How to know if a rental market is over-saturated?

Question

Hello BP Community,

I am not currently a real estate investor, but I'm at the point in my life where I'm trying to get my feet wet. My wife and I own a single family home in CA, and have enough cash to start investing in alternative avenues. I've been spending a lot of time researching Euclid, OH to potentially purchase a rental property between 80-100k (20% down). There are a few reasons I'm looking at this area. The waterfront development, and the Amazon fulfillment center which are close by.

Questions I have:

-When looking at Zillow, there are already many rental properties available that mathematically seem that they would cash flow positive. How do I know when a market is over-saturated for rentals? Key indicators, equations, etc. ?

-Is there typically a high rental property volume when near a high amount of manufacturing/distribution center jobs?

-What would be a decent cash-of-cash return percentage for first time investment?

-Things you wished you would have known when investing in your first rental?

We have no debt besides our current mortgage which is ~$2,400/month. We both have fairly high paying jobs so if there was a 10%+ vacancy it wouldn't be the end of the world, just looking to cash flow net positive on an annual basis.

I have experience renting out our primary residence on Airbnb. Considering short-term and long-term options.

Any help would be greatly appreciated!

Thank you,

Nathan Schattner

Ted Rud · Answer

One thing to keep in mind when browsing Zillow, Craigslist, Facebook, Rentometer, etc. to get rent estimates, is the time of year you are looking. Here in Fargo, ND, rental prices have already started decreasing with winter right around the corner. Most people don't like to move during the winter months. The rentals I mainly focus on are also located near colleges, so there is a big demand for 1 year leases beginning June 1st (right after college ends), or August 1st (right before college starts). From my past 3 years of experience renting out houses near colleges, if you can show your property 3 months prior to your new desired leasing date (for me that is before college starts or right after it ends), you will have your greatest chance of success.

One example from this past year is when I found out in the middle of Feb. that the current tenants did not want to renew a lease for June 1st. I posted the house on Zillow on a Weds, had 7 interested groups of college kids by that Friday, set up an open house showing that Sunday (5 groups showed up and 4 took applications), and had a signed lease in hand by the following Monday!

With regards to Cash-on-Cash return, that will vary from one market to the next. The 1% rule is followed pretty closely in the market I invest in (monthly rents ~ 1% of the cost of the property). With that being said, we target properties that will Cash-on-Cash return 10% or more. From what I've been seeing, we are a bit conservative with some of our estimates and have actually been seeing 12%-15%+ Cash-on-Cash returns on our purchases. We also self manage so that is a big cost that we are currently avoiding. At some point in the future, we will start using a property management company but we plan to self manage our properties until the rents have increase enough over time that we will still cash flow nicely even after paying an 8%-10% property management fee.

Domenick T. · Answer

I look at the historical vacancy rate relative to the surrounding areas and the state-wide average.  RentFax provides a report for this.

Alex Sabio · Answer

I have a home in Euclid, OH and I also live in southern Cali. I bought it last year for 74K and rent it out for $975. I had terrible property management (Monument Realty) and my tenant recently moved out. The one thing I’ll tell you is you do have to register your property with the city if you are renting it out ($200 fee annually). I received a violation in June (cracks in the driveway) and its been a pain in the ass to deal with. The first quote I got to fix it was $7,000! Now I’m working on getting more quotes. Let me know if I can help.

Tom Ott · Answer

Working a lot in Euclid, I can tell you, that it is not oversaturated. One thing to keep in mind is that there is a high demand for rentals. Also, if your proeprty is renovated nicely you will stand out amongst some of these other properties. Some investors who live OOS throw some paint on the wall and call it a rental. Tenants can tell the difference. The renovated Euclid properties I work with get rented out in about 1-3 weeks.

Amazon moving in has been HUGe for the area. Don't forget there is a second, even larger, a distribution center in Cleveland. It is in North Randall near Maple Height.

Good luck to you!

Nathan Schattner · Answer

Perfect - thanks!

Taylor L. · Answer

Falling rents are a great indicator of oversupply. As are units that sit on the market for a long time. If the professionally managed apartment complexes are giving out a lot of move-in specials, that's another big indicator.

Zillow might not be the best indicator for that particular market, so you should also look at other places where rentals are posted. Apartments.com and Craigslist can be good as well.

I'd be more concerned about jobs and industry in the rust belt. What is the change in population and jobs in that market over time?

You might want to look at reputable turnkey companies as well. Even if you don't end up buying turnkey, you can look at the markets they're in and learn from that.

How to know if a rental market is over-saturated?

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