Good News for Rental Returns on US Property

Good News for Rental Returns on US Property

The combination of more people looking for a home and higher property prices is putting strong pressure on the US rental market. As a result, analysts predict monthly rental rates will rise yet again this year, excellent news for investment in buy-to-let property in the US.


According to Reis Inc., the average monthly rent in the US has risen 14 per cent since 2010, considerably more than inflation and well ahead of the rise in US property prices. In 2014, rentals increased by 3.6 per cent and prices are expected to go up by a similar amount this year to reach an average of US$1,161 a month.


Rental prices have risen by considerably higher rates in several metro areas. Denver saw the highest increase with 14.2 per cent in the year to January followed by Jacksonville in Florida where monthly rents at the beginning of this year were 12.9 per cent higher than January 2014. Oakland and San Francisco in California also saw double-digit rises.


More competition

One of the reasons behind the progressive hike in rental prices is the massive improvement in employment prospects throughout the US. Job creation has gone up by 2.3 per cent over the last year, but some locations have seen considerably higher growth. Houston in Texas and several Florida metro areas are cases in point. In total, some 2.8 million Americans have found employment over the last 12 months.


The increase in jobs has led to higher demand for rental properties, particularly from young people who cannot afford to buy a home. “The share of young adults with jobs has climbed in the past year and most of them will be renters first,” said Jed Kolko, chief economist at Trulia.


Competition for rental property gives tenants less scope for negotiation on rental rates and allows landlords with properties in sought-after areas to increase prices.


Fewer homebuyers

The tide is turning on homeownership in the US – once a nation where over three quarters of the population owned a property, the US now has the lowest level of homeownership for two decades. Many Americans now prefer to rent a property rather than buy one despite cheap mortgage rates.


The so-called millennial generation (those aged between 18 and 34) opt for rental property rather than buying because high property prices make it difficult for them to access the buyers’ market. In addition, many prefer the flexibility offered by renting, allowing them easy mobility for employment opportunities.


Higher property prices have also prevented many young families from buying property, particularly those who were victims of repossessions during the boom years.


Expensive properties

Another reason behind the rise in rental rates in the US can be found in the type of new property available on the market. 238,000 apartments were built in the US last year, the highest number for 14 years. But this big addition to the condo market did little to alleviate the shortage of rental housing.


The vast majority of new condo complexes were high-end developments offering luxury service. These premium properties attract high rental rates and the average monthly payment for these US properties was US$1,721, 46 per cent more than the average rate for an older property.


Apart from new condo developments, there’s very little new inventory on the US rental market and this situation is not expected to change in the near future. The combination of this shortage plus the increased competition for rentals and higher property prices across the country means rental rates will only continue to rise.


Sources: Reis Inc., Trulia