GVP Insights: Discount to Homeownership

Los Angeles, CA

Gelt Venture Partners

This version of GVP Insights aims to shed light on the evolving landscape of multifamily fundamentals, particularly focusing on the theme of “Discount to Homeownership”. Since March of 2022, the steep rise in interest rates has not only reshaped the dynamics of the housing market but has also significantly widened the pool of renters. One noteworthy trend our analysis reveals is that millennials are delaying the traditional milestones of homeownership and family formation and opting to rent for longer durations.

The New Reality: Renting as a Strategic Financial Move

1. Financial Flexibility: With interest rates on the upswing, renting provides a level of financial flexibility that has become increasingly attractive. Our data shows that many individuals are strategically choosing to allocate resources to investments with potentially higher returns, rather than tying up capital in homeownership.

2. Delayed Family Formation: Millennials are forming families later in life, and this shift is influencing housing choices. Renting allows for the flexibility needed to adapt to changing family dynamics, providing the freedom to explore different neighborhoods and housing options.

Take our recent acquisition (closed 9/1/23) in Orange County, CA. The median value for three-bedroom townhomes in the area is $850,000. With interest rates for mortgages around 7%, tenants would be paying more than $5,500 per month in mortgage with principal and interest and that doesn’t include property taxes which would be roughly another $800 per month, and insurance another $100 per month making their all-in costs around $6,400 per month to own a three-bedroom townhome inclusive of $200k down payment. After Gelt completed a fresh interior renovation (shown below), our tenants can rent a comparable 3-bedroom apartment with attached parking for $3,850 per month. That is a 60% discount to homeownership in the area. For reference, Gelt was able to achieve a $500 monthly premium for a renovated unit versus a non renovated unit.


The Economics of Renting vs. Owning

1. Affordability Metrics: Our analysis demonstrates that, in the current market conditions, renting often makes fiscal sense compared to owning a home. The upfront costs, coupled with ongoing maintenance and property taxes associated with homeownership, make renting an economically viable option for many.

2. Investment Diversification: Beyond financial considerations, renting enables individuals to diversify their investments. By directing capital towards alternative investment opportunities, one can potentially achieve better overall returns than through the traditional path of homeownership.

Charting the Path Forward

As one economic cycle comes to end and a new one begins, our investment strategies are positioned to capitalize on emerging opportunities in the apartment rental market. The Discount to Homeownership underscores the importance of a flexible approach, and our team is dedicated to uncovering investments that align with these shifting trends.  

Should you have any questions, require further insights, or wish to discuss potential investment strategies tailored to your portfolio, please do not hesitate to reach out to our team. We are dedicated to providing you with the expertise and support needed to make informed real estate investment decisions in this dynamic landscape. Thank you for your continued trust in our analysis and guidance.

View the full article, click here.