What has caused 10-20% rent growth and will it last?
Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
What has caused 10-20% rent growth and will it last?
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I didn’t even think of @Charles Seaman 2 answers, or at least not first.
My first 2 were more and more regulation is driving “mom&pop landlords” (85% of rental property owners own less than 10 properties.) to sell their properties to owner occupants, driving down available inventory. (Sales inventory is down 90% give or take, how much is rental inventory down? Don’t forget, every eviction prevented is one less unit available and we’ve heard for almost a year about the millions “at risk”. Those that are left are pricing in the risk of their tennant not paying in the future. Turns out actions have consequence, maybe even “Unintended consequences” I think I read that somewhere.
So you’ve got 4 reasons already. I’ll toss in a bonus one. If you own a $200k property bringing in $1200/mo you’re probably doing ok by most metrics. But if 5 years later that property is worth $400k and it’s brining in $1300/mo you might figure out you earned 12 years of rent in appreciation if you sell, and maybe that’s 50 years of rental income.
So. Unless you think inflation will magically go away, the federal government will stop spending trillions it doesn’t have, the local governments will stop trying to buy renter’s votes by giving them more and more “rights” I don’t think prices can do anything but skyrocket. Is a 20% rent increase unexpected in a world where gas prices are up 50% and people are asking for a 100% increase in the minimum wage?
30 Replies
- Apartment Syndicator · Charleston, SC · Member since 2017 · 519 posts · 631 votes5y
@Bobby Larsen While fundamentals might play a part in the substantial rent growth that's being realized in many markets throughout the country, it is my belief that the two (2) biggest factors are inflation and a lack of rent growth in 2020 due to uncertainty. With $6T added to the currency supply, it would be tough not to see prices increases. When you couple that with more investor and consumer confidence, you get what we have now.
I didn’t even think of @Charles Seaman 2 answers, or at least not first.
My first 2 were more and more regulation is driving “mom&pop landlords” (85% of rental property owners own less than 10 properties.) to sell their properties to owner occupants, driving down available inventory. (Sales inventory is down 90% give or take, how much is rental inventory down? Don’t forget, every eviction prevented is one less unit available and we’ve heard for almost a year about the millions “at risk”. Those that are left are pricing in the risk of their tennant not paying in the future. Turns out actions have consequence, maybe even “Unintended consequences” I think I read that somewhere.
So you’ve got 4 reasons already. I’ll toss in a bonus one. If you own a $200k property bringing in $1200/mo you’re probably doing ok by most metrics. But if 5 years later that property is worth $400k and it’s brining in $1300/mo you might figure out you earned 12 years of rent in appreciation if you sell, and maybe that’s 50 years of rental income.
So. Unless you think inflation will magically go away, the federal government will stop spending trillions it doesn’t have, the local governments will stop trying to buy renter’s votes by giving them more and more “rights” I don’t think prices can do anything but skyrocket. Is a 20% rent increase unexpected in a world where gas prices are up 50% and people are asking for a 100% increase in the minimum wage?
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Charles Seaman Rent is a component of inflation (one of the largest) so rent growth leads to inflation, not the other way around. Unless you're saying that material costs have increased and as a result, there's less construction and lower future supply. This does occur but would lead to gradual increases over time.
The $6T could play a factor if it leads to higher wage and employment growth but without renters making more money (higher wage growth) or there being more renters with jobs (employment growth), what is it that's actually shifting the supply and demand of rentals? I try to look at it as simple supply and demand, basic economics 101. I could see how the enhanced employment and stimulus checks of the $6T have increase demand but those are temporary measures that would lead me to believe rent will decline after it's over.
@Bill B. You've made a few points, so let me try to address them one at a time. 1) Fewer mom&pop landlords - In the scenario where a mom&pop owner sells there property to an individual, there is one less renter and one less rentable property. Wouldn't this be a wash? 2) Evictions - I agree with you on evictions, which is mostly why I'm nervous. If 5% of renters are not paying rent, that's basically the same as reducing the total supply of housing by 5% which would have a huge impact. Does this mean that when the eviction moratorium ends and 5% of renters are evicted, there will be a 5% increase in supply and bring rents back to where they were before pandemic? 3) I'm not sure what you mean with the $200k scenario. 4) Inflation - how does the government spending money impact rents? If a person earns the same and works the same, how does this allow him/her to spend more on rent? 5) Regulation - How does current government regulation impact rents? If you're saying that government regulation disincentives' construction and thus the slows the supply portion of supply & demand, I again completely agree. However, supply is a long term factor so I don't see how it would increase the long term average rent growth of 3% to this years 10-20%. 6) Wage growth - Despite the increases to minimum wage, wage growth is averaging 3.5% so it is hard to imagine. I suppose your point would make sense in certain markets and class-C properties where the average renter/household is earning minimum wage and seeing a 100% increase over the next 3-5 years.
