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Unlike Investors, Landlords Are Keeping Their Cool

22 October 2014 in Trading Ideas

Even with the stock market inching its way back in the past few days, the last month has been tough for many shareholders – as of Monday, the S&P 500 was still down more than 4% since Sept. 19.

Away from equities, however, not everything is so bleak.

Take, for example, the returns that investors in single-family rental properties are continuing to see. As Investor’s Business Daily reported earlier this month, the US market may have slipped a bit but remains fairly buoyant.1

In an analysis of three-bedroom properties in 586 counties, housing data watcher RealtyTrac found that investors buying US residential rental property in the third quarter of 2014 are getting an average annual return of 9.06%, IBD said, less than the average annual return of 9.65% a year earlier.

It doesn’t take a math whiz to figure out that the prospects for a 9% return are increasingly compelling as the near-term future for stocks looks more uncertain.

Those investing in real estate stocks and related alternatives might agree. For instance, the Renter Nation motif, which holds a portfolio of real estate investment trust stocks, has gained 5.6% in the past month. During that same time, the S&P 500 is off 3.7%.

So far in 2014, the motif has gained 25.6%; the S&P 500 has risen 5.4%.

IBD noted that continued strong returns may wind up keeping some single-family rental homes off the for-sale market, indirectly helping to keep buyer competition down for homebuilders. Builders vie to a degree with sellers of existing homes, IBD pointed out, and the National Association of Realtors said last month that the existing housing inventory available for sale slid 1.7% in August — but that’s still 4.5% higher than a year earlier.

As for rental houses, RealtyTrac Vice President Daren Blomquist told IBD that in high-risk, high-yield markets where unemployment and vacancy rates are higher than national averages, the average return was a hefty 19%, up from a year ago thanks to a strong rise in rental rates.

Home prices, meanwhile, were more volatile in such markets, Blomquist said, with three out of the 16 posting double-digit percentage decreases in median home prices from a year ago.

Median home prices in the counties analyzed in the report rose more than 7% on average vs. a year earlier, while average fair-market rents for three-bedroom homes increased an average of less than 1%. The average rental vacancy rate in these counties was 7.4%, compared with a national average of 8.7% as of the end of 2012, according to IBD.

For now, IBD said, single-family home rentals have remained strong enough that they’re helping to absorb some of the overflow and demand from apartments, which have fared well.

1Marilyn Much, “House Rental Market Stays Strong But Profits Slip,” investors.com, Oct. 2, 2014, http://news.investors.com/business/100214-719904-high-risk-markets-enjoy-double-digit-returns.htm, (accessed Oct. 20, 2014).