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2016 Economic Outlook for Landlords

economic outlook 2016 real property managementMost housing industry economic outlooks are based on the perspective of consumers (i.e. renters or personal home buyers) – not the perspective of property investors or landlords.

The difference in perspective is important because many factors seen as positive for consumers are the opposite for property investors or landlords.  For example, increasing rental rates are bad for consumers, but great for investors.  The general media will lament higher prices, but the fact is, this is good for investors.  This outlook article views the housing industry from the lens of investors looking to buy and hold rental properties.

The key trends we see for 2016 include the following:

The already tight rental market will continue to get tighter. Vacancy rates continue to decline.  For example, the vacancy rate for 3BReconomic outlook 2016 real property management single family residences through the fourth quarter of 2015 was 5.12%, down from 5.52% the previous year and a glaring difference from 10.7% in 2009. The Real Property Management organization expects vacancy rates to start stabilizing in 2016, but continue to decline slightly.  This will put pressure on rental rates.

Rental rate increases will continue to outpace inflation by a wide margin, and be higher than increases in the price of housing in general. Investors will benefit from improving economic conditions including stable employment rates, flat wage growth, and higher interest rates. The dip in the number of Americans owning homes translates to an increase in demand for rental homes, which is a promising point for investors. The average rental rate for a 3-bedroom single family home in the United States was $1,353 in December 2015, up 3.1 percent year-over-year according to RentRange.

Most economists are predicting economic growth will continue in 2016 between 2 – 3%. With unemployment rates down to economic outlook 2016 real property management5.0% in November, labor force participation holding at 63.7%, and Millennials likely to start leaving the nest after saving money during the past few years while living with parents, household formation will continue to grow.  A disproportionate share of the new households will be rentals because of Millennial’s preference for being flexible and their demonstrated unwillingness to purchase a homes. This bodes well for landlords.

Despite these positives, property investors will have a tougher time finding profitable properties to buy in 2016. The new and existing supply of homes is down to 5.7 months, and the supply of single family homes to 5.2 months — both rates are the lowest in many years. Foreclosures have also dropped to 470,000 according to CoreLogic which represents a 24.3% decline from the previous year.  And, many markets that contained distressed housing have recovered.

economic outlook 2016 real property management

The wild cards for rental investors will be global economics, terrorist activity and U.S. politics during an election year.  Any one of these factors could have a negative psychological impact on the economy.  In December, the Conference Board reports that consumer confidence is down to 96.5 from 101.3 just six months earlier.  If consumer confidence drops sharply because of some “event”, it could benefit investors by reducing consumer demand for housing and mitigate housing price increases.  This could offer investors a window of opportunity to buy.  And if the economy should falter, the downside for landlords is limited, because everyone needs a place to live.

In summary, 2016 should be a positive year for landlords and property investors.  It may not be dazzling, but it should not disappoint.

economic outlook 2016

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  1. Claudia says:

    What about lowering rent to keep a renter happy if they agree to a longer term. Rather than declare a little income each month, we are amortizing a loss of around $100 a month plus home improvement investments like double wrapped energy efficient vinyl windows, new roof, new 6 panel interior doors, new carpet, replace broken appliances with new top of line over 8 years… after a recent refi we still lose around $100 a month. Appraised at 485K we owe 245 K. 1610 a month mortgage, 1800 rent, 200 goes to rpm, lose 100$ a month is this ok for a 7 year plan before 4 kids go to college?

    1. Hi Claudia and thanks for your comment! There are many different ways to obtain and keep a good tenant. Generally speaking, there are plenty of tenants available, but knowing how to find a good one is key. Retaining a good tenant can depend on many variables, some are in your control (rent pricing, upgrades to your property, good management) and some are not (financial issues, growing families, job relocation, etc.) I wouldn’t be the right person to advise you on your 7 year financial plan, but maybe discuss with your property manager and a professional financial planner. Good luck to you and your family! 🙂

    2. Claudia,
      A note from our Chief Marketing Officer, Bob Pifke…..
      “You should be charging the market rate for your property and not discount it. To encourage a longer term rental, agree to fix the rent for the first two years and cap the rate increase for additional years in the lease agreement. With rental rates rising approximately 5% a year for the last two years, a cap on rent is a fair incentive. Generally moving is expensive, so most tenants already have a financial incentive to stay put. Your home sounds wonderful. Make sure you are equitably compensated for it.”

  2. Lynn says:

    Claudia,
    Don’t forget to consider what you are paying in property tax and home owners insurance! This is an expensive business, and your tenants don’t see it that way.
    Lynn