of real numbers. In other words, when you adjust for inflation, people’s income year-over-year has actually declined or stayed flat. It hasn’t increased like the media has led us to believe.

In regards to home ownership, the problem is that fewer and fewer households can afford to buy a house. Even with these low interest rates, there are more and more people renting than buying today and that’s by choice or by necessity. This increased rental pool has caused increased demand and that increased demand has pushed rents through the roof. That’s one of the effects that we’re seeing. The nation’s home ownership rate does continue to decline and I foresee that to continue for years to come. It peaked at 69 .2% to be specific, back in 2004. Today, we see it 63.4%, that’s a huge drop. For every percentage decrease in that home ownership rate, we’re seeing somewhere in the neighborhood of probably a million new people coming into the rental pool. That’s a huge number. They need to live somewhere. That’s where we hopefully step in as real estate investors, to provide them clean and affordable housing.

What happened? This started off with tighter mortgage standards. Now we’re seeing multiple credit checks, owner’s income and assets verification, these are headaches, higher credit score requirements and lower debt-to-income ratios. Also, we’re seeing lackluster income growth as I mentioned before. That’s a problem because when you can’t afford it and the situation continues to get worse, what happens? You stay in the rental pool and you have to find yourself what is effectively affordable rental housing.

Third, there’s this lingering psychological damage that has fallen out from the housing bust. Plus, people are choosing to be more mobile. They don’t want to be tied down to a home that they own with a mortgage and feel like they have shackles on their ankles, where they can’t get up and move if they need to for new employment in other markets or if they just want to get up and go. That mobility is a huge bonus. Renting keeps them from being tied down. It just makes it simpler. An interesting demographic are the millennials. Those are the people who are 18 to 34 years old. They are less likely to be living independently of their families today. Therefore, they’re not establishing their own households. They’re not buying new homes. They’re staying at home to the point where they can afford to move out. When they do move out, they are looking for rentals, whether it be apartments, single-family homes, or units in duplexes and fourplexes.

Even with these young adults or millennials living with their parents, the number of US households increased by one and a half million this year, since January. That increase was entirely due to renters. It wasn’t because of owner-occupied households. In fact, I’m looking at a chart from the Wall Street Journal that charts the change in the number of US households since the end of 2000. If you look at the trend for owner-occupied homes, it increased pretty much year-over-year consistently from 2000 to about 2007, then flattened out and slowly declined and continued to decline up until now. However, when you look at the chart for renter-occupied homes, it was pretty much flat for many years from 2000 to about 2004, took a tiny dip, and then in 2004 started increasing year-over-year consistently up until now to a point where it has far outpaced the number of owner-occupied homes.

In fact, those two charts crossed somewhere between 2011 and 2012. Where now, we are seeing owner-occupied homes decreasing, renter-occupied homes continuing to increase, and that gap is widening. The cost of renting is rising much faster than inflation. It’s forcing even the low and middle income Americans to pay a larger share of their income for housing. You take a market like Oakland, California, which led the way in rental increases and we saw an 11.8% increase in that market. That’s crazy. What’s happening is, people are becoming cost-burdened. Economists and mortgage lenders generally consider a household to be cost-burdened when it’s paying 30% or more of its income for rent.

The reason it’s such a big problem is because we’ve seen the share of renters that are aged 25 to 34 increase their cost-burden somewhere in the neighborhood of 40% to 46%. This is a growing problem. The problem is not likely to go away anytime soon. A Gallup poll that was taken earlier this year found unfortunately that more and more Americans have given up on the dream of owning their own home. In fact, only 7% of Americans polled in that survey think they’re going to buy a home in the next year and only 36% think they will buy a home in the next five years. In Gallup’s own words, they said, “It has been a closely held belief for many in the US that owning a home is a key to eventual personal prosperity.”

I completely disagree with that. It is true that that’s a widely held belief. The fact is that home ownership is not a road to personal prosperity. You’ve got to remember that your home is not an asset, it’s a liability. It’s always taking money out of your pocket. You have a mortgage payment every month. That is negative cashflow from an income and expense perspective. Even if you own your home outright, free and clear, you still have to pay annual property taxes, insurance, and utilities. Again, it’s a liability, not an asset. The real path to prosperity is to buy income-producing real estate that actually generates a positive cashflow for you each and every month. Your tenant is actually paying off your expenses and paying off your mortgage for you as time goes on.

