Smart money finding investments in rentals
My generation had it beaten into our heads that owning your own home was the only sensible choice both financially and socially. I can still hear my parent's voice in my head "paying rent is throwing money away," but financial times have changed drastically during the past five years and what was once a given is now only a luxury.
If home prices and mortgage rates have fallen to the point that the monthly cost of owning a home is more affordable than at any point in the past 15 years, why are rental units with higher monthly rates in demand? Interestingly, one of the by-products of the housing crisis is the growing demand for rentals. Much of this demand is from previous homeowners who either found themselves caught up in a foreclosure or a short sale and will not be able to get back into homeownership for years or first-time buyers without enough of a down payment to buy as well as being subjected to tight lending conditions.
According to the Wall Street Journal, there are 10 key markets around the country where the average monthly mortgage payment is currently less than rent. In Atlanta, which has the most favorable values for owning versus renting, the average monthly mortgage is $539 and the average asking rent is $840. Three of the 10 cities noted were in Florida. Jacksonville's average monthly mortgage is $711 and its monthly rent is $779; Miami's average monthly mortgage is $977 and the rent is $1,071; and Orlando's average monthly mortgage is $695 and the rent is $851. These numbers are based on a 20 percent down payment and a 4.5 percent 30-year, fixed-rate mortgage including insurance and taxes.
Even though low mortgage rates are making homeownership more affordable they still aren't spurring sales. Potential homeowners who do have the ability to purchase and are able to meet the mortgage qualifications are in no particular hurry, since the perception in many parts of the country is that the bottom hasn't been reached yet and that the mortgage rates are not going up any time soon.
So what's a savvy real estate investor to do with the cash burning a hole in his pocket? It doesn't take Warren Buffett to figure out that if the demand is in rental units that's where you invest. Home building has been experiencing an upturn but much of the increase that was reported at the end of November came from the construction of apartments, town houses and other multifamily developments in order to meet that demand.
Right here in Manatee and Sarasota counties, at Lakewood Ranch, developers who built 7,000 homes during the housing boom are now turning to building rental units. There is currently a project being built for a 277-unit apartment building with expectations that it will fill up very rapidly. Economists are predicting that the next residential housing boom will be in multifamily, rather than single family, products.
However, most families still want to live in single family homes, even families who have been foreclosed on or don't have the ability to buy. Because of this life style choice, smart investors large and small are buying homes in foreclosure, or which are about to be auctioned, and instead of flipping them for a quick profit are holding them as rentals.
This is just another piece of the fallout from the housing market, and like all financial markets the smart money will always find a way to profit. If my parents were around today they would probably be telling me to buy the foreclosure down the street and rent it out, and they would