#1. Not a wash, because he doesn’t sell to a renter. He sells to the person escaping a high tax bad weather state or someone finally leaving their parents house.
#2 you forget, those 5T of renters evicted need a new place to live. So you’ve also increased demand 5%
#3 the $200k scenario says owning rental properties is becoming a worse investment as the returns are diminishing. That means less people will do it, so there will be less supply.
#4 when the government spends money it doesn’t have it had to create that money. When it creates that money it causes inflation. When it causes inflation wages go up. When wages go up they can afford more rent. They are charged more rent because the landlord is paying more for painters, plumbers, landscapers and handyman because they are being paid more.
#5 regulation causes people to get out of the landlord business or never enter it. Convert properties back in to owner occupant and raise rents to compensate for increased rent. Imagine if I’m renting you a home and if you’re one day late teh cops come NS arrest you and pay for the whole house to be cleaned and made ready to rent at your expense. That’s rent A. Now imagine if you stop paying it takes 6 months for me to get you evicted after spending $5k on lawyers and there is zero chance of me recovering any of that money. That is rent A + X where x gets bigger and bigger as there;s more regulation.
#6 When minimum wage goes up 50-100% what do you think happens to the “experienced workers” that were making 150-200% of minimum wage? They’re darn well getting 25-50% increases. They’re not going to work for the same as the guy on day 1. If the average rent growth was 3.5% when inflation was zero and now it’s 5% you’ve certainly made a case for 8.5% rent increase.
Replace rent with gasoline and justify a 50% increase. Food’s up, cars are up, travel is Up.
You have to point to something that will stop it from continuing.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes5y
Everyone is working, collecting bonus unemployment, collecting stimulus, and does not have to pay their debts. Saving and the stock market are at all time highs. And homes are not affordable. We have a consumer and debt driven economy...and consumers are loaded and debt is free. There is no mystery here.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Mike Dymski Less people are working now than they were pre-pandemic.
All valid points on collecting bonus unemployment, collecting stimulus, and not paying debts. What happens to rents after bonus employment/stimulus ends and people have to pay debts?
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes5y
The people who are not working are making $17.50 per hour on unemployment; so, there is no incentive to go back to work and make less. The job market is insanely hot and employers are having to pay sign-on bonus at levels never contemplated before.
I don't know what happens next and can't control it. But I am very confident that affordable rents in decent locations will always be in demand. And adding value in this market is extremely lucrative.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
#1 - This could be an argument for specific cities but not across the entire country.
#2 - Most professionally managed properties exclude individuals with evictions on their record. Most of the time evicted tenants end up renting rooms and have roommates. Demand definitely won't be increasing as a result of evictions.
#3 - This is an argument against real estate prices. If a rental property is a bad investment, it doesn't disappear. It sells for less.
#4 - Inflation is a measure of rents and a basket of other goods/services. Inflation DOES NOT cause rents to increase unless you're referring to it's impact on new construction. Just because operating costs go up, it doesn't mean they can choose to increase rents and make more money. They can increase rents but vacancy will drop and net income with either stay the same or decline.
#5 - Same answer as #4. If regulations cause expenses to go up, a landlord cannot simply increase rents to cover those additional expenses. Overtime, there will be less investment in the industry and less new construction which will lead to higher rents but that is a long term shift.
#6 - What likely happens is automation of the minimum wage jobs and a smaller workforce.
Oil and gas prices are impacted by entirely different factors so it's difficult to draw a correlation but they're up mostly because of OPEC cuts. Used car prices spiked and have already flattened- up only 0.2% in July. If rent growth flattens then there's going to be a lot of surprised investors this year. But again, difficult to draw a comparison between housing and cars. People delayed buying cars last year. Did they delay having housing?
Before I point to something that stops the trend of this past year, I need to be able to point to something that has led to the rent growth we've seen this past year and all I can point to right now are temporary unemployment/stimulus.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Mike Dymski Again, I agree with you Mike. What makes me cautious is that those factors are all temporary and ending in the next 1-2 months. Value-add is still a great place to be but most primary and secondary markets are trading at 3-4% cap rates today because people are assuming significant rent growth going forward.
