Economic Factors to Consider Before Investing in Single Family Rentals

Part 1:  Job Growth

Investing in single family rentals (SFRs) is a great way to diversify from the stock market, and understanding what makes a market or a specific property a strong investment is crucial to grow your assets through appreciation and cash flow. While there are a number of factors you should consider before buying an investment property, examining the overall economic drivers that shape a real estate market can help you accurately predict if it is a good place to invest or not.

In our new blog series, we’ll be examining the top five economic factors that will help you decide where to invest in single family rentals today. Today we’ll start with one of the most important economic drivers of demand for SFRs – jobs.

A strong job market sustains a robust economy, and allows single family rentals to command rents that justify the price of entry. More people in the workforce means more individuals will create households. New households increase the competition for the available rentals, which in turn, drives up rental prices. Of course, this is the case only when demand outpaces supply, which we will delve into in Part 3 of this series.

Jobs are created when the economy grows, and a great indicator of the economy is the Gross Domestic Product (GDP). The Q4 2015 GDP numbers have not yet been released, but when they are, our Research Services Teams expect them to show that the U.S. economy will have grown in the low 2% range in 2015. While the predictions in 2016 aren’t much higher at a close 2.5%, it is still a strong indicator of the steady job growth the U.S. has experienced since the end of the Great Recession.

U.S. GDP 2000-2015

US GDP 2000-2015

Last year, we gained just over 2.6 million new jobs, which is the 3rd best year since 1999. Additionally, we are in the midst of the longest stretch of job growth in U.S. history, and the economy has consistently added jobs for 63 consecutive months. We have recaptured all 8.7 million jobs that were lost as a result of the Great Recession, and even gained an additional 5 million positions. The U.S. is projected to gain a little over 2.7 million positions in 2016, which will become the new 3rd best year since 1999.

U.S. Job Growth 2001-2016

US Job Growth 2001-2016

More than 2.6 million jobs were created last year (see chart below). The top sector of job creation was Education and Health Services, followed by Professional and Business Services. This is important as these are career jobs, which support economic growth, and create secondary jobs.  As these workers spend their paychecks in the local and regional economies, it strengthens other sectors of employment such as those in Leisure and Hospitality and Construction, which drive SFR demand.

2015 U.S. Employment by Sector

US Sector Employment

The last row of the chart displays employment for the Mining and Logging sector, which lost 130,000 jobs last year. This shouldn’t be a cause for worry for SFR investors though, as most of those jobs were not in metropolitan areas, where the bulk of SFR properties and demand are located.

Top 10 U.S. Markets for Job Growth

Top US Employment Markets

In 2015, every major market experienced job growth which you can see in the charts for both the top ten and bottom ten markets for job growth. This means that every market also saw an increase in demand for rentals including SFRs. Even better news is that there’s every indication that the growth will continue throughout 2016, despite the rocky start of the stock market.

Bottom 10 U.S. Markets for Job Growth

Bottom Employment Markets

Of the multitude of factors affecting single family rentals, job growth is one of the strongest predictors of a profitable real estate investment market. All indications show that every market in the U.S. will continue to demonstrate this growth. However, while job growth is indeed a leading indicator for demand, it shouldn’t, by itself drive an investment decision. It’s also important to consider supply, interest rates, homeownership rates, home prices, and rents, among other factors. Next week, we’ll talk about the supply, (single family and multifamily construction) so stay tuned, and while you’re waiting, you can view pre-vetted investment properties in solid markets throughout the U.S. in HomeUnion’s Investor Portal.

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