Investing in Rental Properties: What Your Clients Need to Consider

What You Need to Know

Investors eyeing the rental market should ask: What are the core fundamentals, and what property type will get the most value for the investment?
In a higher-interest, renter’s market, new properties command top dollar as would-be homebuyers search for an alternative to expensive home loans.
As interest rates come down and homebuyers return, new rental buildings in key growth markets should continue to do well.

With rising interest and cap rates, many real estate investors are moving into rentals, with guidance from their advisors. That makes sense — as home prices become more unaffordable, buyers who are priced out of the market will turn to rentals, driving up prices. But a brand-new rental building in Miami is not the same as a core multifamily property in Cleveland.

Beyond rentals versus homes, the questions every real estate investor must ask are: What are the core fundamentals, and what property type will get the most value for the investment?

Consider this: The United States has a housing shortage. For the past 20 years, U.S. population growth has outpaced home construction — and nowhere is that problem more acute than in the Sunbelt. In Florida specifically, roughly 1,000 residents are moving each day.

Between 2020 and 2021, Florida had the country’s highest net inflow of residents, with 221,000 more people moving in than out. Despite the influx of new residents, housing supply has failed to keep up with demand, as many homebuilders, still reeling from the global financial crisis, have been reluctant to build. But 2022 is different from 2008.

Back then, the housing boom was largely fueled by speculative homebuying. That’s not the case this time. With the rise of remote work, affluent professionals are looking to permanently relocate to low-tax states that offer a higher quality of life. This has caused tight rental markets not just in population centers such as Miami, but in places like Orlando, where competition for rentals is now stiff.

These are long-term demographic trends that likely won’t be upended by fluctuating market forces.

Considerations for Investors

In addition to location, investors must also consider property type. Most investors have exposure to real estate through public REITs, which are largely composed of core properties. But as valuations on REITs decline, so do returns, which, at their peak valuation, often yield more modest, bond-like returns of 4% or 5%.