- 5yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
The 10-20% rent growth is somewhat area dependent. We are seeing an influx of people in the PNW and they need a place to live. I'm not talking retail and restaurants, but professionals with better paying jobs. I imagine some will buy houses and they will get replaced by new tenants. Will this end? Sure; but who knows when. We are long overdue for the depression, the tsunami and the mega earthquake too.
#1 yes, and the rent increases are only happening in certain cities.
#2 many people don’t end up with an eviction on their record because they suddenly vacate when they see they finally have a court date. And, more regulations are making it illegal to use eviction history to determine qualifications. Such as “Between March 3, 2020 and six months after the COVID-19-related civil emergency ends, landlords cannot deny a tenant housing or take adverse action because of a COVID-19-related eviction history.”
#3 No, you’re not listening. Holding it as an investment becomes a bad deal. So the landlord sells, and it’s not bought by a landlord because it’s no longer a good deal. It’s bought by an owner occupant. One less rental property.
#4 if all landlords in an area have their costs go up. (Whether it’s inflation or higher property taxes.) their options are raise rent, sell and remove another rental property, or lose money every month. I assume zero are taking option 3. So either they raise rents or sell and reduce inventory, so rents increase. You can’t say they’ll just make less money. Is that what restaurants do when their supply costs increase? All restaurants that sell that supply either raise costs or stop selling it.
#5. Same answer as number 4. If the regulations make them start to lose money every month, they can sell or raise rents or lose money. If no one will pay the higher rents they sell and give more pricing power to last men standing.
I don’t think any landlords will be “surprised” if rents only go up 3-5% next year. They know they can’t go up 10-20% every year doubling rents every 3-7 years is impossibleWe all agree inventory is down and inflation is up you might as well be asking why are housing prices up 20-30% inflation, no inventory and regulation adding costs and reducing future supply .
I thought the question was what caused them to go up. So I give up, you tell me why they went up. Make it a reason that we can all agree on. So we can end this thread. I thought you were the one that asked why it was happening but apparently you already knew why.
Ps. If your true question was how long will these increases last I think the obvious answer is less than 3.5 when rents will have doubled at 20%. But again, since zero landlords predicted this 10-20% gain zero were planning on it. It’s just gravy and we welcome the return to 3-5% increases when it happens. I don’t think anyone is predicting a decrease in rent in non-decking population markets.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Bjorn Ahlblad Really like the Seattle and Tacoma market, just wish it wasn't a 3.5%-3.75% cap rate market.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Bill B. Apologies if I frustrated you. I was just looking for simple reasoning from a supply and demand perspective and your responses seem to keep alluding to owners "removing rental properties" or kids moving out of their parents and buying a home. That would imply the larger share of the population buying home vs renting and that's just not happening.
As it relates to increases expenses, just because someone increases prices whether rents or a restaurant's food prices, it doesn't mean they're making more money. If expenses go up at a restaurant, they either become more efficient and reduce expenses elsewhere, become better operators, accept lower income, or fail. If prices, for any product, are increased beyond an equilibrium level of demand, they sell less product and do not maximize income.
@Bobby Larsen
September is insurance annual renewal month for me. So far rolling in at 15%-30% over 9/20 rates, but I had little to no increase from 9/19 to 9/20. I expect this is a function of building and material costs. Rents in my area up around 8%-10% on turnover.
I can’t wait for property tax renewal rates later this year and property tax appraisals next spring.
I have been fortunate to collect rents throughout with reasonable consistency and little difficulty filling voluntary vacancies.
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Marco G.
Insurance renewals… My favorite time of the year!
We’ve seen our rates double since 2018 but most of our properties are on the west coast which have been impacted by fires for a few years now. We entered the Florida market this year and that insurance market seems like an even bigger mess.
If your properties are in Texas then I imagine the winter freeze is likely behind the increase in insurance as well.
- Investor · Broken Arrow, OK · Member since 2016 · 210 posts · 314 votes5y
@Bobby Larsen, I've read this entire thread and would like to take a stab at encapsulating it as I actually understand, or at least think I do, everyone's responses.. It's the differences between macroeconomics and microeconomics.
Macroeconomics - inflation is up, there is way too much money out there chasing lower housing supply, interest rates are probably artificially low and we have supply and labor chain issues due to COVID and never before seen levels of government "regulations" at both federal and state/local levels.
