By Strategic Passive Investments
Rent hikes were a fact of life in 2020 and 2021. In fact, many areas of the country posted double-digit rent increases both years, and CoreLogic reported in December 2021 that rents for single-family homes nationwide rose more than 9 percent, on average, over 2021. Freddie Mac experts predicted the same thing will happen again in 2022, noting that the rental market has not yet hit the “tipping point” where rents are too high and tenants look for other options, although they also predicted single-digit rent increases in larger metro areas like Phoenix and Las Vegas.
“During the early days of the pandemic, many residents fled expensive, densely populated, coastal urban city centers for less expensive and less dense suburban locations,” Freddie Mac analysts wrote in the agency’s “Multifamily Outlook” report released at the start of 2022. They added that this movement will “reshape the demand seen in markets across the nation.”
Why & Where Rents are Still Rising
Although low mortgage interest rates definitely make the idea of buying a home attractive to most households, a dearth of available homes for sale in most areas makes this process difficult or impossible. As a result, many renters are electing to keep on paying that monthly rent while waiting for inventory to loosen up so they can switch to a monthly mortgage. With the resignation to renting comes a certain freedom in terms of location, which is definitely affecting renters’ decisions when it comes to where they elect to live. Many employers reacted to last summer’s COVID-19 delta surge and the winter omicron surge by delaying or postponing plans to have employees return to the office indefinitely. As a result, renters are looking farther afield when it comes to where they plan to live in 2022.
Markets in relative proximity to large metropolitan areas are particularly attractive to renters these days. An area packs even more bang for the buck for both investors and residents if it offers a variety of outdoor activities, such as swimming, hiking, boating, or skiing. Freddie Mac experts say they predict the weakest rent growth in “high-density areas that experienced a residential exodus during the COVID-19 pandemic [including]… the New York City suburbs (2.2 percent), Central New Jersey (2.3 percent), and Long Island (2.7 percent).” Of course, it is worth noting that even in these areas, rents are still rising.
Investors should be aware that part of the reason rents are rising so fast is because of inflation. Landlords must be ready to factor this into their own operating costs when acquiring rental assets. In many areas of the country where rent freezes were implemented in order to stave off evictions during the pandemic, landlords have been forced to think creatively in order to avoid foreclosure themselves. For example, some were compelled to begin charging for services like trash and landscaping, which had previously been included in the rent, or assess other amenity fees. Because inflation tends to “filter” through the rental market more slowly than other sectors of the economy, investors should be aware that there are still likely between nine and 12 months of inflation-based impact coming even if things level out in 2022.
Where Rentals are Most Likely to Generate Returns in 2022
Investors interested in acquiring rental properties in 2022 should be looking in locations that meet several specific criteria. Those criteria include:
Even with its geographic advantages, southeastern investors still struggle to get inspections and appraisals done on time due to the lack of labor typical today across the country. Working with an established investment firm can help because these types of firms tend to have existing relationships that investors can leverage to expedite a variety of municipal processes.
According to Zillow, “year-round sunny weather” is a big draw for residents right now, making areas of the country with temperate climate and strong jobs markets particularly compelling for renters. Zillow pegged Tampa, Florida, as 2022’s “hottest market for 2022,” but all of the markets listed in the data giant’s “hottest markets” list are located in the southeast.
Remember, you do not have to own properties on the beach to benefit from beach-proximity. During the height of the pandemic, buyers and renters considered anything within a four-hour drive of the ocean to be attractive. We recommend properties within two hours or less of the beach if you want to attract premium rental rates in 2022.
Rental Competition is Just Getting Steeper
For investors worried they have missed the boat on acquiring rentals, remember that everyone needs somewhere to live and, let’s face it, most of us do not want to spend our lives with our parents. As a result, the Millennials, “Noughties,” and Zoomers are starting to form their own households and, furthermore, many of these households are much smaller (one or two people) than the “traditional” four-person household of the past. This means the demand for your assets is going to rise because an estimated 11.5 million new households will form in the United States over the next decade, according to projections from the Harvard University Joint Center for Housing Studies. There is plenty of time, but it is going to be more important than ever to acquire the right properties in the right locations.