The rental market presents a challenging landscape for real estate investors feeling the pressure of rising costs and interest rates. Despite facing headwinds, Baselane's 2024 Real Estate Investor Survey highlights a positive outlook for growth in the year ahead.
Key Takeaways
- 81% of investors plan to grow their portfolio over the next two years.
- More than half of investors are less concerned about vacancies in the next 12 months.
- Top factors influencing the real estate market performance outlook for investors are home prices (33%) and financing costs (35%).
- 44% of investors favor conventional loans for real estate financing.
- Nearly a quarter of investors (22%) faced rental property insurance hikes of 11% or more, while 13% experienced increases exceeding 20%.
- 50% of investors reported property tax increases over 6%, with 18% facing steeper hikes of 11% or more.
Investor sentiment appears to be cautiously optimistic
While uncertainty lingers in the wake of the pandemic and subsequent interest rate spikes, there's a sense of cautious optimism among investors. When asked about their plans for the next two years, the majority of investors (81%) expressed intentions to grow their portfolios, while only 17% are opting to maintain their current holdings.
This appetite for real estate growth may stem from promising projections of a market rebound. With fewer housing starts on the horizon, rental demand will remain steady and pave the way for a recovery in occupancy rates and rent growth. These positive indicators are driving investor confidence in market conditions (30%) and less concerns about vacancies (52%) over the next 12 months.
Affordability concerns are impacting outlook
Although interest rate cuts are expected in the coming months as inflation eases, pricing conditions are still causing affordability concerns for a third of investors (33%). The median home price for July 2024 sits at $422,600—up 4.2% year-over-year, according to the National Association of Realtors. This continues a 13-month run of price increases across all four U.S. regions.
Limited housing inventory is also driving prices up. According to joint data from the U.S. Census Bureau and the U.S. Department of Housing and Urban Development, housing starts for privately-owned homes have fallen 6.8% since June and 16% compared to July 2023.
Nonetheless, there are signs of a gradual market rebound. Sales activity edged up in July, reaching $3.95 million, a 1.3% increase from June, though still 2.5% lower than the same period last year.
Carrying costs for rental properties are increasing
On top of rising real estate prices, investors are also seeing their operating costs increase. Nearly a quarter (22%) of those surveyed saw rental property insurance hikes of 11% or more, and 13% experienced increases over 20%.
To put that in perspective, the average cost of homeowner’s insurance is $1,754 per year. Generally speaking, landlords typically pay 15% to 25% more given the added risk of having renters—that’s an extra $2,017 to $2,192.50 per year.
Investors are also noticing an uptick in property taxes, putting more pressure on their cash flow. 18% reported property tax increases over 6%, while half (50%) experienced steeper increases of 11% or more.
The result of these increases? Landlords are raising rents to cover their costs. According to Zillow’s Observed Rent Index, rent for multifamily properties across the U.S. stands at approximately $2,070 for July—an increase of 3.45% from July of 2023. Zillow’s same index for single-family homes shows average rent at $2,294, up 4.65% from $2,192 in July 2023.
Conventional loans are still the most popular financing option
When it comes to financing real estate investments, 44% of investors favor conventional loans, far surpassing other financing options, such as all-cash purchases, private money loans, HELOCs, seller financing, and hard cash. This highlights investor’s familiarity with mortgages as a tried-and-true method for buying real estate.
Investors choosing to rely on conventional loans may also point to mortgage rates gradually trending down, but they’re still nowhere near pre-pandemic levels. Currently, 30-year fixed rates hover around 6.46% compared to 3% rates before the pandemic and 7.79% peak in 2023.
Traditional mortgages also typically offer more flexible repayment terms and competitive interest rates compared to alternative financing options.
Financing and home prices are top of mind
With mortgage rates expected to hover around the mid-six percent range early next year and the housing market potentially not finding a supply-demand balance until the end of 2025 (or later), it’s no wonder financing and home prices are top of mind for investors (35% and 33% respectively).
Adding to these concerns is the increasing market share of institutional investors (those buying 1,000 properties per year). Their large-scale purchases can increase prices in certain areas, making it harder for local investors to compete. This trend is evident in Q1 2024, showing 18.7% of U.S. homes sold to institutional investors—the highest percentage in almost two years—and these homes were sold for a substantial 55.2% profit, up from 46.3% the previous year.
On the flip side, limited supply and soaring home prices are fueling rental demand. Currently, rent is 27% cheaper than buying a home in all 50 of the largest metros. As more people are priced out of buying, they're opting to rent. Independent investors can leverage this demand to generate more returns on their portfolios.
Bottom line
While rising costs for buying and running rental properties pose a challenge for some investors, it’s also an indication of a strong and resilient real estate sector. One investor’s survey answer sums up the prevailing optimism for the future of the rental market: “Real estate is always a good investment—you just have to find the right property.”
Research methodology
Baselane conducted an online survey of landlords and real estate investors in the U.S. within our network between June 18, 2024, and June 26, 2024. We surveyed approximately 2,116 investors and collected responses until achieving over a 10% response rate for a statistically significant sample size.
This landlord survey aimed to capture valuable insights into investing strategies, financing preferences, property ownership costs, and expectations for future real estate market performance. To ensure the data's accuracy and relevance, we used unbiased, non-leading questions and implemented branching logic to show or hide questions based on previous answers. Sentiment was assessed on a 1-5 scale rating inquiry ranging from 'Strongly Disagree' to 'Strongly Agree'.
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