When do Rental Prices fall
Argyle, TX · Member since 2013 · 76 posts · 20 votes
When do Rental Prices fall
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John UnderwoodPro Member
Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votesQuote from @Nathan Gesner:
Quote from @John Underwood:
It is tied to supply and demand.
Demand drives prices up.
I pay cash for houses so interest rate has no bearing on the rent I charge.
You're too young to pay cash for houses. Use the power of leverage, man!
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.
I am paying 6k to 50k for properties.
Just bought a Mobile Home and land for 6k.
Bought 3 houses for under 30k (tax sale)
Bought another house in my ROTH IRA for 50k in a $300/sqft ARV neighborhood.
I don't need leverage at these prices.
40 Replies
- 3yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
It is tied to supply and demand.
Demand drives prices up.
I pay cash for houses so interest rate has no bearing on the rent I charge.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
Rents don't typically drop, but the last couple of years saw incredible increases so a correction wouldn't surprise me.
The DIY Landlord Book4.7248 Reviews - Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @John Underwood:
It is tied to supply and demand.
Demand drives prices up.
I pay cash for houses so interest rate has no bearing on the rent I charge.
You're too young to pay cash for houses. Use the power of leverage, man!
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.
The DIY Landlord Book4.7248 Reviews - 3yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Quote from @Nathan Gesner:
Quote from @John Underwood:
It is tied to supply and demand.
Demand drives prices up.
I pay cash for houses so interest rate has no bearing on the rent I charge.
You're too young to pay cash for houses. Use the power of leverage, man!
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.
I am paying 6k to 50k for properties.
Just bought a Mobile Home and land for 6k.
Bought 3 houses for under 30k (tax sale)
Bought another house in my ROTH IRA for 50k in a $300/sqft ARV neighborhood.
I don't need leverage at these prices.
- 3yBruce WoodruffPro MemberContractor/Investor/Consultant · San Diego / Phoenix · Member since 2021 · 12k+ posts · 15k+ votes
Based on my observations over the decades, it is rare for rents to go lower, regardless of what the economy does.
- Real Estate Broker · Cody, WY · Member since 2010 · 28k+ posts · 41k+ votes3y
Quote from @John Underwood:
LOL! You got me there!The DIY Landlord Book4.7248 Reviews - Argyle, TX · Member since 2013 · 76 posts · 20 votes3y
Quote from @Bruce Woodruff:
Based on my observations over the decades, it is rare for rents to go lower, regardless of what the economy does.
I sure hope they don’t fall here in the DFW. I could the little cash flow I have to to help save for the next deal
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
I don't think they decrease, I just don't think they increase at the same rate the last 1-2 years have shown. Infact, they need to net increase while prices decrease. That's what the market is missing.
I think they go up, on average, 5-10% this year while house prices go down 15-20% this year. The year after I think up 3-7% rent, down 7-12% on houses. It really depends on a lot of variables, but I believe that's what will happen. Maybe not those exact %'s but that ratio of rent:house prices tightening.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
I think that for the first time in a decade, rents are at serious risk of falling in 2023, yes.
While I'm not ready to predict a fall quite yet, I think that rents are a "coin flip".
Here are some of the reasons why rents might go down:
- Demand is a wildcard. During COVID, we saw millions of "household formations" - but "household formations" is a really misleading stat/term. If a couple breaks up and one of the parties moves out to rent their own place, that counts. If a child moves out from their parent's basement, that counts. Household formation spiked sharply in COVID, and that had nothing to do with population growth, and perhaps a lot to do with free money, great jobs, work remote, and more. I think there is every reason to believe that a recession brings down housing demand and people move back in with one another. Something to watch.
- Supply: We are going to have the most new housing stock coming online ever in the next 18 months. Builders have already broken ground on 1.6M multifamily units nationwide, and millions more in the Single Family space. You don't stop construction once you've broken ground. This supply absolutely will have an impact on both real estate asset values and rents.
