THE BLOG

When the Buyers Come Back, Then What?

03/23/2015 05:46 pm ET | Updated May 23, 2015

Rental property investors and house flippers who renovate and sell to them have certainly had a great run since the crash that began in late 2006. Millions of bargain basement priced foreclosures and strong growth of rental demand and rents has made it easier to reach the primary goal of the rental investor ... cash flow.

Simply, the investor wants a long-term rental property that will rent out for more money every month than the costs of ownership. The bigger the difference between costs and rent income, the happier the investor. Of course, they also want the property to appreciate in value. That's pretty much a done deal, as they bought at such a deep discount to true market value.

The economy, particularly in the areas of job and wage growth, must show improvement to drag home buyers out of their rentals and into the market as buyers. According to data published by the National Association of Realtors and in a spreadsheet linked from that page, there is a pronounced growth in the number of existing home sales in most areas of the country since 2011. It isn't stunning, but it has been steady for three years or so. If this trend continues or even grows, we should begin to see buyers returning to the market in greater numbers.

What do rental property investors have to look forward to if the demand for rental properties starts to dwindle due to a movement toward buying? The first thing we should consider is exactly where these buyers will be coming from. If many are coming from the large group of Millennials still living with their parents for economic reasons, then it's not likely to have a major impact on rental property investment, rents that can be charged, or cash flows that can be captured.

If, on the other hand, most of these new buyers are going to be leaving a rental unit behind, then it could be more of a problem for investors. Rising rental property inventories will bring down rents and cash flow opportunities. Even though it's almost always the case that the rental property owner will keep the unit occupied, they may need to offer incentives or reduced rent to do so. That's obviously going to reduce the cash flow that was expected when they entered the investment.

Throwing in the unknown of new home construction and demand versus existing homes, it's no easy task to predict with any certainty what the future holds for rental investment. Of course it's also highly influenced by the home prices in an area. When they're high as a matter of history, such as in some areas of California and New York, it's still going to be tough for buyers to come up with the means to purchase. But, in those areas it's tough for renters as well.

Disregarding high priced pockets, overall nationally the near-term future for rental property investors still looks pretty good. Even a gradual increase in buying pressure shouldn't cause a problem, as population growth and new household formation is still driving a strong demand for rentals. At best, inventories will remain low, demand and rents high, and there will be little necessity for incentives and free rent offers.

Buyers are definitely creeping back into the market, but it's a trickle compared to historical buying. If the trickle turns into a flood, the game will change. It's going to take a lot of economic rain to get that flood going though.