Investor · Newport Beach, CA · Member since 2019 · 190 posts · 176 votes
I don't think I've been this cautious in a long time. I think there are still good opportunities but some markets are just bonkers. I'll caveat this by saying it's not just real estate, all investable asset classes seem risky at the moment. In order to forecast what the next 12, 24, 36 months will look like in the multifamily industry, I've been asking myself what the catalyst was for 10-20% annual rent growth across what seems like the entire country. Population growth, employment, wage growth, supply, etc. all have been following the same 5-year rolling historical average, so why the big jump in prices and rent this year? I have some thoughts but very interested to hear from other experienced operators.
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?
More so of a trickle down effect from it playing a major role in the overall housing market increase.
Not saying that if a house’s value increases by 20% that rents will necessarily increase by that same 20%, but they tend to trend in the same direction.
While working with many buyers the lack of inventory combined with high demand driving prices beyond affordability has caused many to just rent. I’ve also had many sellers “cash out” then rent with the expectation that there will be a market correction which will increase inventory and lower prices when at that point they will “buy back in”.
Supply and demand is the major factor in any pricing, but costs also play a vital role. Rental properties are just like any other business looking to make a profit. Acquisition and operation costs drive rent rates. As prices to build and buy rental properties increases, so do the rents that are demanded. Insurance and taxes are increasing along with property values further driving up expenses. On top of all the usual expenses, eviction moratoriums have increased risk and driven up costs for landlords.
Even landlords who purchased properties years ago that are locked into lower payments will increase rents to keep up with market and property values. The rent value of my property is based on purchase value today, not what I paid for it.
As far as if rents will decrease, I don't see that happening. Whenever an industry sees prices stabilize at a new price level, there is considerable resistance to that price falling. If you are a landlord renting now at higher values, you are going to keep pricing at that value. You may decrease a little if vacancy levels creep higher, but you are not going to take a loss.
The other factor that has been hit on is inflation. The shelter portion of CPI is about a third of the total inflation number. It is made up of "rent equivalent" value for home owners and actual rent values for renters. Rent equivalent is how they capture home values. It asks "what would your house rent for"? The actual rent portion is about 6% of CPI. Of course there are some problems with how these numbers are calculated. If you purchased or rented your house ten years ago, you are not paying anywhere near todays rent value. This is where the index can fail to capture actual shelter value. A new rental today is feeling higher inflation than someone who lived in a home for years. Another factor to consider with shelter is that they only survey an area twice a year, versus other CPI items that are tracked monthly. This means housing expense lags in the CPI.
Inflation is driven by too many dollars chasing not enough goods, as the standard definition. Too many dollars come from an increased money supply. Government spending on stimulus, forgivable loans and other programs has increased supply. Low interest rates and loose lending policies have also increased supply. The government wants and actually needs inflation when operating in a massive debt position. Without inflation, the government couldn't keep up with debt payments. For that reason alone we know inflation is here to stay.
I also observe that price movement and valuations are never linear over time. There are periods of major shifts in value, followed by flatter periods. I think this is one of those shifts.