The offset to this, of course, is housing affordability. With such a large increase in interest rates, housing is way more expensive for the typical buyer. This puts upward pressure on rents, and should not be discounted.I think it will be really hard to predict rents nationwide, and that there will be a lot of variability by market next year. Pay attention, and understand that yes, rents can, and will go down at some point during your career in investing. This is one of those times when risk is highest in my opinion.
- 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Scott Trench:
I think that for the first time in a decade, rents are at serious risk of falling in 2023, yes.
While I'm not ready to predict a fall quite yet, I think that rents are a "coin flip".
Here are some of the reasons why rents might go down:
- Demand is a wildcard. During COVID, we saw millions of "household formations" - but "household formations" is a really misleading stat/term. If a couple breaks up and one of the parties moves out to rent their own place, that counts. If a child moves out from their parent's basement, that counts. Household formation spiked sharply in COVID, and that had nothing to do with population growth, and perhaps a lot to do with free money, great jobs, work remote, and more. I think there is every reason to believe that a recession brings down housing demand and people move back in with one another. Something to watch.
- Supply: We are going to have the most new housing stock coming online ever in the next 18 months. Builders have already broken ground on 1.6M multifamily units nationwide, and millions more in the Single Family space. You don't stop construction once you've broken ground. This supply absolutely will have an impact on both real estate asset values and rents.
The offset to this, of course, is housing affordability. With such a large increase in interest rates, housing is way more expensive for the typical buyer. This puts upward pressure on rents, and should not be discounted.I think it will be really hard to predict rents nationwide, and that there will be a lot of variability by market next year. Pay attention, and understand that yes, rents can, and will go down at some point during your career in investing. This is one of those times when risk is highest in my opinion.
If rents go down, houses will go down further. Are you expecting a crash? I think the new build areas and the STR areas face the highest level of correction. While other areas, don't really fall that much.
I think rent goes up, still. Just prices go down, too. I think there'll be a good percentage of new builds that stop plans, too. They'll sell unfinished work. I don't think new supply will supersede demand though. I think for sure it tilts the leverage the seller sits on, depending on area.
- Los Angeles · Member since 2018 · 464 posts · 471 votes3y
As has been said, rental rates depend on supply and demand. The interest rate to purchase a property has no bearing on existing properties, except maybe somebody fool enough to get an adjustable rate and not refinance before the adjustment hits (coz it never adjusts downward).
What will make rental rates drop would be a immense influx of rental properties to increase supply, like 20% of homeowners move to a different state and rent out their old dwelling. Or NIMBY constituents of municipalities stop pressuring their city councils to make new construction as difficult as possible, resulting in a rash of new apartments.
As I don't see either scenario as being likely, I expect rents to level off at most, and probably not for long before they start going up again. Inflation has affected everybody and everything, and some companies are forced to raise wages to keep employees, and raised wages mean that more people can afford more rent.
Therefore, I expect the demand to remain constant or increase in coming years.
But remember, my prognostication abilities are no better than anyone else's.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesI'm not "expecting" a crash. But, I am starting to bet that rents will be flat, with a very reasonable probability of falling. I believe that Dave Meyer and the On the Market team's recent forecast of a 6-10% decline in single family housing prices is quite reasonable. And, I think that a 20-25% decline from valuations (yes, following the huge decline in valuations already taken in 2022) in the multifamily space is very possible in the next 12-18 months - I'd be terrified as an operator in that space right now.
Quote from @V.G Jason:
If rents go down, houses will go down further. Are you expecting a crash? I think the new build areas and the STR areas face the highest level of correction. While other areas, don't really fall that much.
I think rent goes up, still. Just prices go down, too.
My approach to investing has always been more conservative than a lot of folks. I buy one small multifamily every year or so, with a partner, and slowly compound my wealth with traditional 25% down payments and 30-year mortgages.
I'm certainly continuing my very cautious approach to investing - I'll almost certainly make a move next year. But, I do not have confidence that rents will increase next year nationwide, and none of the economists/data experts I follow or talk to have much confidence either. I think it's a coin flip next year, and this is the first time I've ever felt this way.
