From Dream Homes to Dream Leases: The Rise of Renters By Choice

3 weeks ago 10

There’s a peculiar narrative circulating the Internet about affluent lifetime renters who rent by choice rather than out of necessity. Stories are going around about people who prefer the freedom of movement and dislike the idea of having to do repairs abound. A few months back, Architectural Digest ran a story about lifetime renters, including a 71-year-old financial professional, a Forbes journalist, and a middle-class NYC family who love to travel.  

From an investor’s point of view, these are dream tenants: financially secure, likely to rent long term, and highly likely to look after a rental like it was their own home. Now, there is research data that suggests that “forever renters” are on the rise across the U.S. 

What the Data Says (Sort Of)

More specifically, properly management software company Entrata conducted a survey of 2,000 renters earlier this year and got some notable (and quotable) percentage points. The most-quoted one is that 41% of renters surveyed said that their concept of the American Dream had “nothing to do with homeownership.” And 20%, or 1 in 5, said that they anticipated becoming lifelong renters ‘‘by choice’’ rather than due to financial constraints. In fact, 17% of those surveyed said that what they specifically liked about renting was the financial freedom of not being tied to a mortgage. 

Many media outlets interpreted these figures as signs of a tectonic shift in Americans’ mentality, or a “paradigm shift,” as Rental Housing Journal excitedly called it. 

You can probably sense that what’s coming is a bit of skepticism about these figures. First, the Entrata survey’s sample population was all people who lived in large apartment communities of over 50 units. We can deduce that these were mostly urban renters. 

Coincidentally—or not-so-coincidentally, as we’ll see—Architectural Digest’s interviewed forever renters all lived either in NYC (Manhattan, no less) or Seattle, which is well-known for its thriving renting culture with plenty of choice. 

I have no doubt that being a lifelong renter in Manhattan, Seattle, or the nicer parts of Miami is indeed a viable and even attractive lifestyle choice, provided the renter has the means to sustain it. Not worrying about roof repairs or yard work is definitely a pro of renting, especially if you are frequently traveling. 

Moreover, the overall culture and how we fit into it plays a huge part in our decision-making. As someone who lived in a large city for many years, I know that renting not only doesn’t need destigmatizing there, it’s so normal that no one bats an eyelid. This was so much the case that yours truly, too, professed her contentment to be a “forever renter.”

Now, I live in the suburban Midwest—and I can confidently tell you that no paradigm shift regarding homeownership is happening here. That’s not because there are no options for renters. There are several new apartment blocks in the vicinity of where I live, most of them build-to-rent communities. The cheapest one in the least luxurious block is a small studio that costs nearly $1,300 per month—about the same as a monthly mortgage payment on a decent two-to-three-bedroom home in the area. 

Whichever way you cut it, it doesn’t make good financial sense, although the lack of available funds for a down payment without a doubt keeps many people renting. The long list of available apartments in build-to-rent blocks that came up during my search suggests that they are not nearly at full occupancy. Private landlords able to offer single-family homes have the edge in this area: Renters just get more space for their buck.

Is There a Cultural Shift Toward Renting? 

But the issue is not just the cost per square foot. The deeper issue is the ingrained culture of homeownership in this area—and many, many areas across the country. 

The further away you are from a major metro area, the more people tend to own their own homes than rent. And we all know that you cannot (want to) be what you cannot see. When everyone around you is a homeowner with a nicely maintained yard, you also want to be a homeowner. 

This isn’t just this writer’s opinion. Forbes, identifying the most- and least-competitive rental markets, points out that what’s normal for an area is a major factor shaping the demand for rentals. 

No one will be surprised to see New York in the top five most competitive rental markets. Of course, New York is also unaffordable, but it also is one of those places where renting for many years or even a lifetime, has been considered normal for a very long time. Renting there doesn’t necessarily correlate to low income, either: Some New Yorkers rent in the city while owning a home elsewhere; others live in rent-controlled properties and are happy with that arrangement.

By contrast, the Detroit-Warren-Dearborn metro area is one of the least competitive rental markets. As Forbes explains, “Renting isn’t as common as homeownership in the Detroit metro area, so renters won’t face strong competition in the market.” 

This long-standing preference for homeownership checks out in another statistic: Whether people choose to renew their leases or not—when it’s a real choice rather than one dictated by the unaffordability of other available options. 

RentCafe did a snapshot of the hottest rental markets recently, looking at percentages of occupancy and renewal rates.  There were some telling results: For example, suburban Chicago emerged as the hottest rental market in the country because it has both a very high rental occupancy rate (95.6%), and a high lease renewal rate of 69.5%. By contrast, Chicago proper, while it does have a high occupancy rate of 94.7%, has a lease renewal rate of only 58.7%. 

In other words, people have to live in central Chicago for all sorts of reasons, but they don’t necessarily want to stay. It’s also worth noting that the high lease renewal rates in suburban Chicago are due to the overall low affordability of homeownership in the area more than anything else. 

The figures point out that this lack of an overall appetite for long-term renting is generally more pronounced the smaller and more rural you go in the Midwest. For example, Des Moines, Iowa, has a lease renewal rate of 58.8%, and the state of North Dakota saw an even lower lease renewal rate of 55.8%. At the same time, it’s worth noting that all of these places still have an occupancy rate of well over 90%. This means that people rent everywhere, and investors don’t need to start worrying about not finding tenants in small-town Midwest. 

But it’s worth knowing that the vast majority of renters in these areas are almost certainly not renters by choice and mostly would like to move on to homeownership as soon as they can. If you’re an investor in these areas, you should factor the possibility of high tenant turnover into your planning. When you do find a tenant who is content to rent for a longer term, know that you’ve found a rare(ish) and valuable thing.

Alternatively, seek out places with an established or emerging culture of long-term renting. How to find them? Here’s a clue: Look for desirable, midsized metro areas where renting is both accepted and financially sound for the area. 

A good example would be a city like Grand Rapids, Michigan. It is not (yet) unaffordable and has enough going for it to sustain the desire to live there longer term. I personally know people who lived there initially for a short time but ended up staying for years. It also has a big student population, which contributes to the overall normalization of renting.

Final Thoughts

Far from a uniform paradigm shift toward renting as a choice, increased numbers of long-term renters mean mostly what they’ve always meant: a lot of people who would like to own a home but cannot. This isn’t true everywhere, though, and overall desirable locations do have higher-than-average numbers of people who are happy to rent for longer. 

If one of your goals as an investor is to reduce tenant turnover, then seeking out places with an established renting culture is well worth the effort.

Ready to succeed in real estate investing? Create a free BiggerPockets account to learn about investment strategies; ask questions and get answers from our community of +2 million members; connect with investor-friendly agents; and so much more.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.

Read Entire Article