Why the Rental Property Market Is Still So Hot

Posted On Wednesday, 28 February 2024 10:56

If you've tried to buy a rental property in the last few years, you know that competition has been fierce. There are countless buyers bidding in the market, driving prices up and making it harder to secure good rental properties for your own portfolio. Because so many homes are being used as rentals, it's also become harder to purchase a primary residence for some buyers.

Why is it that the rental property market is still so hot? And does it show any signs of cooling in the near future?

The Value of Rental Properties

Rental properties are extremely valuable, and for several reasons.

•  Indefinite value. Property is intrinsically valuable, and if history is any indication, it tends to get more valuable as time passes. Holding a rental property means having a safe store of wealth – and in many cases, the value of your property will appreciate with each passing year.

•  Passive income potential. Many people invest in rental properties because of the passive income potential. If you can rent the property for a monthly price that exceeds your operating expenses, you can generate consistent monthly profits. It's true that rental properties do require significant upkeep and landlords have many responsibilities, but you can mitigate this by working with a third party. For example, if you invest in Houston rental properties, a Houston property management company can manage them entirely on your behalf. Because of this, rental properties are an even more attractive option for investors with capital and not a lot of time.

•  Rising rent prices. Rent prices have been increasing consistently for the last several years, and they're poised to increase further in the future. While this has caused some complicated dynamics in the real estate market, it makes rental properties even more attractive to prospective investors.

•  Financial leverage. Rental properties are also an attractive investment because they offer the potential to use financial leverage. Essentially, that means investing with other people's money to increase your buying power artificially. Because many real estate investors take out loans to invest in rentals, they can artificially multiply their investing potential.

•  A hedge against the stock market. The real estate market functions somewhat independently from the stock market, so it serves as an excellent hedge against the stock market. If you have your assets distributed across multiple asset classes, you'll be better insulated from practically any conceivable negative economic event.

•  A hedge against inflation. Inflation is actually a good thing for holders of good debt, even though it drives prices up and hurts the economy when it grows too quickly. Because inflation devalues the currency, the value of your debt decreases as inflation rises. This makes the prospect of purchasing rental properties with a loan more attractive to those who are concerned about inflation.

Current Market Dynamics

Current market dynamics strengthen these advantages:

•  Lower interest rates. After some brief time with higher interest rates, the Federal Reserve has signaled a desire to push interest rates lower. While we may never see the historically low interest rates of the COVID-19 pandemic again, we are going to inch closer to that territory. And of course, lower interest rates are generally favorable to real estate investors.

•  International intrigue. U.S. real estate has been an attractive investment option for foreign investors for decades, but it’s become even more popular in recent years. Thanks to the prevalence of property management companies, it's easy for foreign speculators to get exposure to the American real estate market.

•  Limited inventory. Complicating things further, inventory is highly limited. There are fewer newer houses being built, meaning there are fewer new options for people to buy on the open market. Limited inventory leads to higher prices and more aggressive •  competition from dedicated investors.

•  Population growth. At the same time, the population keeps growing, resulting in higher demand in addition to limited supply. Real estate investors know that demand for U.S. housing is only going to increase in the immediate future.

•  Economic uncertainty. We're also living through times of economic uncertainty. The stock market is volatile. Inflation has run rampant. The political world is chaotic. Accordingly, people are looking for safer investments that can help them outlast periods of tumult; and investing in rental properties often fits this mold.

It's hard to make predictions about the real estate market, because there are so many complicated, intertwining variables related to it that are inherently predictable. Even so, it seems unlikely that the momentum for rental properties is going away anytime soon. If anything, interest in rental properties could even increase in the future. No matter what, you'll want to do your due diligence when planning your real estate and investing decisions – and prepare your portfolio for any conceivable development.

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