Smart Investors Consider Rental Demand Before Buying

Millennials and residential real estate investors make the perfect pair. One has a relatively strong preference for renting (millennials will spend $600 billion in rent from 2014 to 2018, according to this report), while the other has the keys to those properties. As such, current supply/demand fundamentals favor investors. However, a strong renter base is hardly the only factor driving high rental demand nationwide.

A variety of factors can drive rental demand, and it’s important to take all of them into account when deciding to be a remote landlord.

5 Major Drivers of Rental Demand

RentersLookingforHome

Through our sustained research efforts, we’ve discovered that there are five major factors that contribute to high rental demand (across all markets). They include:

  • Job Growth: Solid job growth indicates a steady economy, which leads to a greater likelihood that residents will remain in the area for the long term.
  • Migration: Rising job numbers also results in the migration of out-of-towners looking to improve their financial situations, further spiking the number of people in the renter pool.
  • Population Growth: A generation that places much less emphasis on having children than those previous (i.e. baby boomers) has led to plunging birth rates. Nonetheless, organic population growth is prevalent in many markets, including most of the Sunbelt.
  • Elevated Home Prices: Not surprisingly, an increase in owner-occupied home prices inhibits home buying; thus increasing the likelihood that new households will choose to rent.
  • Lifestyle Preferences: Remember the $600 billion that millennials will spend on rent through 2018? It reflects a growing preference among that cohort of delaying homeownership to stay in rentals closer to stay in rentals closer to a metro’s urban core. This makes for solid, dependable renter bases.

Economic Factors Spurring Rental Demand

One of the most important economic factors in any real estate transaction is the current condition of the economy. When attempting to determine a market’s potential, consider its:

  1. Job growth statistics
  2. Vacancy rate
  3. Projected rent gains

A general rule to follow is this: Make sure job growth and projected rent gains in a market you desire are higher than the national average, while the vacancy rate is lower.

Finding a High-Demand Market

Our research team has compiled a top 10 list of markets with the projected strongest rental demand for 2017, regardless of returns.

HighDemandRentalMarketsWest Coast
Oakland, Los Angeles, San Diego and Seattle markets remain extremely popular, thanks to their job markets, which are among the strongest in the country. In the 2017 National Single-Family Rental Research Report, these West Coast markets have the highest rent-growth forecasts this year. Additionally, home prices remain high, limiting competition from first-time homebuyers.

Other Tech Markets
Austin and Boston earned top positions this year due to limited supply – there just isn’t enough inventory to meet the growing renter demand in both markets.

Renter Migration Markets
Mild weather is drawing renters of all ages to Atlanta and Raleigh, while the tourism and hospitality sectors of Orlando and Las Vegas are feeding the renter demand in those markets.

Other Key Economic Factors

A quick word of caution: While there is a lot of rent money to be collected in high-demand markets, you should also consider other factors when determining the best fit for you. Remember, metros that are in high demand also tend to come with higher price tags. So if your immediate concern is obtaining favorable cap rates, it may be best to select a market that’s not within the top 10 of our High-Demand Markets.

Your Next Step

For a fuller picture of the nation’s most promising investment markets (which take into account average cap rates), download our 2017 National Single-family Rental Report.

Free 2017 Research Report on Investment Markets

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