General Landlording & Rental Properties

User Stats

4
Posts
1
Votes
KS Hanley
  • Queens, NY
1
Votes |
4
Posts

Does Higher Market Price Actually Equal/Yield Higher Rents?

KS Hanley
  • Queens, NY
Posted Jan 21 2022, 13:41

Hi,

Housing prices have inflated over the last year and a half significantly.

For example in a market where in mid 2020 a two-family was priced at 160K, it is now priced at 260K.

My consistent question is does this price jump equate to a tangible jump in rental prices? If the property had renters at $600 and now the property is market set at $260k, the rent must go up. Rent should now be priced at 1%, or $2600 between the two apartments to ensure profitability.

However in those markets, can you now charge $1300 to a renter who was paying $600? If I evict due to lack of affordability, will I find renters in that market who could afford $1300? Or, would I attract renters from a different area to come to that market and pay the new rent? With such low rent the area might not be the best and encourage new renters to move.

I'm consistently wondering if the rapid inflation translated into tangible profits, particularly in the hold multifamily markets.

If anyone has any information to share, I would appreciate it.

Thanks,

TSH

User Stats

16,092
Posts
25,793
Votes
Nathan G.#1 All Forums Contributor
  • Real Estate Broker
  • Cody, WY
25,793
Votes |
16,092
Posts
Nathan G.#1 All Forums Contributor
  • Real Estate Broker
  • Cody, WY
ModeratorReplied Jan 21 2022, 14:04
Quote from @KS Hanley:

Hi,

Housing prices have inflated over the last year and a half significantly.

For example in a market where in mid 2020 a two-family was priced at 160K, it is now priced at 260K.

My consistent question is does this price jump equate to a tangible jump in rental prices? If the property had renters at $600 and now the property is market set at $260k, the rent must go up. Rent should now be priced at 1%, or $2600 between the two apartments to ensure profitability.

However in those markets, can you now charge $1300 to a renter who was paying $600? If I evict due to lack of affordability, will I find renters in that market who could afford $1300? Or, would I attract renters from a different area to come to that market and pay the new rent? With such low rent the area might not be the best and encourage new renters to move.

I'm consistently wondering if the rapid inflation translated into tangible profits, particularly in the hold multifamily markets.

If anyone has any information to share, I would appreciate it.

Thanks,

TSH

There's some correlation, but a property value increase of x% does not mean you'll see a rent increase of x%.

in my market, sales prices are up 25% in the last two years while rent rates have increased 10-15%. If a property met the 1% rule 2 years ago, it does not meet the 1% rule today and it may be several years before the rent catches up.

User Stats

4
Posts
1
Votes
KS Hanley
  • Queens, NY
1
Votes |
4
Posts
KS Hanley
  • Queens, NY
Replied Jan 21 2022, 14:21

Thanks for responding to my q. So my follow up question is what is the incentive to buy and hold properties that don’t have a sensible market vs rent increase correlation?

I would be gambling on the inflated valuation with no tangible return on rents. 

User Stats

1,765
Posts
3,281
Votes
Bill F.
  • Investor
  • Boston, MA
3,281
Votes |
1,765
Posts
Bill F.
  • Investor
  • Boston, MA
Replied Jan 21 2022, 14:29

@KS Hanley

From the analysis I did a bit ago using some of BP's data, yes home value and rent growth are strongly correlated 

User Stats

16
Posts
17
Votes
Dan Nutter
  • Investor
  • San Diego, CA
17
Votes |
16
Posts
Dan Nutter
  • Investor
  • San Diego, CA
Replied Jan 21 2022, 14:42

There's definitely a correlation between the two, but it's not a direct correlation. Rent increases tend to lag a couple of years behind the home value increases, from everything I've seen.

And yes, in our current housing market it seems as though positive cash flow is not as easy to find as it was a few years back. In the geographic location I invest, I'm happy to be cash flow neutral for a year or two before rents catch up. I'm also hedging my bets on future appreciation, which I'll admit isn't necessarily the best way to invest (it's more like an educated gamble).

User Stats

16,092
Posts
25,793
Votes
Nathan G.#1 All Forums Contributor
  • Real Estate Broker
  • Cody, WY
25,793
Votes |
16,092
Posts
Nathan G.#1 All Forums Contributor
  • Real Estate Broker
  • Cody, WY
ModeratorReplied Jan 21 2022, 15:50
Quote from @KS Hanley:

Thanks for responding to my q. So my follow up question is what is the incentive to buy and hold properties that don’t have a sensible market vs rent increase correlation?

I would be gambling on the inflated valuation with no tangible return on rents. 

Most markets have strong cashflow or strong appreciation. Very few have both. Some markets will see a 30% increase in sales price but only 15% in rent rates. Go to a place like Kentucky and you may see 20% increase in rent rates and only 10% increase in sales price.

User Stats

4,142
Posts
4,988
Votes
Bill Brandt#3 General Landlording & Rental Properties Contributor
  • Investor
  • Las Vegas, NV
4,988
Votes |
4,142
Posts
Bill Brandt#3 General Landlording & Rental Properties Contributor
  • Investor
  • Las Vegas, NV
Replied Jan 21 2022, 16:41

@KS Hanley

I’d give you at least two reasons why you keep the property that has appreciated more than rent.

1) your actual cost hasn’t increased. The “market value” is an opinion and doesn’t count any selling costs. Imagine your $100k property went up to $110k but rents didn’t change. Do you spend $10k selling because it doesn’t return a certain percent. (We won’t use the “1% rule” because it was never a rule and never worked nationwide or even marketwide.)

2) if you’re going to sell and buy a new property that meets your % rule and that property is still available. Either a) it hasn’t risen in value at all and why would you want to buy it or b) you should have bought it instead of your current property as it was obviously an even better deal “back then”. 

3) return on price doesn’t mean anything, return on your investment is the key. So in your example you put $40k down (20%) on the $160k property. Today you do a cash out refi at 75% of $260k and take out $195k loan. Now you have $5k in the deal. If you wouldn’t buy the house for $5k, then yes, sell. But don’t forget your $40k downpayment already made $100k in appreciation, 250% return. That might be more important than the cashflow to most investors. 

“High price” properties TEND to have a lower cashflow return (because more and more people can afford to buy at that payment) and a higher appreciation return. (Since appreciation is usually a % of of original value higher goes up more.)

I think you will find many of the financial free BP members got there with cashflow but many of the really wealthy got there with appreciation, forced or natural. 

Don’t lament value increases, would you rathe buy a property that went down in value so your cashflow returns were better? There are markets where you can probably do that, just choose them instead. :-)

GL

User Stats

193
Posts
120
Votes
Alex Forest
  • Rental Property Investor
  • Henrico, Va
120
Votes |
193
Posts
Alex Forest
  • Rental Property Investor
  • Henrico, Va
Replied Jan 21 2022, 17:55
Take a look at this article that plots price to rents over time, pegging the ratio value of 1.0 to January 2000. It's a gross national representation. There is correlation, but times when the two are out of step for a period of time too.

https://calculatedrisk.substac...