A significant portion of the American housing stock is rental homes. Over the past 50 years, a third of families in the United States have lived in rented housing, according to a study presented by the nonprofit organization Brookings.
Rental rates rose after the global recession (2008-2009) and remain relatively high today. The share of renters has recently increased among some groups that have traditionally been more likely to be homeowners, including middle-and high-income families and middle-aged people.
There are still noticeable differences between the typical owner of their own home and the tenant.
The fund of rented housing is diverse, but the structure is significantly different from what is used to, for example, in Russia.
The main thing: almost half of the rented housing accounted for by small buildings are single-family homes and townhouses with two or four sections. Only 23% of the properties are buildings with 20 or more apartments. Interestingly, about 5% of rental properties are mobile homes.
At the national level, only a small proportion of rented homes have serious problems with heating, running water or electricity. In recent years, tight restrictions on new construction have prompted investors to renovate and upgrade old apartment buildings, especially in high-demand locations.
When choosing a property for investment, it is important to take into account the differences between regions in terms of the size of the lease. The highest median monthly rent is in large urban counties on the West Coast. It is lower in the Midwest and South.
Renters' incomes are generally higher in expensive regions, but even they can't always compensate for a higher level of rent. For example, residents of San Diego (California) rent 36.2% of their income, an apartment or a one-bedroom house here costs an average of $2.1 thousand per month, and rates continue to rise.
Historically, the US government has spent more resources on supporting homeowners than tenants, despite the fact that the latter have lower incomes on average. Currently, there are various subsidies for homeowners at the federal level, in particular, the deduction of mortgage interest from income subject to federal taxes (MID). Most of the benefits of MID go to high-income families.
Low-income households receive rent subsidies. Now they cover about a quarter of such families. In all US states, this category of renters is struggling to cope with rent payments. According to the Department of Housing and Urban Development, nearly 20.8 million Americans spend more than 30% of their income on housing. About 25% of tenants spend more than 50% of their income on it.
Since the beginning of the pandemic, the situation of citizens with low wages has deteriorated significantly. 39% of those who worked in February 2020 and had a family income below $40,000 per year reported losing their job in March 2020. In November 2020, 9 million tenants delayed their rent.
At the same time, in some large cities with traditionally high prices, rental rates have decreased, and in smaller and cheaper locations, a constant increase has been recorded. A striking example is San Francisco, where over the past year (since March 2020), rent has fallen by an average of 24.1%, now a one-bedroom apartment can be rented here for $3.2 thousand per month.
The situation was partially saved by the support measures. The federal CARES Law, passed in March 2020, increased the amount of unemployment insurance and expanded the number of its recipients. Under the same law, the federal government issued millions of low-income Americans with one-time incentive checks worth up to $1.2 thousand. In December 2020 and March 2021, Congress passed additional measures.
In 2020, the government temporarily restricted evictions, which are the main way to deal with defaulters. Also, throughout the United States, authorities at various levels have launched additional funding programs for struggling tenants. However, these funds were enough to support only a small part of the population.
The pandemic is obviously a unique circumstance, but even in more stable times, such tenants are becoming a problem for private investors. Especially those who own long-built properties with low rents. Payments for repairs and maintenance are very significant for this category of housing, and if tenants are not found or they do not pay, the owner risks going into the red.
The peculiarity of the rental market in the United States is that the state plays a minor role in it. Most of the housing is owned by private owners from individual to institutional investors (for example, various real estate funds - REITs), and it is built and financed by them. Even in the economy-class rental sector, which caters to low-income tenants, most properties are privately owned.
The introduction of marginal rental rates is not very common in the United States, although this topic has been frequently discussed in recent years. Some major cities, such as New York City, San Francisco and Washington, have local rent control programs. But in more than half of the states, laws prevent local governments from imposing restrictions.
The profitability of long-term rental housing in the United States is relatively high. So, according to the ATTOM Data Solutions report for the first quarter of 2020, the average annual income from renting a single-family home was 8.4% per annum. Although the results vary greatly from region to region. For example, in the traditionally expensive locations for buying a home (like San Francisco and New York City) the return on rent will be 3-4% per annum.
For an investor located abroad, an object that brings a stable income and requires minimal personal participation is traditionally optimal. To search for such a property, it is useful to consider the following.
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