I not only agree with this statement, I’ve seen it happen with my own eyes. I blogged about this trend not too long ago as vacancy rates in Reno have been going down the past six quarters. The rental market for residential homes is and going to be healthy for a while.
Why? Bad credit, ex-home owners, people who are downsizing, are all possible tenants. This is great news for cash flow investors who have been snapping up great deals in the starter home market. My sister in law bought a house for $125,000 a year ago. Their mortgage is $845/month. They used to be cramped in a 1-bedroom apartment for $760/month. There’s room for cashflow.
Two things I want to make clear: this is not for higher end homes. And definitely not for commercial real estate, which continues to take a beating. A good buying rule here is Patrick Killelea’s simple formula:
(“Excerpts from Reno Real Estate Blog interview of Patrick Killelea:)
“Your buying safety rule as simple as it is, was one of the most important real estate lessons I learned this year. Can you describe to us how this can help a buyer make a better investment decision?
Patrick: Just compare the cost of renting to the cost of owning the same thing. The break even point is somewhere around 6%. If the annual rent is about 6% of the purchase price, it’s a toss up whether to rent it or buy it. If the rent is lower than 6%, rent. If the rent is higher than 6%, buy.
The only true sign of a bottom is a price low enough so that you could rent out the house and make a profit. Then you’ll know it’s pretty safe to buy for yourself because then rent could cover the mortgage and ownership expenses if necessary, eliminating most of your risk. The basic buying safety rule is to divide annual rent by the purchase price for the house:
annual rent / purchase price = 3% means do not buy, prices are too high
annual rent / purchase price = 6% means borderline
annual rent / purchase price = 9% means ok to buy, prices are reasonable”
I used that formula to test out the investment viability of homes here in Reno and it was much better than 9 percent! Some hit the 20% mark — a great sign for positive cash flow. Investors, enjoy it while it’s here. Good times seldom last forever.