When Do Investors Buy Rental Properties? Insights From A Theoretical and Empirical Investigation of Housing Market Breakeven Vacancies

Real estate is an attractive investment asset because it provides positive cash flows from rents and prospects of valuation gains. This paper studies the housing market breakeven vacancy, the extent to which an investor needs to rent a property to equalize its costs and benefits. As a metric in rental property investment screening, investors are more likely to buy when the breakeven vacancy is high such that the transaction has a promising prospect of breakeven or better. An original asset pricing model is developed to define the housing market breakeven vacancy. The theoretical model reveals that the breakeven vacancy is not static but nonlinearly determined by housing price growth, price-to-rent ratios, interest rates, operating expenses, and rental income taxes. While higher housing price growth, lower interest rates, and smaller operating expenses lead to larger breakeven vacancies, price-to-rent ratios and rental income taxes hold theoretically ambiguous effects. Furthermore, housing market breakeven vacancies are estimated using country-level data from 12 developed nations and regional data from 30 U.S. metropolitan areas. Empirical analysis suggests that declining interest rates and rising price-to-rent ratios have fueled the ascent of breakeven vacancies until 2022, while house price collapses around crises have led to slumps in breakeven vacancies. Lastly, the housing market breakeven vacancy estimates are highly correlated with actual investment home purchases in the United States at national and regional levels, highlighting the practical relevance of this metric for income-producing property investments.