This trend will continue and home ownership rates will continue to go lower and lower. Effectively, we have a renter nation. How does that apply to you? What happens is, as things shift and change in the economy and in local markets, people move up and down on what is referred to as a socioeconomic scale or a ladder. You will find that people will move up into better housing as they can afford it and it will move down into more affordable housing as they need to. If they can afford to buy their own home, they will make that move. Otherwise, people move around and move up and down and live where they can afford to live. That socioeconomic scale is affected by jobs and job growth and income and even by markets. What does this mean to you as a real estate investor? As these Americans continue to move to less expensive areas where housing is more affordable, what we’re going to see are metropolitan areas like those that we are in, like Atlanta, Dallas, Houston, Indianapolis, Kansas City, Birmingham, these markets will continue to see growth in a size of its pool of renters. That increases the rental pool size, increasing demand for rental housing and that may ultimately lead to increased property values. You have strong rental demand, strong rental rates, demand for your housing, and these are smart markets to put your investment capital in because you can buy affordable housing that makes sense the day you buy it with positive cashflow and some decent appreciation potential. The other thing too is these increased rents are increasing the income off these rental properties. Year-over-year, we’re seeing 4% to 5% or more on average in the rents increasing. That just means more towards the bottom line.

This is what we see happening in markets all around the country. Yes, we are a renter’s nation at this point. Do you call it a rental crisis? Maybe. Again, it depends on what side of the equation you’re on. You could turn it to your advantage. Wherever there is crisis, there is opportunity. The smart investor will put themselves on the right side of that crisis to make sure that they profit from it. During the great depression, many smart investors picked up real estate for pennies on the dollar and held them through the tough times but eventually had an asset that increased dramatically in value and generated positive cashflow for them. Don’t look at every situation as a problem because with every situation, there could be good or bad. It depends on what you focus on.

There really is a great opportunity here. Look down the road ten or twenty years from now, we are in a position where we can pick up some very affordable housing today where the rent-to-value ratios are still at 1% or above in many markets where there are jobs and job growth. You can lock those in with 30-year fixed rate mortgages where your tenant pays it down at still historically low interest rates. You can build a portfolio with 30-year fixed rate mortgages, at least for people who qualify here in the US, and there are financing options for those foreign nationals listening to this program. But lock in with historically low interest rates for 30 years, have your tenant pay it down, have inflation eat away at that mortgage over time because you’re paying it off in cheaper and cheaper dollars. You can build a portfolio in multiple markets with that cashflow today that will have increasing cashflow in the years to come with building equity through appreciation and amortization of the loan.

In twenty years from now, you’re going to be so far ahead of where you are today by taking advantage of this, what I’ll call, a once in a lifetime opportunity where we have essentially a perfect storm of properties, availability a large rental pool, low interest rates, etc. Take advantage of this opportunity. If you’ve started, great, I congratulate you, keep going. If you have a good pool or portfolio, keep building. If you haven’t started yet and you’re thinking about it, what are you thinking about? There is no other investment out there that gives you the opportunity and the leverage that real estate does. It is an ideal investment. If you haven’t heard my podcast about real estate being the ideal investment, go back and listen to that. Ideal meaning it has income, depreciation, equity growth, appreciation, and leverage up to 80%.

Again, we may be in a rental crisis, we might be a renter’s nation, but it is what it is. You can’t change that, at least not in the short term. Take advantage of it because there are no other good options out there. When we see these thousand point swings in the Dow like what we saw in August, other investment options are very scary. In fact, I have a client, his name is Stewart, he had about $850,000 in the stock market earlier this year. I’m not sure exactly what he was invested in but his portfolio was just under $500,000 today. He called me up the other day and he said, “I’m completely done with the equities market. I’m pulling everything out and I’m going to focus on investing in real estate.” I thought that was a very wise decision because my feeling about the equities market going forward, whether it’s in the next six months, next year, two years is that we are going to see a major correction coming. That’s my opinion, that’s my projection. I’m just following various news sources on fundamental and technical analysis. I just see the setup there. Unfortunately, we should’ve seen this correction many years ago. The reason we haven’t seen a correction yet is because the markets are artificially inflated. I’d like to say they’re rigged. When you have central banks all around the world printing “trillions of dollars” of new currency and putting that into the system, it does nothing but fuel the equities market and the other markets that benefit from that directly or indirectly. This is why we see the 1% keep getting richer and richer. It’s because this so-called 1% can take this money at virtually 0% interest and redeploy that into markets that are artificially juiced and create almost unlimited returns. You and I can’t do that as the average Joe investor.

The best opportunity for the average investor in the United States and abroad is to buy prudent, income-producing real estate in markets that make sense the day you buy them, in good markets, good neighborhoods, in new or like new condition, professionally managed, with quality tenants in the most hassle-free method possible. That’s how we define cashflow turnkey investment property.

I hope this has been helpful. If you have any questions, give one of our investment counselors a call. You can call them for a free strategy session if you’re thinking about real estate or looking to expand your portfolio. We’ll help you align your goals with what’s available in the market today. Remember to subscribe so you get our weekly episodes automatically downloaded to your smartphone. We really appreciate you helping us out in spreading the word. Again, thanks for listening. We’re now in 110 countries and growing. We just love having you as our loyal listeners. Once again, thank you and we’ll see you again on our next episode.