Investing in SF Real Estate - Why do renters rent?

[Ravi Renduchintala]

If you are investing in single family real estate, then you know that rent payments are the cash-flow engine of your investment. So, let us take a look at the motivation behind renting. The first one is nest egg-reluctance. This simply means that families are reluctant to take a big piece of their savings and plunk it into a mortgage. Why? Because of personal economic uncertainty. These families would rather keep their nest eggs for a rainy day if there is job loss or income reduction. In a home buying situation they no longer have access to these funds since the days of using your home as an ATM machine are over. So, in many instances, these renter families may be paying more than whatever tax deductible mortgages might cost them. But they still choose to rent. The second reason is the suspension of appreciation. What we mean by this is that renters no longer believe that home prices are going to appreciate dramatically, allowing them to keep moving from starter homes to bigger and better homes cashing in on home price appreciation. Of course a sustained period of home price gains may soften this attitude. But for the present, this is the new normal. The third reason is flexibility. The next job can be anywhere and in this slow growth economy many folks can't sit back, wait and be choosy. That rented house is easier to get out of than a thirty year mortgage which would involve selling the house in order to move lock stock and barrel. It becomes a big impediment to mobility.

Then there are those who can't afford the mortgage, the taxes, the Home Owners Association and related fees. They simply rent at their comfort range. Finally, there is post-mortgage trauma. These are families that have been burnt by foreclosure and other unfortunate loan repayment related ailments. It's going to be a while before they slap on a mortgage. They do like renting houses, though.

So what does all of this mean for a real estate investor? It means that your cash flow engine for rental real estate is sound, provided you buy the right house, in the right neighborhood, with the right manager.