Why The Plunge In Apartment Vacancies Is A Really Big Deal


Photo: Calculated Risk

This morning we mentioned how apartment vacancies had fallen to their lowest level since 2001, offering up yet another reason to be (somewhat) bullish on housing in 2012.But it’s a bigger deal than just the obvious point that lower vacancies = more need for construction.

Karl Smith at modelled behaviour has a great post about the inevitable upward pressure on rents, and what higher rents mean for the economy.

This makes single family rental conversion more profitable. I was actually in this business for a while. It’s a pain in the arse. It really is. You can see why almost all single family is owner-occupied. However, there are times when the profits are just too juicy to pass up.

There are times when the current rent – current rent – will pay your mortgage, taxes, insurance, maintenance plus a buffer on a property. This means you need no rent increases to make this deal work and the property could literally be worthless when the mortgage is up and you still would have made money.

You can’t walk away from it. Investors won’t walk away from that. Its too juicy. Even if it does mean 4am calls about a domestic dispute that wound up smashing your windows and now the kids are freezing.

They make buying make more sense. Folks have to live somewhere. You look at rents and they are screaming higher. Then you look at a potential mortgage, lots of young couples will say – who cares about the property value – the mortgage alone makes it worth it.

Don’t underestimate the ability of wide-eyed young couples to do this. I had a family member just buy a home in what we affectionately call “the hood.” Her and her husband have solidly middle class jobs. The mortgage, however, was lower than their rent.  When you are young and feel like you can handle the neighbourhood, whether it is full of foreclosed homes or folks engaging in off-label pharmaceutical sales, you will take it.

So everything feeds into everything else. The tightening in apartment-world will turn into good news in the regular home-buying world.

Read Karl Smith’s full post here >

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