Rising Costs of Owning Real Estate – How Are You Adapting?

Question

Over the past few years, the costs of owning and operating real estate have climbed faster than many of us expected.  Stricter building codes, added environmental compliance, more expensive building materials and labor,  the re-set on replacement costs continue to drive up insurance premiums are a few examples that come to mind and have impacted my business.  For those of you actively investing or managing real estate, how are you dealing with these cost pressures? Are the costs influencing  or changing your real estate investing strategy?

Stuart Udis · Answer

Yes, insurance is where I've seen the biggest change. It has a greater impact on some of my inventory in emerging neighborhoods. The misalignment of replacement cost and property value really impacts premiums. I've had numerous conversations with my broker recently about switching to cash value instead of replacement cost when the carrier is relying on replacement costs that far exceed the value.  I just received a quote back with a replacement cost of $1.43M and the property is only worth $800K. It's a masonry structure. The chance of a total loss is highly unlikely. Even if there was, the carrier is not paying out $1.43M so why allow that number to influence the premium. Utility pricing is another expense that keeps creeping up. It's important to shift utilities onto the tenants in multi-unit buildings. Construction costs make it impossible to operate in certain price points without cutting corners. In Philly you simply can't operate in large swaths of the city due to cost constraints. I looked at a few flip opportunities recently & couldn't make the numbers work. I looked back at my costs renovating the same homes in 2013.....$45K with all licenses and permits. Today, that same renovation costs $115k + a full set of architectural drawings and probably 45-60 days for permit issuance between plan preparation and review. 10 years ago, it was a paper application and permit was issued in 3-5 days.

Jeremy Horton · Answer

This is a good question - costs have jumped tremendously here - Insurance probably 50% in the last 2-4 years easily (and this is for properties not in a flood zone with no claims ever made). Rising insurance costs and carriers dropping from the area is a real problem.

Same with labor - plumbers used to be $85/hour. They are $145/hour here now. Unreal.

I actually haven't bought anything for the past 2 years. It hasn't made enough sense. I think the only thing you can do is buy even more conservatively...that's IF you want to continue in the typical LTR space.

As far as what I have actually done: I bought a piece of land I plan to develop with a business in the next few years. Invested more heavily into stocks - including crypto. Streamlined my existing properties - basically some preventative maintenance. I'm also working on structuring my business a little better - getting leads, funneling/analyzing them, making offers, getting a website and all that. Basically making it more "official". I feel like RE can be a good long term investment strategy if you buy right - mainly the tax benefits in retirement.

I actually think changing strategies makes sense - some kind of development, mobile home or manufactured home park, small multi families. Whatever it is, it has to be extremely affordable.

Mike Dymski · Answer

@Alan F. agreed on the money printing driving record levels of inflation.  The government increased the money supply by $7 trillion or 40% during the pandemic...that's not a typo.

A 15% tariff is an increase in cost of 15%, whether paid by the company, the consumer, or some combination of both.  So, costs are increasing because of tariffs.

Halting immigration is 1-2 million new jobs per year, which is a majority of total new jobs in the country.

Alan F. · Answer

I offer a different perspective for your consideration; inflation has been a long slow run up, predominantly from 2014 up. Keynsians printing fiat currency is how we've arrived here. Inflation is systemic, tarrifs are targeted. These distinctions, though, will be hard for people to discern. It's my belief it will take years to work out of the economy. Long term cause and effect are elusive . . Im not convinced that lowering the underground labor force will move the needle to a large degree.

America has the labor, unfortunately not always "the will to do it"

This macroeconomic environment reminds me of the early '80's...ironically "the great moderation" ensued.

I could be very wrong though, it wouldn't be the 1st time!

Mike A. · Answer

Everything has gone up.  Not really looking to purchase anything as the risk / reward isn't worth it.  A mutli we purchased in 2020 was 700k.  It's now selling for 2.5 times that.  I am not sure how anyone could be making very much money in new purchases right now. In New York, we have Good Cause Eviction protections in some areas.  You cannot even adjust for this with the rents any longer.  Another landlord who's in Albany is house hacking, so put in a tenant in her building.  She's said the woman has been a nightmare ever since.  She's breaking things, smoking and drinking in public, her kids have friends come over and have sex (underage apparently), etc.  She's been trying to get rid of her for three months.  Also, the tenant hasn't paid their rent in three months.  Every time they go to court, another thing mysteriously breaks or stops working.

Between the new laws, costs and risks, I am not sure why anyone would jump in to purchasing a property in New York State right now.  Connecticut is a bit better, but it has it's own issues.  The costs for running anything in Connecticut is more expensive than New York, but the laws are a bit better.

We have decent tenants, but they complain about the increases; and we only increase 4% a year to help keep up with insurance and taxes.  They don't understand.  The tenants think all landlords are stupid rich. While some may be, most are not.

Denise Supplee · Answer

You’re definitely not alone in feeling that squeeze, a lot of investors are rethinking how they underwrite and operate because of those rising costs. For me, it’s been a mix of tightening my acquisition criteria, getting creative on financing, and focusing on properties where I can directly add value to offset expense creep. I’ve also leaned harder on preventative maintenance to avoid those big, sudden capital hits.

In my Co-Investing Club, we’ve been adjusting our approach by diversifying across more markets and asset types, targeting opportunities with stronger cash flow from day one, and negotiating better terms with operators to help buffer against rising expenses.

It’s a tougher environment, but with sharper analysis, strategic partnerships, and the right network, it can also push us toward smarter, more resilient investing

Allan C. · Answer

You can switch RCV to ACV and max deductibles for a bit to ride out the storm, but investors need to realize how price setting mechanisms work in free markets. Someone is the marginal (high cost) landlord that sets market rates, and the rest of the lower cost providers are the price takers who make margin.

like any other commodity in the world, you need to ensure that you are the most efficient provider. Have you done everything you can to operate your rental efficiently? If so, just wait a little as everyone else will have to increase rent to cover their costs. Insurance rates are going up faster than people can adjust, so it's a matter of time till markets rebalance. If demand does not outstrip supply, then the lower cost supplier will start to set the market and the high cost suppliers will go out of business.

Mike Dymski · Answer

Absent an economic slowdown, it's going to get even more expensive when tariffs kick in and with a tighter construction labor market with no immigration.

Kevin M. · Answer

@Stuart Udis I can tell you the math currently doesn't work in Philly as you've hinted above. There is no ROI for rental rehabs or investment in 90% of the market. Investment will be frozen until a new equilibrium is established. This will occur either through a drop in home values and investment/upkeep (Detroit) or through rising rents/returns to keep up with increases to costs/risk/scarcity (San Francisco). My bet is we meet somewhere in the middle in about 2 years with notable increases to the median rent and a decrease overall to quality inventory as the bottom quintile of operators dies off.

I'm already seeing rents increase this leasing season compared to '23 and '24. I think rents need to jump another 10%-20% in the next 2 years to make up for the increase in operating costs through property taxes, insurance, labor- plus added regulatory risk.

You could get away with bad deals and operations when interest rates were 3%. Not working anymore. The bad investments are beginning to die off.

Rising Costs of Owning Real Estate – How Are You Adapting?

Most Popular Reply