Committing to acquiring a single-family rental (SFR) investment property in an unfamiliar market requires lots of due diligence, research and analysis. This kind of insight could take months to complete, especially if you’re doing it alone. That’s why we’re here to help and show you what you should be looking at when investing in a SFR market that’s not in your backyard. The key is to look for metros with strong rental demand.
Rental Demand – Defined
Rental demand is created when there is a competitive need for rentals in the area. This happens for multiple reasons, like an oversupply of renters and undersupply of housing. For instance, a Fortune 500 company may be relocating to a new area; this move will bring in more jobs and therefore more people looking for housing. This rise in demand means that if you own a rental in this market, you reap the advantages of being able to demand higher rents, have less risk of vacancy, and gain more applicants to screen in order to find quality tenants. For all these reasons and more, it’s immensely important that you find a market to invest in that has a strong rental demand now and in the future.
To calculate rental demand for any market, you should look at the economic drivers that increase rental demand.
Five Major Drivers of Rental Demand
Our Research services team has discovered that there are five major drivers of rental demand. They are:
- Job Growth
- Household Formation
- Elevated Home Prices
- Lifestyle Preferences
Now, let’s dive into each one:
When new payroll jobs are created in a metro area, workers may relocate to that region and require housing. To find out which metro areas feature the greatest job growth, HomeUnion® has created in-depth research reports highlighting economic conditions and supply and demand fundamentals.
Migration trends fuel the creation of new rental housing. For instance, workers flocked to Williston, N.D. in 2012 to find employment in the energy industry after immense oil reserves were found in northwestern North Dakota. In 2010, Williston’s population was 14,176 but it nearly doubled to 26,977 in 2015, according to the U.S. Census Bureau.
Household formation, or a group of people living together under one roof, drives rental demand. As greater numbers of Millennials opt to delay major life decisions, such as getting married, they often opt to rent with at least one roommate, instead of owning a home.
Elevated Home Prices
The soaring cost of buying a home in major U.S. cities means that people have to look for alternative housing options. While the national median home price is currently $239,700, based on data from the National Association of Realtors, buying a home in a coastal market like San Francisco exceeded $1.2 million in April. Price points like these make owning a home nearly impossible.
Shifting lifestyle preferences have driven rental demand in particular areas, namely core urban areas vs. the suburbs. According to a Summer 2016 study by CB Richard Ellis, for the first time in nearly 100 years, the rate of urban population outpaced the suburbs in the U.S. “Americans once flocked to the suburbs in search of a better life. Today many young workers prefer city life, pursuing an urban lifestyle and seeking proximity to jobs,” the report states.
Get Help in Identifying a Strong Rental Demand Market
It can be time-consuming to identify strong rental demand markets as there are many economic factors to consider before you invest in an area outside your location. That’s why we developed proprietary algorithms and models to help you easily find strong rental markets without having to do all the legwork yourself. See our Investment Locations Now.