The RPM/RentRange quarterly rental report is out and, to put it bluntly, single family rental prices in the Sacramento region are smokin’.
In Q2 2015, the median price of three-bedroom, single-family homes in the Sacramento region has increased to $1,510/month. That represents a 7.0%(!?!?), increase over last year’s Q2 numbers. By comparison, nationwide single family rental rates rose 6.1% over the same period to $1,329/month; that’s pretty good, but the River City is outpacing the rest of the country by almost a full point.
(“Single Family Homes” in our survey are limited to three bedroom, two bath properties).
So, it’s a good time to be a landlord, and things are a little tight for tenants, but why?
Well, unless you’ve been off the grid for over a year, you know that the real estate sales market is really, really hot.
The result is that we’ve seen a lot of movement in two classes of clients: “reluctant landlords”, (the ones that never really wanted to have rental property but didn’t want to sell in the depressed market before now), and our “professional investors”, (defined, for the purpose of this discussion, as investors who intentionally acquired property during the last downturn).
The reluctant landlords finally get to pull the ejection handle and get out of this business, and we congratulate them, (although we’re sorry to see them go). In many cases they were able to break even or even make a little money on the transaction while staying neutral or slightly positive in monthly cash flow for the last few years. We’re sorry to see them go but we were happy to help, and wish them well. Life’s too short, etc.
On the other hand, our “professional investors” evaluate the returns they’ve realized on their investments and get to choose from a pretty awesome list:
- Stay put, (my favorite)
- Invest in single family homes in another market
- Invest in another class of property like commercial, industrial or land, (in another market)
- Invest in another vehicle like stocks & bonds, commodities or tulip bulbs
- Buy a boat
- Or anything else they can afford. They earned it.
The end result is the same. Rental prices rise, here’s why:
In general, when single family homes go on the market, there is a high probability that the purchaser is an owner occupier, (they’re moving in and making it their home), especially in a hot market where sales prices are going up; the result is simple economics: if we reduce the availability of a given commodity, (rental housing in this case), the price goes up.
So, what happens when single family rentals hit the sales market? More economics…
Any sales agent will tell you that, given a choice, they would rather sell a vacant house rather than an occupied one. The logistics are simply easier: spontaneous showings are possible, no scheduling issues, no kids or pets to derail staging efforts, the list goes on. Now, take that list and add a resident that isn’t particularly interested in moving and won’t, (usually), see any benefit…
That is the reality of selling an occupied rental home. The simplest and cleanest solution for a landlord is to simply not renew the lease and put the property on the market at the end of tenancy. Certainly, some of those renters that weren’t renewed will turn into home buyers themselves, but most will be looking for another single family home to rent.
So, in addition to the reduced availability of our commodity, (houses to rent in Sacramento), we have now increased demand, (displaced renters from investment properties moved to the resale market).
The result? The price goes up, only faster and farther, (like 7% year-over-year).
The remainder of the report supports this market dynamic as well. The Vacancy Rate, (the percentage of the three-bedroom rental inventory that is available for occupancy), dropped by .2% from 4.51% to 4.31% while the Saturation Rate, (the estimated percentage of Sacramento’s single family homes, as a share of all single family homes, that are rental properties), dropped from 27.32% a year ago to 26.71% in Q2 2015.
The overall number of properties available to rent dropped while the occupancy of those properties is up. It’s a good time to be a landlord.