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What’s the Best Percentage of Owners & Renters for Capital Growth?

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Investment Property: Owner Occupier vs. Renters

The renters’ proportion is the share of all tenants living in a particular market versus all dwellers and the the other part refers to the percentage of owner-occupiers. Say a suburb has a population of 1,000 with 700 as owners-occupiers while 300 are tenants, the proportion of renters would be 30%.

Owner-occupiers typically care for their properties better than their tenants. Thus, they tend to improve or enhance the property even beyond the clear functional sense. The benefit of overcapitalisation increases the overall housing quality in a community controlled mainly by owner-occupiers.

With a low percentage of rental properties, it follows that competition is lesser if an investor intends to offer rental accommodation in the area. Thus, renter proportion is considered a current supply indicator.

Several investment experts will attest that there’s a particular mix of renters and owner-occupiers that make a suburb a better deal than others.

Let’s take a look at this example:

Once a market covers about 65% to 70% as owner-occupiers, this becomes the perfect condition when it is the best time for the investor to sell.

However, there was no available information to lend truth to these claims. Anyone is quite happy sharing their opinion, less any proof of evidence. This presentation seeks to provide data with an accurate and detailed objective of the ideal proportion so you may go and seek more of these suburbs.

A metric calculation comparing how many renters live in a suburb from the owner-occupiers in the exact location is something that comes from the census data.

Most experts agree that buyers should not consider markets where many renters vs. owner-occupiers exist. However, the debatable issue is the ideal ratio or combination of the two.

So, what would be the best combination?

Some say it’s about 25% renters, and others believe it should be 30% renters.

But the best ratio is ZERO if you are pushing for CAPITAL GROWTH.

Let’s talk about Supply and Demand

If there are potential renters and there are few available rental properties as options, these two are likely to happen:

  • Low vacancies;
  • Increased rental prices.

The market dynamics are still the same if one is after capital growth. If the buyers’ demand is more significant than the available properties (supply), the likelihood of rising prices for the properties is quite apparent.

It is a simple concept – a fundamental economics concept that one needs to fully understand when looking for the next area to buy an investment property. One has to do extensiver research on supply and demand, otherwise, results can be depressing.

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The ratio of renters to owner-occupiers denotes the number of rental properties available or supplied in its suburb. It’s a supply indicator. But some have interpreted this figure as a demand indicator as they have translated the percentage of renters as indicative of how attractive the location is to renters. So, be careful when interpreting such data.

Generally, one doesn’t want to compete with a co-landlord. Ideally, the investor likes to be the only one that offers a rental and that tenants will be jostling among each other to plunge into his property at the open inspection. The investor expects his proprety manager to build up a good list of applicants and select the best renter for his property. This means that he prefers the percentage of tenants against owner-occupiers to be as low as possible.

The other point of view

Undeniably, most experts do not want the renters’ ratio to be as high as possible. But most people get muddled up on what the metric stands for, as they believe that it translates to be both supply and demand. They think of it as a bit of supply, and yes, a bit of demand, too. Thus, they conclude that there’s some ideal mix of tenants to owner-occupiers.

So, they prefer to get some renters in the area. They tend to believe that the fewer the tenants are, the less attractive the place is for them. It’s like zero tenants imply that there’s something terrible about the location or suburb, that’s why it’s not attractive to any renters.

To correct this point of view

There is no problem having a suburb filled with owner-occupiers, even 100% is ok. Admittedly, both owner-occupiers and tenants basically want the same thing:

  • Schools;
  • Shops;
  • Hospitals;
  • Parks;
  • Safety surroundings;
  • Peaceful and quiet neighbourhood;
  • Proximity to various job opportunities.

None of the features in the list are specific to owner-occupiers and not as uniquely attractive to renters as well. Both the owner-occupiers and the tenants would surely want to move and reside in a particular suburb of their choice.

Just to be clear, when one says ‘zero renters,’ it doesn’t mean there is NO demand from renters at all. It just means there is NO supply of rental properties.

The percentage that the tenants represent is a supply indicator, not a demand. Thus, it doesn’t signify how seriously the renters would like to live in one specific area. In other words, it doesn’t indicate the demand available for rental properties. On the contrary, it represents the number of rental units already available — the supply of rental properties.

Imagine if there is only one investor that owns a property for rent in the entire market. Each tenant who wants to rent in the area would come to that person. Some will still wish to rent, even though there are no tenants in a suburb. This situation just strongly suggests that there’s remarkably under supply or lack of rental properties available. It seems that the suburb is a beautiful area to live in, or it wouldn’t have owner-occupiers in the first place. Got it?

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Key Takeaways

Renters mean rentals for the landlord. Rental properties denote supply in the market.

No rentals would mean more of a supply shortage than a demand shortage. It’s highly liklely that renters wanted in but unfortunately couldn’t get in.

Be careful when interpreting supply and demand factors.Supply and demand must not be mistaken for each other, else the performance of your investment will be going the wrong way too. % of renters to owner occupiers is a supply indicator. Do not interpret this metric as the demand for rental accommodation.

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