Hope that helps. - 3yV.G JasonPro MemberInvestor · Member since 2022 · 3k+ posts · 3k+ votes
Quote from @Scott Trench:
I'm not "expecting" a crash. But, I am starting to bet that rents will be flat, with a very reasonable probability of falling. I believe that Dave Meyer and the On the Market team's recent forecast of a 6-10% decline in single family housing prices is quite reasonable. And, I think that a 20-25% decline from valuations (yes, following the huge decline in valuations already taken in 2022) in the multifamily space is very possible in the next 12-18 months - I'd be terrified as an operator in that space right now.Quote from @V.G Jason:
If rents go down, houses will go down further. Are you expecting a crash? I think the new build areas and the STR areas face the highest level of correction. While other areas, don't really fall that much.
I think rent goes up, still. Just prices go down, too.
My approach to investing has always been more conservative than a lot of folks. I buy one small multifamily every year or so, with a partner, and slowly compound my wealth with traditional 25% down payments and 30-year mortgages.
I'm certainly continuing my very cautious approach to investing - I'll almost certainly make a move next year. But, I do not have confidence that rents will increase next year nationwide, and none of the economists/data experts I follow or talk to have much confidence either. I think it's a coin flip next year, and this is the first time I've ever felt this way.
Hope that helps.I am assuming you're saying this as a generalization. What regions do you think take the hardest hits & thoughts on STR income for the next 18 months?
And why 18 months---election?
- 3yJose JacobPro MemberInvestor · 11040 · Member since 2019 · 186 posts · 111 votes
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
I am a Realtor for about 30 years and flipper for 8 years. I never experienced a rent drop in any areas. I use to rent 1 bedroom for $500 in early nineties and the same place cost $1500 now. So rent never goes down. There are so many births happening in United States. Land is not expanding but people need a roof over their head. So no worries. Rent will not go down. Home value will fluctuate along with supply, demand and economy. But rent price is pretty stable unless there is massive lay offs in a particular city. Usually rent goes up when interest rate increases. individuals seek to rent till rates comes down to be qualified to buy.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
There are a 1,000 reasons something can or cannot, will or will not happen. It’s ALL supply and demand.
Let’s say rents fall and borderline landlords start losing money. So they sell to an owner occupant (because as we just said, the landlord is selling because rental rate is incompatible with renting it out.) so now there’s one less rental. This repeats over and over until rents find a price that is profitable.
Rates going up is making buying unaffordable, so we are creating renters. If there is a wave of foreclosures, you’re creating more renters. If inflation isn’t cured costs are going up so rents have to go up to cover higher costs or the property is sold.
Rents increased faster during the Great Recession in Las Vegas faster than any point in the last 20 years except the last 2 - 3 years. The world is just too complicated with hidden demand levers to say something will happen. Does anyone think rent in their market will be cheaper in 10 years? If so, sell now before others figure that out. Good luck and carry on.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votes
I think it will be region dependent. I think the coastal cities, and high fliers from the last year, like Denver, Austin, Boise, etc. are likely to get hit hardest. I think there is reason to be scared in a lot of sun belt cities with lots of supply coming online.
Think about this: Who in their right mind buys an apartment complex with 7% interest rate debt, at a 5 cap? 5% cash flow on 7% interest? That makes no sense. The debt is negative leverage. That should terrify people. A spread WILL return. The market appears to me to be going all in on massive rent growth to get back to a reasonable spread, or else it is praying for interest rates to come down quickly. That's not a position I am comfortable betting on at this time.
I think that the 18 month timeline has nothing to do with the election, and much more to do with the simple compounding pressure of what are likely to be sustained high interest rates. In the multifamily and commercial real estate space, people do not have fixed rate 30-year mortgages. They typically have variable interest rate debt - though some of the more cautious folks will have bought rate caps that fix their rates for a few years.
Every month, more and more folks with these variable rate loans and 5-year balloons will have to sell or refinance their properties. Every month, more foreclosures will tick. Every month, those sales/foreclosures (in the multifamily space, not the 1-4 unit residential space) will set new comps for one another that will wipe out equity and make it hard to lend. Every month,
I think this pressure ramps month after month, and takes its toll - so I think the degradation in prices is a "process" and not an "event" that transpires over the next year or two.
