Is My Market Killing itself?

Question

I live in Columbia, Missouri.  It is a college town.  That simple.

It seems that rents here may be just a bit inflated (at least in my opinion).  I am looking to invest in a duplex. (Live in one room and rent the rest out.)  The numbers seem to work in this scenario.

My real question, however, deals with my market.  In the past year or two, there have been several large apartment buildings put up near campus, and I am aware that there are plans to put up at least 3,900 more bedrooms in the coming years.

It may be hard to tell if you aren't in this specific market, but could this adversely effect my rent rates?  I was speaking with someone who knows more than me on the subject, and he said that they are basically building there own downfall.

So is there a trend here? Is there a way to measure the trend?  Or is it just a "jump in to find out how cold the water is" situation?

Any knowledge is welcome and thanked. :)

Ethan Peyton · Answer

Thanks Shelby!!

Account Closed · Answer

Hi Ethan - I am very familiar with the Columbia market and know exactly where you are coming from.  It seems there are new apartment complexes popping up left and right...

The above comments are great suggestions - and also something else to think about.  Columbia is a college town with a continual growing university.  This past year, I think they hit another high in enrollments.  While the apartments keep coming, the students also keep coming.  Investing in a duplex that you live in as well - seems to be a great idea in that market.

Good luck!
Shelby

Ethan Peyton · Answer

Both great answers.  I had not thought of these angles.  Thank you for the information.

I guess no matter how much I know, it will be impossible to know everything.

Kyle J. · Answer

Since I don't know your market specifically, I'll just throw out some general thoughts on the subject.

Could 3,900 new units affect the rental rates?  Maybe.  Maybe not.  That's a lot of units.  I don't know the size of your market or whether there is already a rental housing shortage, or a surplus.  Or whether people are moving into your market, or out of it.

One of the criteria that may play the biggest role in answering your question is whether or not your property(ies) would tend to be in direct competition with apartments.  By that I mean, if you typically own/rent out small 1-2 bedroom properties, well I would think you might be more affected by the going rates for apartments since people could easily choose to live in one of your units, or an apartment if it was substantially cheaper.

On the other hand, if you rent out larger 3-4 bedroom single family homes, then the going rates for an apartment might not be that relevant.

As an example, I have several good-sized 3 bedroom single family homes with large yards that are currently being rented by families with multiple children.  These tenants are not at all interested in living in an apartment due to the size of their family, furniture, etc.  So the cheaper apartments nearby are simply not competition for me.

However, I do have one smaller 2 bedroom single family home that is rented out to a single occupant.  There are also several large apartment complexes nearby.  Could those apartments affect the rate I can charge for this home and even possibly lure my tenant away with a cheap enough rate?  I'd say it's much more likely.

Anyway, just some things to think about before you "jump all in".

Jon Klaus · Answer

I don't know your market, but consider the national trends over the past several years.  The banking crisis hit about the same time as the real estate down turn.  Commercial construction came to a near stand still for about 5 years.  So did housing construction.  Household formation slowed down as many people/families doubled up or adult kids stayed with their parents or moved back in with them.

Even so rent demand picked up, because we went from around a 67% home ownership rate to about 63%.  A very big swing in just a few years.   Home sellers and foreclosure people came into the rental market.   However, population growth didn't slow down very much.  We still grew the US population by about 15,000,0000 over the past 5-6 years.  But new houses and apartments didn't get built to match the growth.

Result:  Pent up demand for new housing, now that banks are lending again, the stock market is inflating, job growth is back, etc.  A whole lot of homes and apartments are going to get built to catch up to this demand.  They already are.  Yet rents are still rising.  It will take some time for the new supply to catch up with demand.

Then we get to repeat the cycle, but with a few yet unknown twists.   And unknown timing.  Make the trend your friend.