Note: The following article was originally posted to “The REAL deal” blog by Bob Pifke on January 9th, 2018
Each year, Property Management Business Solutions LLC, the franchisor of Real Property Management, forecasts the economic outlook for landlords and rental property investors. Our forecast for 2017 was 90 percent accurate, so we seem to have a good feel for what landlords and investors can anticipate in the coming year.
We have five predictions for 2018.
- Rental property investors will find it increasingly difficult to find high cash flow rentals to purchase in the coming year. The reasons include rising housing prices, an increase in the percentage of people buying houses, a reduction in the housing supply, low foreclosure rates, and an increase in the number of first-time home buyers. Combined, the supply of houses will not meet demand, so housing prices will rise. During 2017 housing prices rose on average 6% to $248,000. We expect the rate to continue or be higher in 2018, and so investors looking to purchase should consider doing so now instead of waiting.
- It will be more expensive to finance new rental property purchases as mortgage rates rise in response to increases in the prime rate. We anticipate 30-year fixed mortgages to exceed the current 4.0% level and approach 5.0% by year-end. The Federal Reserve will likely increase rates at least three times during 2018. Similar to our first prediction, now is a better time to buy rather than waiting.
- Rents for three-bedroom, single family residences will continue to increase, but at a much slower rate. During the past 15 years, housing affordability has declined. Wages have not grown to match increases in housing and rental prices. This lack of affordability will constrain rent increases in 2018, as it started to do the latter part of 2017. This will tighten cash flow for investors, and should be considered when planning for 2018, particularly for capital improvements.
- It should still be relatively easy for landlords with single family residences to fill vacancies. Although vacancy rates started to rise in 2017 from 4.8% to 5.2%, we expect this to stabilize in the low 5% range throughout 2018. Population growth, limited new construction, and the short supply of existing homes for sale will force people to stay in rentals.
- Rent increases for vacancies and renewals will be similar. In the past ten years, vacancies commanded a much higher rent rate increase than renewals. This changed during the past year. As “accidental landlords” (those forced to rent their house because the selling price was less than the mortgage) are leaving the business, intentional investors are expanding. As a result, more financial discipline will be applied to rent rate decisions. Intentional investors are much more likely to focus on market rates when determining rent.
A bonus prediction flows from our fifth point. During the coming years, investors in single family rentals will become increasingly sophisticated. Their real estate investments will be treated like investments. Investors will become more attuned to cash-on-cash returns, depreciation, appreciation, and total return on equity. As a result, competition in the Single Family Rentals market will increase, and investors will see more competition not only to purchase potential rental properties, but also see more sophisticated competition for rental rates, qualified residents, maintenance services, and other elements. Real Property Management plans to be at the forefront by helping investors learn more to become part of this increased sophistication. We are investing heavily in new tools, financial reporting capabilities, and training of our system to meet these needs.