How To Determine Rental Demand Before Buying Income Property

Headshot of RealWealth Co-founder Kathy Fettke. smiling.

Kathy Fettke


How To Determine Rental Demand Before Buying Income Property –  Video


Video Transcript

Kathy Fettke: Who’s out there? Who wants to be a renter? Who do we want to be our renter? There’s a shadow demand of three to five million people who moved in with mom and dad during the last recession and have been slowly getting employed. We’ll see how they do. The largest generation today is these 22, 23, 24-year-olds, 23 being the largest generation. Guess what, I have a 23-year-old, so we’re just right there in the middle. These millennials will drive two-thirds of household formation, that’s what’s predicted. Paying attention to these kids is vital.

Now, are they going to be homeowners or renters? Of course, they’re going to be renters for a while. If you have a 22, 23 or 24-year-old, tell me if they’re buying a house. If they are, you’re an amazing parent. I’ve actually offered to give my daughter the down payment, and she’s still not looking for a house, and her mom is in this business. Anyway, this group is going to be renting for a while. They’re going to be creating the largest household formation. If you want to rent to them, you need to be in areas where the millennials are going. If there are job losses in high tech, or at least in high tech that’s in a bubble, then you want to be following these kids who are getting real jobs.

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What I mean by that is, I have an employee who told me that her friend got hired in San Francisco as a startup first job. I was making over $100,000 a year as an executive assistant, no experience, nothing. Our employee was making less than that, but she goes, “You know what, I know I could go to San Francisco and probably get paid a lot more than I am making here. The difference is, I know that’s not real money because with the startup, it’s just borrowed money.

Over the last few years, if you had a really good idea, what they call a napkin idea, you could get $10 million in funding. These hedge funds were just borrowing money, and borrowing it for free and investing in these startups. If you’re a startup and you got $10 million venture capital money, sure, you can think $100,000 salaries to people who have no experience. You can lease that building in San Francisco and have no income to show for it. If you want to have a job that’s recession proof, or if you want tenants that are recession proof, make sure they’re working for companies that aren’t basing their revenues on one hundred percent borrowed money like that. We’ve got to see earnings.

Only 31% of Gen Xers want to buy homes. 2006 was peak home buying time for Gen Xers and we know how that went. A lot of them went into foreclosure, and were not really in a big hurry to buy again. These people are most likely going to be renters. We’ve got the millennials who are renting, the Gen Xers who are renting.

The US population is growing by 4.5 million every year. When you really dive into those numbers, it’s mostly immigration. Again, will these be renters or buyers? Certainly, in the coming years, they will most likely be renters. We’ve also got foreign demand and flight to safety.

That is why homeownership is the lowest it’s been in 50 years, 63%. It peaked at 69%, in 2004. We lost one million net homeowner households over the past 10 years and gained 10 million new rental households, and that is only going to continue to climb. We believe here at RealWealth that the huge demand for affordable rental housing will continue for at least 10 years. After that, the economy will have recovered and millennials will be just ripe for buying a home. They’re going to be getting close to their peak home-buying years at that time.

Rental household growth average 770,000 since 2004. Interestingly, like I said, we know that the Gen Xers may not jump back into homeownership, but those aged 45 to 64 had twice the rental growth than those under 35. It’s a very fascinating statistic and it surprised me for sure.
National vacancy rate is down to 7%, lowest in 20 years. As I said, huge demand for rentals for at least 10 years. Single-family rental growth has been faster than multi-family by 35%. That’s interesting too, it seems a lot of people like to have their home, instead of living in a multi-family property. Rents are expected to continue to increase, simply because there’s more demand for rentals than there is available rental property.

Headshot of RealWealth Co-founder Kathy Fettke. smiling.
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