At the start of each year, the Real Property Management organization makes a series of predictions about the economic outlook for investment property owners. These predictions can help landlords and those looking to invest in the single-family rental home market make informed decisions, not to mention improve the performance of existing and future investment properties.
For 2018, we forecast a real estate market characterized by steady growth and higher interest rates. So now as 2018 draws to a close, how accurate were we? Let’s take a moment to review what happened in the single-family rental home market this year and test the accuracy of our predictions.
Prediction #1 – Rental property investors will find it increasingly difficult to find high cash flow rentals to purchase in the coming year.
Reality – As expected, housing prices continued to rise through 2018, with Zillow reporting a strong 7.7% 1-year gain for the year, resulting in higher home prices in many markets. This may be in part due to the housing supply decrease last year. According to the U.S. Census Bureau, new construction fell below expected numbers for 2018, down roughly 6% from this time last year. Yet at the same time, the percentage of people buying houses continued to steadily increase, reaching 64.4% in the third quarter of 2018. And CoreLogic reports a serious delinquency rate of 1.5 percent for the end of 2018, which is back in line with the average rate before the 2008 economic downturn.
Prediction #2 – It will be more expensive to finance new rental property purchases as mortgage rates rise in response to increases in the prime rate.
Reality – Mortgage rates did indeed continue to rise in 2018, driven by four rate increases from the Federal Reserve this past year. According to Bankrate, rates for an average 30-year fixed mortgage rate after beginning 2018 just under 4% ended the year at 4.75%, after spending most of October in the 5% range.
Prediction #3 – Rents for three-bedroom, single family residences will continue to increase, but at a much slower rate.
Reality – As predicted, rents across the country have continued a slow but steady upward climb. Many landlords across the industry have had success raising the rent on renewals by up to 4%, depending on the market, and Morningstar Credit Ratings, LLC reports a rent change for single borrower, single-family rental securitizations of 3.8% for October.
Prediction #4 – It should still be relatively easy for landlords with single family residences to fill vacancies.
Reality –After a few months of increases early in the year, the average vacancy rate has leveled out at 4.8% for the end of 2018. Industry experts cite uncertainty about the economy and the new tax plan, as well as limited new construction and higher mortgage rates, discouraging some people from buying and keeping the vacancy rate steady.
Prediction #5 – Rent increases for vacancies and renewals will be similar.
Reality – The market shift we identified last year, which noted a new professionalization of real estate investors in the single-family rental market and more disciplined, market-driven rent rates, had a clear impact on rent increases in 2018. According to Morningstar, rent increases for vacant-to-occupied properties had increased in 2018 by 1.7% at last count, going a long way toward closing the gap between vacancy and renewal increase rates.
Bonus prediction – Last year, we offered one additional prediction about a shift in the type of investors getting involved in a growing, evolving single-family rental home market. We predicted that in the years ahead investors in single-family rentals will become more sophisticated and instead of simply collecting the monthly rent to cover their mortgage, will become more attuned to aspects such as cash-on-cash returns, depreciation, appreciation, and total return on equity.
Reality – We continue to see increasing numbers of investors, both large and small, taking notice of the robust rental market and higher quality of property management services. As investors (and not homeowners), they are slowly changing the market by applying their business acumen to the more do-it-yourself style of landlords past. Investors of all types are entering the single-family rental market at a rate of 544 per day, signaling more and more sophisticated competition for qualified residents, services, and, ultimately, more competitive rental rates.
For 2017, our predictions were close to 90% accurate – a tough number to beat. But in 2018 we came just as close, as almost every prediction we made turned out to be consistent with current market conditions – and a few trends still playing themselves out.
Ready for the Real Property Management predictions for 2019? Watch for them to come in January.