The hot market can offer both opportunity for profit and opportunity to get burned.
The opportunity to profit arises when there are lots of buyers who think prices will continue soaring. And the opportunity to get burned happens by following the crowd, and assuming that the bubble will never burst.
Once again, residential rental real estate is a hot market. Vacancies are low and rents are high. What's more, vacancies have been falling and rents have been rising for some time.
According to data from Reis Inc., a property-research firm, unrelenting rental-price increases have pushed national apartment rents to their highest level since 2007. Concurrently, national vacancy rates are now at a 12-year low of 4.3%.
The residential rental market includes both apartments and single-family homes.
Investors – landlords and property flippers – have been a driving force behind the housing rebound. Today they account for up to 25% of purchases. And their buying spree has helped lift the national median existing-home price 13.7% in the last year.
Single-family homes have also been swamped with institutional money.
Blackstone has spent over $5 billion to acquire 25,000 single-family homes. American Homes 4 Rent (AMH) is another big player that’s spent over $2.5 billion to acquired 14,000 homes. The influx of this institutional money is unprecedented.
Activity in both the multi-family units (apartments) is similarly robust.
Blackstone Group (BX) is the most recent example, having bought 80 apartment properties from GE Capital for $2.7 billion. Blackstone's purchase is the latest in a long string of transactions that have helped lift per-unit prices. Moody's apartment index, which tracks the national average price of multi-family rentals, is up 59% from its 2009 lows.
Property developers are following the money, and new construction has surged. Apartment building completions in the top 30 metropolitan areas of the country more than doubled. And more apartments are on the way, with new permits to build multi-family homes reaching a new high.
Of course, all real estate markets are local markets. Until recently, I owned a single-family rental property just north of metropolitan Denver, where vacancies are at a 13-year low. Rents are also at a multi-year high.
I bought the property since 2003, and it's been a solid income investment. It’s consistently provided monthly rental income of 15% to 20% above my costs. When my last tenants moved out, I could have negotiated a 12-month lease with new tenants willing to pay 20% more than what the previous tenants paid.
But instead of finding new tenants, I decided to sell the property. The reason was simple: I don't expect real estate to stay hot much longer.
There are a few obvious reasons. Multi-year trends in both vacancies and rents are unsustainable. I expect more multi-family units will mean lower rents. That aside, the market simply looks and feels like it’s approaching a melting point. For evidence, look no further than bidding wars for homes that hit the market.
The proceeds from my property sale won't be invested in residential real estate. I don't like my local market, nor do I like other markets. I've written about Signs This Real Estate Class is Set to Roll Over, explaining why apartment REITs and single-family REITs are especially risky today.
I've taken advantage of a hot-market opportunity to cash out at a price 30% above my initial purchase price.
A red-hot market can always continue rising. But history is replete with examples of investors who bought into soaring markets and failed to sell before the crash. In my mind, the current real estate rental boom is just that – a hot market that will one day turn cold.
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