The hot market can offer both opportunity for profit and
opportunity to get burned.
The opportunity to profit arises when there are lots of buyers
who think prices will continue soaring. And the opportunity to
get burned happens by following the crowd, and assuming that the
bubble will never burst.
Once again, residential rental real estate is a hot market.
Vacancies are low and rents are high. What's more, vacancies have
been falling and rents have been rising for some time.
According to data from Reis Inc., a property-research firm,
unrelenting rental-price increases have pushed national apartment
rents to their highest level since 2007. Concurrently, national
vacancy rates are now at a 12-year low of 4.3%.
The residential rental market includes both apartments and
Investors - landlords and property flippers - have been a
driving force behind the housing rebound. Today they account for
up to 25% of purchases. And their buying spree has helped lift
the national median existing-home price 13.7% in the last
Single-family homes have also been swamped with institutional
Blackstone has spent over $5 billion to acquire 25,000
American Homes 4 Rent (
is another big player that's spent over $2.5 billion to acquired
14,000 homes. The influx of this institutional money is
Activity in both the multi-family units (apartments) is
Blackstone Group (
is the most recent example, having bought 80 apartment properties
from GE Capital for $2.7 billion. Blackstone's purchase is the
latest in a long string of transactions that have helped lift
per-unit prices. Moody's apartment index, which tracks the
national average price of multi-family rentals, is up 59% from
its 2009 lows.
Property developers are following the money, and new
construction has surged. Apartment building completions in the
top 30 metropolitan areas of the country more than doubled. And
more apartments are on the way, with new permits to build
multi-family homes reaching a new high.
Of course, all real estate markets are local markets. Until
recently, I owned a single-family rental property just north of
metropolitan Denver, where vacancies are at a 13-year low. Rents
are also at a multi-year high.
I bought the property since 2003, and it's been a solid income
investment. It's consistently provided monthly rental income of
15% to 20% above my costs. When my last tenants moved out,
I could have negotiated a 12-month lease with new tenants willing
to pay 20% more than what the previous tenants
But instead of finding new tenants, I decided to sell the
property. The reason was simple: I don't expect real estate to
stay hot much longer.
There are a few obvious reasons. Multi-year trends in both
vacancies and rents are unsustainable. I expect more multi-family
units will mean lower rents. That aside, the market simply looks
and feels like it's approaching a melting point. For evidence,
look no further than bidding wars for homes that hit the
The proceeds from my property sale won't be invested in
residential real estate. I don't like my local market, nor do I
like other markets. I've written about
Signs This Real Estate Class is Set to Roll
, explaining why apartment REITs and single-family REITs are
especially risky today.
I've taken advantage of a hot-market opportunity to cash out
at a price 30% above my initial purchase price.
A red-hot market can always continue rising. But history is
replete with examples of investors who bought into soaring
markets and failed to sell before the crash. In my mind, the
current real estate rental boom is just that - a hot market that
will one day turn cold.