Multifamily REITs: Increase in Renting Results From Structural Changes

Short of cash and unsettled in their careers, young Americans are waiting longer than ever to buy their first homes. The typical first-timer now rents for six years before buying a home, up from 2.6 years …

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The Great Recession brought about structural changes to multifamily REITs, which have shown to be beneficial. Those changes have spurred growth in apartment rentals. First-time buyers’ decision to delay home purchase and overall home ownership decline demonstrate two important factors driving the strong operating performance of these REITs.

Student loan debt and high down payments have stretched millennials’s budgets. Those stretches translated into longer periods before they can buy a house. Moreover, workforce opportunities in today’s world have resulted in a mobile workforce. Such changes in the job marketplace have delayed many significant adulthood events, such as marrying, having children, and purchasing a home.

For those reasons, renting no longer has the stigma of wasting money as viewed by earlier generations. Also, many people prefer renting now because of the additional costs homebuyers face, such as property taxes, HOA fees, and home maintenance and repairs.

The cost of renting, however, takes a considerable part of the renter’s income. In Q2 of this year, Zillow reports that renters spend an average of 30.2 percent. This sizeable percentage is the highest since 1979. In larger cities, renters pay an even higher percentage of income. For example, California tops the list of areas becoming unaffordable. Renters in Los Angeles, for example, spend about 49 percent of income for rent; San Francisco 47 percent, Miami 45 percent, and NYC 41 percent.

Investors wonder how long multifamily REITs will benefit from rent increases, which have fueled internal growth. Even though many renters have a higher than average income, increasing rents cannot occur for long. One key to investing in multifamily is to consider companies operating in areas with growing employment rates, where income rises faster than rent rates. 

Source: Yahoo, Zillow, Seeking Alpha, Monogram Residential (Photo)

Written by Heli Brecailo

Disclaimer: This newsletter is not engaged in rendering tax, accounting, or other professional advice through this publication. No statement in this issue is to be construed as a recommendation to buy or sell any security or other investment. Please do your own due diligence before making any investment decision. Some information presented in this publication has been obtained from third-party sources considered to be reliable. Sources are not required to make representations as to the accuracy of the information, however, and consequently the publisher cannot guarantee accuracy.

Disclosure: The author has no positions in any shares mentioned, and no plans to initiate any positions within the next 72 hours.

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