Top Reasons To Invest in the Multifamily Rental Market
Investors should consider investing in the multifamily rental market for many reasons, one of which is the demand for rentals. In this article, I’ll focus on who rents, why they rent, and the demand they are creating for this asset class.
But the first thing you should know is that there was an explosion of new renters from 2004 through 2016.
Source: Harvard JCHS – America’s Rental Housing 2020
Ten million new renter households formed during that period. As of 2021, the number of renters has moderated to roughly 44 million. According to RentCafe, the growth in renters came amongst all age cohorts (7% increase in ages 34 and under, 17% increase in ages 35 – 59, and 43% increase in ages 60 and up).
While the growth in older renters is a lifestyle and mobility choice, younger age groups rent longer for various reasons. So, let’s examine the many factors that cause young people to rent for longer than they ever have.
Reasons Why People Are Renting More
High Home Prices
In January 2004, the median home price was $209,500. By January 2016, that number was $291,100. As of August 2021, the median home price is $390,900. That’s more than a 34% increase over the last five years. Home prices have skyrocketed, so many are now priced out of the market. Their only alternative is the rental market.
New Home Shortage
Part of the rapidly escalating increase in home prices is due to a supply shortage. CNBC reports that the U.S. is short 5.24 million homes. That deficit has increased sharply since 2019, when the gap in supply was 3.84 million.
The new construction industry has been plagued by labor shortages, increasing land prices, and supply chain disruptions. These difficulties began well before the pandemic but have exacerbated the problem.
Low Wage Growth
As we saw earlier, home prices increased 39% between 2004 and 2016 and 34% between 2016 and 2021. The next question is, what did wages do during those same periods?
In 2004, the median household income was $57,674. By 2016, it had risen to $60,309. That’s only a 4.6% increase compared to the 39% increase in single-family homes. Since 2016, median household income has grown faster. By 2020, the median household income was $67,521. That’s a 12% increase since 2016, which is still almost three times lower than the increase in home prices.
As you can see, it’s tough to afford a house when the median household income has only risen 16.6% since 2004. During that same period, the cost of houses has gone up 73%
Inflation
Homes are rapidly becoming unaffordable for a large portion of the population, but housing isn’t the only issue people are struggling with.
Have you been to the store lately? Have you driven a car?
Prices aren’t just up—they are way up. For example, beef was up 12.2% in August 2021 compared to August 2020. In that same period, eggs were up 9.9%. The USDA predicts that by the end of 2021, wheat will have gone up between 33% and 36%. This is inflation, and it hasn’t been this bad for years.
Whether at home or in a restaurant, food prices are universally up. And so is gas. As of October 19, 2021, the average cost of gas is $3.34 a gallon. A year ago, people were paying $2.17 a gallon. That’s a 54% increase. And unfortunately, there are places where gas is over $5.00 a gallon.
The primary mode of shipping these goods in the United States is trucking. With gas prices as high as they are, it should be no surprise that almost everything you buy today costs more than last year. This inflation is impacting us all.
2021 is the year of sticker shock…and they say it will get worse. The rental market allows people some relief. The lower cost of renting instead of owning affords people extra cash to spend on everything else.
COVID-19 Pandemic
In many ways, COVID-19 has been a black swan event. A 100-year pandemic has negatively affected every aspect of our lives. The economy was shut down when it began, and we all went into lockdown.
We watched in horror as our friends, neighbors, and family members caught the virus. Most survived, but many did not.
Once the vaccines became available, places started opening back up, but life as we knew it has yet to return. Lessons learned from COVID-19 are plentiful. However, financially speaking, we learned that job security is a myth, savings rates are too low, and investing for passive income outside your primary job is wise, as nothing is guaranteed.
Why The Rental Market Is Strong
The rental market is vital for various reasons. We are seeing high numbers of renters across every age cohort.
The over-60 crowd is coming into retirement, and many want mobility. They want to be closer to their children and grandkids. They want to live without the responsibility of maintenance, lawn care, and upkeep. Living in rentals has been the perfect solution, and that’s why this is the fastest-growing group of renters. They’re turning to the rental market, and once this group downsizes, they typically do not go back to buying a home. They rent for the rest of their lives.
As for Generation X, Millennials, and Generation Z, they are delaying homeownership and renting longer than previous generations did.
Until recently, wage growth had been stagnant. Unfortunately, as incomes have risen in the last few years, inflation has canceled that growth. Today, it’s harder to make ends meet. Home prices have skyrocketed, and a new home shortage has only exacerbated that problem.
Renter Nation
With expenses at an all-time high, people simply don’t have much discretionary income right now. Their money is being spent on necessities. While a roof over one’s head is a priority, many are opting to make the economical and lifestyle choice of a rental.
As the New York Times puts it in their June 2021 article:
Their article references a Lending Tree survey done in 2021, which examined the 50 largest metropolitan areas in the United States. The survey found that renting was cheaper than owning with a mortgage in every metro.
Whether it was a substantial $300 a month (on the low end), a staggering $1300 a month (on the high end), or somewhere in between, these savings were significant. This financial advantage is a key reason why a large number of Americans opt to rent, making it a compelling investment opportunity.
The rental market has been strong for decades and has a bright future. Intelligent investors anticipate these trends and invest in healthy industries that provide healthy returns.
If you’ve ever considered investing in apartments, now might be the time to take action. To learn more about these types of investments or how to invest with 37th Parallel Properties, schedule a no-obligation introductory phone call.