- 3yScott TrenchPro MemberRental Property Investor · Denver, CO · Member since 2014 · 2k+ posts · 6k+ votesAgree with this. Rents will go up long-term (10+ years), as will property values. I'm holding my portfolio, financed with low-interest 30-year mortgages, and plan to keep buying consistently. This is the winning approach. It's the next 1-3 years that are variable. I'm not setting myself up for an investment that could derail me if property prices and rents fall in the next year - like an apartment complex financed at 60/40 debt/equity that has to be sold or refinanced in 5 years. But, I will still buy small multifamily and finance it with long-term, 30-year loans, or buy outright in cash.
Quote from @Bill B.:
There are a 1,000 reasons something can or cannot, will or will not happen. It’s ALL supply and demand.
Let’s say rents fall and borderline landlords start losing money. So they sell to an owner occupant (because as we just said, the landlord is selling because rental rate is incompatible with renting it out.) so now there’s one less rental. This repeats over and over until rents find a price that is profitable.
Rates going up is making buying unaffordable, so we are creating renters. If there is a wave of foreclosures, you’re creating more renters. If inflation isn’t cured costs are going up so rents have to go up to cover higher costs or the property is sold.
Rents increased faster during the Great Recession in Las Vegas faster than any point in the last 20 years except the last 2 - 3 years. The world is just too complicated with hidden demand levers to say something will happen. Does anyone think rent in their market will be cheaper in 10 years? If so, sell now before others figure that out. Good luck and carry on.
- 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I don’t see rent lowering at all. Less and less buy n hold investors are jumping in due to the numbers just not working to cash flow with these interest rates. Inventory is already low so people looking to rent will have a hard time finding a place. Nobody wants to sell their homes because most people are locked in with sub 3% interest rates. And tired landlords keep selling to flippers that sell them to home buyers. So with a low supply of rentals available, I don’t know why any landlord would want to lower their price. It’s all about supply and demand!
- Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
yes, currently in the last few months we're experiencing nationwide rental reduction.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
Rent rates fall when housing supply exceeds renter demand.
A decrease in rents of .4% from Oct to Nov just happened. I think same from Sept to Oct. While the decreases are tiny, this is the first time that's happened since Zillow began tracking it according to this week's Real Estate Today podcast by NAR.
As rents have increased so much, renters are consolidating and/or moving back home if they can. Of the 18 apts I sold this year, 4 that I know of for sure moved in with their SO or a friend or back home when the new owners raised rents.
If average 20% of renters are making other arrangements as rents become unaffordable , there's your demand side risk.
- Real Estate Agent · Washington DC · Member since 2016 · 847 posts · 654 votes3y
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
The biggest threat to rents right now is reverse household formation, during the pandemic we had record household formation (people moving out of their parents basement, going from having a roommate to living alone, buying a 2nd home, buying an Airbnb, buying a rental, buying 5 rentals etc.) That was caused by three big phenomenons, 1. The pandemic itself, wanting to be away from people during a literal pandemic, this drove not only household formation but likely a huge surge an Airbnb use because people were willing to pay top dollar not to go to a hotel. Remote work drove a need for space and an ability to move as well. 2. Stimulus gave people more money to spend on rents, down payments etc. 3. A good ole fashioned real estate bubble.
All of those factors are not only not growing but reversing as pandemic stimulus gets exhausted, people get lonley, and people get roommates and move back in with parents and Airbnb’s get converted back to ltr’s. On top of all that we have about 1 million new multi family units coming online next year (the most since the 70’s) and we should see some markets see significant rent declines while the less bubbly markets likely remain flat of slightly down.
- 3yDan H.Pro MemberInvestor · Poway, CA · Member since 2015 · 7k+ posts · 8k+ votes
Quote from @Bill B.:
There are a 1,000 reasons something can or cannot, will or will not happen. It’s ALL supply and demand.
