It's been a year for the record books when it comes to home prices in the United States. According to data from Zillow, the average home price increased by 13.2% year over year in May. That's the highest rate of increase since Zillow started tracking home price data 25 years ago. To put some numbers behind this, if you paid $300,000 for a home in May 2020, it could be worth nearly $340,000 today if its value moves in line with the U.S. average. That's a big one-year gain.
However, not just home prices have gone up. Rent is rising fast as well, especially for single-family homes. Here's what the latest data is telling us and what it means for real estate investors.
Single-family rents are rising
The COVID-19 pandemic has led to rising rents, and that's especially true when it comes to single-family homes. According to CoreLogic, the average single-family rent is up 5.3% over the past year as of April. However, when you only look at detached single-family homes -- not townhomes -- the increase is a much higher 7.9%.
In certain parts of the country, the rent increases were even steeper. In Phoenix, single-family rents were up by 12.2% year over year. Tucson, Arizona; Las Vegas; and Atlanta also had above-average rent increases. However, it's worth pointing out that the same metropolitan areas with the strongest rent increases are also the places where home prices have generally risen the most.
What does this mean for real estate investors?
Obviously, this is welcome news for investors who already own single-family rental properties. This data implies that if you have a single-family home that rented for $1,500 a year ago, you should be able to charge about $1,620 per month now. This type of rent increase can make a big difference in an investment property's cash flow.
It's also good news for investors in real estate investment trusts (REITs) like Invitation Homes (NYSE: INVH) and American Homes 4 Rent (NYSE: AMH), which specialize in single-family rental properties. Not only are the values of the properties these companies own rising fast, but they are generating more income. This combination should lead to excellent total returns, at least in the near term.
On the other hand, the answer is a bit more complicated when it comes to investors who want to purchase single-family rental properties now. For one thing, while rent has increased by 7.9% for the average detached single-family home, the average price of such a property has increased by 13.2% -- in other words, the rent you can expect from a rental property hasn't increased quite as fast as the cost to buy one.
In addition, it's worth pointing out that mortgage rates have fallen a bit over the past year, but likely not enough to offset the higher cost of single-family homes. According to Freddie Mac, the average U.S. 30-year mortgage rate the week of May 27, 2021, was 2.95%. In the same week of 2020, the average was 3.15%.
Is now a smart time to buy a rental house?
The short answer is "it depends." Even though rent has increased and mortgage rates have slightly declined over the past year, home prices have risen even faster. If you're looking into buying a single-family rental property, it's still just as important as ever to perform a thorough cash flow analysis before deciding to invest.