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The Rental Market: A Smorgasbord for Investors

The rental market is hot right now, the headlines say. Home ownership is down, and rents are going up. It’s a good time to cash in on the growing demand for rental housing.

But hold on a minute. Not all rental markets are created equal. And while rents are rising and it really is a good time to be a landlord, that can mean very different things in different areas of the country, thanks to a number of obvious and not so obvious factors.

Income and Opportunity Gaps

It’s no surprise that rents are highest in densely populated, affluent areas like New York City and Los Angeles – although Hawaii trumps them all in terms of average rent. Per capita income is high in these places, and housing is in tight supply, so a loft apartment or a beach bungalow can rent for thousands a month.

Of course, in states with much lower average incomes, such as Louisiana and South Dakota, rental prices can hit a much lower ceiling than in those saturated, high-end markets. Wages are lower in these states, and even though rental markets may follow the national upward trend, the actual monthly rent for a single family home or an apartment can end up being several hundred dollars less.

Urban Spillover

Because rents are high and options limited in the big cities, people must often commute to jobs in those places from surrounding cities and even states. Working in LA might mean living in Riverside or Long Beach, and a job in Washington DC might require a commute from the adjacent states of Virginia and Maryland.

That means rents in those “commuter” communities might run higher than in other nearby areas where people don’t have that connection to the local urban hub. Likewise, some areas far from the big city, such as Palm Springs or Aspen, acquire a reputation for trendiness and rents skyrocket even though the locale itself has limited access and appeal.

Population Density

Those “cool” towns that attract big city denizens notwithstanding, rents tend to be lower in areas with low population density. In South Dakota, one of the five states making real estate experts’ list of the best places to be a landlord, urban areas are few and far apart, and the overall population of the state (833,453) is less than the number of residents in New York City (8,405,857 and counting).

The High Cost of Resources

The sheer availability of housing related resources also affects rents. In places like Hawaii and some parts of California, land itself is scarce. There’s simply no room to build more housing, so competition is fierce for the units that do exist.

Construction related costs also play a role. When materials such as concrete and copper wire are in demand on a global scale, those higher costs are passed on in terms of rents. In areas where the “sticks and bricks” that are needed to build or repair a house are in short supply, the cost of transport also affects the overall costs of housing.

Energy is another issue that affects rents. In areas where natural resources are tight, rents may run higher than in more resource rich areas. Case in point: the drought stricken West, where rising water and natural gas rates push up the costs of construction and maintenance of housing units of all kinds.

Good News for Investors?

The ‘rent divide,” as a recent survey calls the great – and often troubling – inconsistencies in the overall US rental market, signals trouble  in the US economy overall and the buying power of Americans in a world of stagnant jobs and marginal credit.

But those widely varying rents around the country clearly illustrate why income property investors need to be, in Jason Hartman’s phrase, “area agnostics” – investors who are willing to consider investing in as many different areas as possible, as a hedge against a collapse in one or more of these local markets.

Study the Markets — And Diversify

Successful investors need to study the markets with an eye to building wealth through income property, and weigh properties with an eye to the relationship between purchase price and rent options.

Though the big markets with their skyrocketing rents may look lucrative, investing in an area with lower property prices where rents fall in the midrange but trend up, not down, is a better choice for cash flow staying power.

It’s important to consider, too, your costs in maintaining that property and making needed repairs as well as the overall cost of doing business in that area. Look at factors like the cost of resources and labor, as well as the local fees and taxes you’ll probably have to pay on the investment.

It can also help to go where the renters go. If you’re interested in a specific geographical area, do your due diligence not just on the property itself but also on factors such as the actual amount of rental property in the area and the profiles of renters themselves – are they college students, young families, retirees?

Home ownership in America is on the decline. But new numbers confirm that at the same time, home (and apartment) rentership is on the rise. And that creates a smorgasbord of opportunities represented by the various points that make up the overall “rental market. It’s a good time to invest – and to be that “area agnostic” who puts investing eggs in multiple baskets for building long-term wealth. (Featured image: Flickr/ jjhart)

Read more from Heroic Investing:

Reduce Tenant Turnover to Keep Cash Flowing

Learn Investing in a Weekend

The Heroic Investing Team

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