Let’s say rents fall and borderline landlords start losing money. So they sell to an owner occupant (because as we just said, the landlord is selling because rental rate is incompatible with renting it out.) so now there’s one less rental. This repeats over and over until rents find a price that is profitable.
Rates going up is making buying unaffordable, so we are creating renters. If there is a wave of foreclosures, you’re creating more renters. If inflation isn’t cured costs are going up so rents have to go up to cover higher costs or the property is sold.
Rents increased faster during the Great Recession in Las Vegas faster than any point in the last 20 years except the last 2 - 3 years. The world is just too complicated with hidden demand levers to say something will happen. Does anyone think rent in their market will be cheaper in 10 years? If so, sell now before others figure that out. Good luck and carry on.
I do not know the source of your rent numbers, but my source shows 2008 to be inflation adjusted peak (still not surpassed) and 2013 to be the minimum. This shows rents declined in the GR.
https://www.deptofnumbers.com/rent/nevada/las-vegas/#:~:text=Las%20Vegas%20Nevada%20Residential%20Rent%20and%20Rental%20Statistics,rent%20in%20Las%20Vegas%20was%20%241%2C210%20in%202019.
- Investor · Las Vegas, NV · Member since 2013 · 8k+ posts · 10k+ votes3y
Sorry, I shoulda been specific. When I said rents increased in vegas during the GR I meant I was specifically raising them. SFR could easily be rented under $1,000 in 2008. By 2010 I was charging $1200. By 2012 it was $1400. I know today 10% yearly increases don't sound like much, but pre-2008 you were lucky to get 5%. We never missed a rent increase, much less lowered rents.
I think what screws up the perception is when people include either MFR or SMFR. I keep hearing about how people were losing their 4plexes because they couldn't find renters. But I had "zero vacancies" (less than 2 weeks twice in 7 years with 20 properties. Call it 1 month out of 20x7x12 months (1680 property months). So 0.0006% vacancy. People who had lost their homes had ZERO interest in renting an apartment. They would do anything to get in to a rental house and stay there. Make life at least appear normal.
TBH: I didn't look at your link because it doesn't matter what it says. It's either too general in terms of property types (does it show only SFR?)or location (does it show only decent neighborhoods?), it didn't collect data from mom and pop landlords like me (‘m not sure how they would have any idea what I was charging in rent), or there's another reason it's wrong if it doesn't show what we used to call strong rent growth from 2008-2012.
In Vegas after the crash You could literally buy all the houses you wanted with a total PITI payment of under $700/mo. Nobody wanted to. As I've posted several times my greatest financial mistake BY FAR was the properties I didn't buy. But this was pre-BP, pre real estate is cool. I literally knew NOBODY that owned 2 houses. Not even a vacation home. I had lost my job and this was my lifeline.
Sorry to get long winded, it just makes me emotional still today. This is a period when I owed $14k/mo in mortgage payments and my wife believed in her unemployed husband. It’s also the reason I made the “mistake” of selling some and paying them all off as fast as possible. But a dozen paid off properties mostly with property management is stress free and more than we need.
- Handyman · Pittsburgh, PA · Member since 2018 · 5k+ posts · 13k+ votes3y
When you speak about how people who lost their home during the GR would go to almost any extent to avoid moving into any sort of apartment, that was very much our experience here in Pittsburgh as well. This was also tied into most LTR tenants' well-documented perennial inability to throw their crap away, sure, but in a far more intense and personal way -- moving from a three-bedroom house to a two-bedroom apartment also meant parting with the precious stuff they had bought to furnish THEIR OWN HOUSE, and for many of them, the memory of buying that stuff was and continued to be tied to one of the happiest periods of their lives.
I don't think we talk about those nuanced realities of a LTR tenant's mindset as frequently as we should here. - Member since 2019 · 7k+ posts · 4k+ votes3y
Quote from @Jack Seiden:
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
To the south.
What's good in the next 5 years is that job growth is highest in the south.
But MF supply is also the highest in the South region. It's known rent is already decreasing.
This thing makes an investment decision to be difficult as well.
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