Microeconomics - Some cities, states, regions are doing better than others. Some people are moving out of areas (for whatever reasons) and moving to other areas. And, we have illegal immigrants moving to all areas of the country creating a hard-to-measure impact on rental demand. Add to that, the eviction moratorium seems to have very little impact on Class A/B properties (and some would say it's actually benefited A/B) while it's had more impact on Class C..
I could add to the items above, but if you read all the posts, think you will see a common theme is macro vs. micro.. So, what should a savvy investor do? What they've always done, but probably need to do more of and do it more diligently, and that is research about the dynamics that are going on in each sub-market and due diligence about what the future looks like based on those dynamics.What is going on in California is entirely different than what is going on in Tulsa..
- 5yBrandon VukelichBusiness MemberReal Estate Broker · Tacoma, WA: 🏢 27 LTRs 🏡 3 STRs · Member since 2018 · 549 posts · 458 votes
Just fyi, I wouldn't say Seattle-Tacoma is across the board 3.5-3.75 cap. Don't get me wrong, still nuts out there. Seattle definitely skews 3.5-4.5 but we still see props trade in Tacoma above 4.5. Not saying that's great but 1+pts better than 3.5. For example, The Azul in Tacoma, 33 units, sold at 6.5% in April. There are still opps out there.
Broker at Multifamily Properties519 Reviews - Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Bill B. Sold in April which means it went under contract in January/February, or earlier. Ages ago in today's market but I am mostly talking about properties with 100+ units. And, I suppose it depends on how you define the cap rate. That was Azul's "current" cap rate as defined by the broker and ignoring delinquencies. The cap rates that I'll almost always refer to are a T3 Income / Yr1 Expense cap rate or a stabilized cap rate whereas the T3 is the annualized trailing 3 month average income actually booked at the property and our adjusted Year 1 expenses. I didn't see the financials on this one but there's been significant delinquencies in this market, and I would be surprised if it was greater than a 4.5% cap rate then.
@Brandon Vukelich I think Bobby wanted you to see last two comments and accidentally tagged me.
- UT (utah) · Member since 2021 · 3 posts · 1 vote5y
W2 wages don’t necessarily grow with 10-20% raise every year unless you quit and find another job. I can guarantee you there aren’t that many people who would do job hopping, maybe in technology worlds but most office workers would choose stability and benefits rather than going through recruitment process in the hope of a 20% raise. To go to your boss and ask for a raise and bonus of 10% doesn’t seem common either, most you get is 3-7% raise, if you are one of the highest performers in the company. Blue collar worker/contractors may be able to demand high pay, but that’s just because we are lacking of trade skills and everyone nowadays work from home and want all the upgrades and repairs which makes contractors more in high demand. In reality, what we experience today is only temporary. For how long? Nobody knows. Why? It’s just not sustainable.
- Real Estate Broker · Coppell, TX · Member since 2011 · 5k+ posts · 4k+ votes5y
1. Housing shortage so when people can't buy they're forced to rent.
2. Price run up on purchases has pushed some buyers out of the market, so they rent.
3. Offer situation where lots of cash is needed or involved to win the bid pushes many out of the market that expected to win a bid with 0% 3% 3.5%FHA, etc down payments....now forced to rent.
4. 30% or more of the people hate their jobs and are considering switching, which could mean moving cities...they want to rent, not buy.
5. Sharing a house AND WFH was not a good fit, so probably many of those situations are breaking up into individual units= more leasing.
6. If I am WFH then I want a nicer place to live....so there go the rents.
7. Apartment investors want their returns and quickly...so best way to up the NOI is upgrade the units and charge more rent. Tenants don't want to move and maybe no place else to move to....so there go the rents.
8. People moving to new cities....often advised to rent and not buy...see if they like it, check out commutes, etc....drive up demand.
- Lender · Charlotte, NC · Member since 2016 · 376 posts · 172 votes5y
We can thank the BlackRocks of the world. This is in no way normal.
- Rental Property Investor · Fort Walton Beach, FL · Member since 2018 · 15 posts · 2 votes5y
My short answer and biggest 2 factors in my opinion (besides the supply shortage):
1) +25% of the money in circulation was printed last year
2) Fed wants to keep rates low till 2023
*Be cash poor and asset rich*
- Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes5y
@Clay Rikard
Both have definitely impacted asset prices but can you elaborate on how the two factors impact rents? Are you saying a 25%+ increase to money in circulation has led to increased disposable wages and wealth to spend towards rents?
How do you think lower interest rates lead to higher rents?
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