To find out what is driving more renters versus home owners in the U.S., we interviewed Real Estate Investor, Lender, Developer and Entrepreneur Jason Hartman. While owning a home used to be a priority for most Americans, more are choosing to rent in 2018, and this trend is predicted to continue. There are actually more renters now in the US than at any time since 1965 (CNBC).
And if you are a real estate investor, it could be a great time to invest in income producing property because of the high demand for housing by renters. Landlords will continue to see a rise in renters across the US. And as long as your rent covers all expenses, you’re cash flow positive and collecting income every month.
Here is how Jason Hartman explains this shift from home owners to renters across the US:
1. Why are the real estate trends driving the renter population to increase?
Jason Hartman: There are several factors driving more rentals in 2018 and beyond. We have to look at Millennials, Baby Boomers, the Trump Tax Plan and rising interest rate impacts. As a macro trend, the trend for rental housing over the next ten years is fantastic.
2. Why are more Millennials renting versus buying?
Jason Hartman: Millennials (20-35) are now renting in higher numbers for many reasons, and it’s important to pay attention to this group. This group is now the largest demographic in American history with over 75 million millennials surpassing the Baby Boomers (Brookings Institution). They either like to rent and choose to rent, or they’re forced to rent because they cannot buy, because they’re saddled with a largely, anemic job market and under-employment. Most of them have ridiculous student loan debt, which is like having a mortgage without a house. Many saw their parents get burned in the Great Recession, and struggle with housing. And this group is very mobile. They find it’s an advantage on your resume if you can move where a job is located.
3. What are more Baby Boomers renting?
Jason Hartman: At the other end of the spectrum, the Baby Boomers are now the “fastest-growing group of renters, Census figures show” (CNBC). As empty-nesters, the kids have moved out, and they are renting by choice. This is a totally new trend that we’ve never really seen. In the past, Baby Boomers would always just own their home, and maybe they’d buy a smaller home when the kids move out, but now a lot of them are renting.
4. Why will the ownership rates drop with the Trump Tax Plan?
Jason Hartman: The Trump Tax Plan, known as the “Tax Cuts and Jobs Act” is also a significant driver for more renters. For high-end markets, the new Trump Tax Plan encourages renting because mortgage interest for a loan over $750,000 is no longer deductible (Entrepreneur). Because they lowered the mortgage interest deduction, it will be an incentive to rent rather than own higher end properties. Depending on where you live, this tax plan change can have a big impact on buying versus renting a home.
On the other hand, investment property owners love the new tax plan because landlords may be able to get “a federal tax deduction of up to 20 percent of their net rental income for tax years 2018 through 2025” (San Francisco Chronicle).
5. How will rising interest rates strengthen the renter market?
Jason Hartman: Interest rates will rise over the next 6-12 months. And the rate increases during the first phase will actually make the market improve because it creates urgency. With interest rates rising on March 21 for the first time in 2018, the Mortgage Bankers Association reports a rise in mortgage applications (CNBC). And buyers, whether they want to occupy the home or invest in a rental property, they will act with urgency to acquire property. But ultimately, it prices people out of the market, and reduces the affordability index so homes become less affordable to both investors and owner occupants. And what that does is ultimately strengthen the rental market.
6. Why do landlords and real estate investors like rising interest rates?
Jason Hartman: When interest rates go up, it improves the rental market, but hurts the “For Sale” market because fewer people can afford to buy. Landlords and investors actually like high interest rates going up because they’ve already locked in their rates in the past when rates were lower. And if rates go up in the future, it limits the amount of rental inventory that comes on the market because investors aren’t buying as much. And the people who are renting, can’t afford to buy, so it puts upward pressure on rents. Bottom line, landlords actually like higher interest rates.
7. What are the best markets for real estate investing now?
Jason Hartman: All around the world you can basically break real estate into three general types: Cyclical Markets (High Risk: Los Angeles, New York, Paris), Hybrid Markets (Medium Risk: Austin, Atlanta, Phoenix) and Linear Markets (Conservative: Little Rock, Memphis, Quad Cities). The time to invest in Linear markets is very good right now because they don’t have the high peaks of the other markets. And some markets near Chicagoland are actually good with excellent cash flow. I would not recommend buying properties in Cyclical Markets because I think those markets are over-inflated at this point. You are taking a huge risk in places like Boston, South Florida, London, Vancouver and Dubai. These high-risk markets are far past the point of fundamental value.
8. Will we see more Pet Rent as Renters?
Jason Hartman: Pet rent is a common practice with institutional apartment owners, and we will see more as the renter population increases. Americans love their pets. I love my dog, and chances are that a little rent pet is not going to change anyone’s desire to own a pet. So, if you rent an apartment, most of them allow pets now because they want to be pet friendly. But they will charge you pet rent. You might pay $25 or $35 extra per month to have your dog or cat living there. And that is a trend that I see catching on with individual owners that own single-family homes. And I think that is a fine trend. As a much as I love animals, I’ve never seen one actually improve the value of the property. They usually don’t improve it, they do the opposite because they cause a little more wear and tear.
With more renters today than in the past 50 years and the new tax plan taking effect (MarketWatch), watch this space.
Bottom line, Jason advises, “rent where you want to live, and invest where it makes sense.” He currently recommends investing in single-family homes with positive cash flow in a minimum of three Linear markets.
Along with being the President of Platinum Properties Investor Network and Hartman Media Company, Jason owns property in 11 states, is the author of 11 books, and produces 15 podcasts, including the Creating Wealth Real Estate Investing Show that is approaching it’s 1000th episode.
