Whenever you plan to invest in residential rental properties in any geographical area, particularly for multi-unit residential rental properties, you must consider these three vital elements to make informed decisions because these influence the value of a current and future value property and its potential income.
- Supply
- Demand
- Vacancy Rates
The relationship between vacancy rates and supply and demand is straightforward. Your understanding of present and future supply, demand, and vacancy rate patterns will benefit your return on investment.
Demand
Keeping close tabs on long-term economic patterns is crucial from an investment perspective. Most of the time, the availability of jobs in a particular area drives housing demand.
If we look at it from a regional or local perspective, improving employment prospects are often followed by a rise in housing demand. People looking for a job tend to look for housing in areas with more job opportunities. In a similar vein, improved income levels are often associated with higher prospective values for multi-residential housing units such as studios, one-bedroom, two-bedroom or more.
Supply
In your research phase, take note of the types of units offered (studio, 1-bed, 2-bed, and so forth), the number of units available, the current rent levels in effect, the property amenities, and the location features that are offered. Having a basic idea of how much revenue and cash flow you may expect when purchasing or building a multifamily residential building in that location can help you make rational decisions. And can establish competitive but profitable prices for various units while also providing the optimal feature or amenity mix to attract that target demographic.
Vacancy Rate
Supply and demand directly impact vacancy rates and might also be influenced by political, economical and seasonal factors. Like local government decisions on zoning and development in a particular area will affect the construction and development of residential or rental properties. Additional factors like inflation, unemployment and immigration rates also impact these. If the demand for residential properties is strong, vacancy rates will be low, and the rents will increase, increasing the property values. Conversely, if the demand is weak, vacancy rates will be high, and the rents must decrease to attract and retain tenants and lowers property value. In a similar vein to demand, if there is a restricted supply of homes available for purchase in the market, more people may prefer to rent in general due to the limited number of purchasing options available. With a greater demand for any property than there is supply, competition among buyers will increase, which will drive up the property’s value. Indirectly, a restricted supply will drive up the cost of renting space by increasing competition.
For example, consider an urban neighbourhood with low demand for residential properties and high vacancy rates due to a lack of readily accessible local public transportation for commuters to and from work and school. According to municipal plans, improved transit services are expected to be operational within the next three years as part of development planning. This will improve the potential investment value of the area. Hence being aware of how municipal infrastructure improvements may affect rental housing demand can help you evaluate the value of your investment at present and in the future.
Additionals
Demographics and population trends also provide a realistic picture of how property values and income distributions will evolve. It is vital as an investor to consider household formation rates and the size of households to determine the mix of unit sizes in a particular development. Observing population shifts from one area to another and the overall migration pattern can provide valuable information.
Thorough market research and evaluation are necessary to decide the type of property to invest in, its location, and the features and amenities. The nature of the project determines the breadth of the research. Smaller multi-residential projects, such as those with only a few apartments (five or fewer), may not require comprehensive market research but relatively localized assessments. To recapitulate, it’s imperative that you do your homework on market factors like demand, supply, and the vacancy rate before you invest any money.
