The Up Side Of A Down Market

At the start of the decade, vacancy rates for rental units in the Twin Cities hovered near an almost incomprehensible two percent. Demand for places to rent came probably about as close at it could statistically to 100 percent.

As a result, landlords didn’t have to offer very much in the way of perks, upgrades or property improvements. Rent went up every year. And owners could almost do as little as stick a sign in the front yard and have the new tenant move in the front door while the old loaded things out the back.

Times changed. Low interest rates and the boom in housing wreaked havoc on vacancy rates. Qualifying for home loans was comparatively easy. It made more sense for a tenant with a good credit score to buy a property rather than rent. After all, that way he or she could realize the tax benefits and appreciation that come with property ownership.

Needless to say, vacancy rates skyrocketed. While low compared to U.S. markets, the cities of Minneapolis and St Paul spiked to seven and eight percent, while the outer ring suburbs saw double digit numbers in several types of units.

To attract tenants, landlords started offering incentives. If a renter signed a one-year lease, he might get the first month free. Some landlords gave away televisions, free cable, and when all else failed, decreased the amount of rent until someone decided to move in. Rent increases became almost unheard of.

Here’s the good news about today’s down real estate market. Fewer people are buying houses. Some are even losing their houses to foreclosure. Those folks still need places to live. So they rent. Demand goes up, and inevitably, so does rent.

In the tight credit market, it’s also more difficult for people to get loans. Which means there are fewer buyers for rental properties, which means purchase prices are going down.

Translation? In the short term, I’m seeing small multi-family properties on the market with very good cash flows. In the longer term, those properties will appreciate rapidly when the market rebounds. (And c’mon — in all the negative press, name one single pundit who’s said it’s never coming back!)

Seems like the best of all worlds if you’re an investor.