When do Rental Prices fall
Argyle, TX · Member since 2013 · 76 posts · 21 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
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes3y
Households are consolidating and rents have already started to decline. People seem to be underestimating the impact of high inflation and the fed's intent to keep rates high for an extended period. Inflation may be coming down but consumers still have to figure out how to deal with the existing high prices. The economy has already lost 5+ million jobs (or 3+% impact on the unemployment rate) to mass early retirement, added deaths, lack of immigration, and excessive levels of disability...and the fed is trying to drive more lost jobs. It's the Shrink to Greatness Plan.
- 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ votes
Quote from @John Underwood:
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.
I was waiting for John to answer this one.. greatest acquisition model on all of BP !! who needs title insurance when you have those price points right ? - Rental Property Investor · Jacksonville, FL · Member since 2015 · 342 posts · 142 votes3y
@John Underwood - How are you buying homes cash? Just curious. Are you raising capital or just doing BRRRS?
- 3yJohn UnderwoodPro MemberInvestor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
Quote from @Mitchlyn D.:
@John Underwood - How are you buying homes cash? Just curious. Are you raising capital or just doing BRRRS?
I have cash from flips and rental income that builds up and I need to reinvest. I have money in my self directed IRA that is making money and building up.
So I don't need to raise money or do BRRR.
- Rental Property Investor · Jacksonville, FL · Member since 2015 · 342 posts · 142 votes3y
@John Underwood - OK, Makes sense!
- Lender · rate.bid · Member since 2022 · 324 posts · 62 votes3y
@Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
Rents generally keeps pace with inflation which at a minimum tends to increase yearly. A sustained increase in rates such as was the case lst few years can (contrary to what might be expected) result in additional increases in rental prices (especially in some markets).
- Rental Property Investor · Central U. S. A. · Member since 2013 · 296 posts · 149 votes3y
There are a few factors that can influence rental rates for housing, and whether or not rental rates will fall in a particular market or for a specific property will depend on the specific circumstances. Some factors that can affect rental rates include:
- Economic conditions: During economic downturns, demand for rental housing may decrease, which could lead to lower rental rates as landlords try to attract tenants.
- Market conditions: If there is a surplus of available rental units in a particular market, landlords may need to lower their rental rates to compete with other properties and attract tenants.
- Property location: Properties located in desirable areas or with desirable amenities may command higher rental rates, while properties in less desirable locations or with fewer amenities may have lower rental rates.
- Property condition: Well-maintained properties with modern features and finishes may be able to command higher rental rates compared to properties that are in poor condition or have outdated features.
- Competition from other housing options: If there are other housing options available in a particular market, such as single-family homes or apartments, this can affect the rental rates for housing units.
Overall, rental rates for housing may fall for a variety of reasons, but it is difficult to predict with certainty when this may occur. It is important for landlords to stay informed about market conditions and to be prepared to adjust their rental rates as needed in order to attract and retain tenants.
- 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
there will be negative pressure on rental rates in 2023
Logical Property Management4.9458 Reviews - 3yJay HinrichsBusiness MemberReal Estate Consultant · Summerlin, NV · Member since 2014 · 45k+ posts · 66k+ 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.
scott in a down turn new construction will definitely stop mid construction. Banks can just stop funding draws its in their fine print thats what happened last go around 08 to 2011. I am seeing that on the west cost projects stopping not necessarily once they go vertical but for sure during the infrastructure development stage.. one right across the street from me they built 30 lots and just winterized and wont start for at least another year.. - Rental Property Investor · Rockford, IL · Member since 2010 · 65 posts · 45 votes3y
I have been investing for over 30 years. Yes, rents can decrease and they have. However, it isn't usually as dramatic as home prices. In the 08 crisis. My rents dropped by 5-10% while prices dropped 25-30% in my area.
- Rental Property Investor · Somewhere over the Rainbow · Member since 2021 · 1k+ posts · 1k+ votes3y
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.
You know the interesting thing about new construction in my area - these new neighborhoods are expensive, relatively. I live in a 180k house I bought for 130k (foreclosure). Old house but completely modernized, big yards good area as well.
They are doing a new construction probably a quarter mile away - huge homes definitely in the 330k+ range. Another neighborhood just down the street - "starter" homes 1300-1500sqft priced for 230-275k. It's just interesting that a lot of the newer homes going up are more luxurious, bigger, have HOAs etc. The cost for utilities will definitely be higher, taxes higher etc. Now this is what gets me - I have a a high W2 income, 2 affordable vehicles paid off, house has 50k equity (we didn't see a major run up like most places did, (I'd say a 10-20% increase and around a 10% drop on the maximum sides), invest on the side etc - you get the picture, we budget our money to a T.
I cannot imagine everyone else is doing the same. Most people have 1 if not 2 car payments. 1-2 kids - possibly private school since the public school system in Louisiana is generally garbage. They are buying these more expensive houses right up. Everything is financed. I just cannot imagine there is much leftover (I don't think most people are getting some huge payment from their parents either). I think a lot of these people are just a couple of paychecks away from something bad happening.
As far as rents - we have had a major supply issue that has driving rents up. I know for a fact in the affordable rental space anyway - most of my places rents have increased ~20%. I imagine we will see a small decrease. The thing to me is the affordability is so low - a lot of these people couldn't buy houses for whatever reason (and a lot will be lifetime renters) and now with rental prices increasing they have to move to really "bad" areas to afford the rent. This is the market though.
The only thing I see making rents decrease is affordable supply. The houses here have renters priced out - they may be more affordable than they were a year ago, but the goal of the new builds is not affordability.
We have a rental mini subdivision going up too - but the rents are 1700-2100 - 2/2 and 3/2 townhome style houses. This again doesn't add competition to the affordable rental space, multi family complexes, 1-4 units etc. Why? Because the rents are still very high - at that price you can buy a home (be it in a slightly different area).
I think there is a niche here is in the affordable rental space - I'm not talking slumlord, but in a B- to C+ area. I think you see less of a decrease here - you're right between the new constructions and the poverty areas
- 3yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
great post, and I totally agree. ALL of the new construction in my area is above the median... but also, there is still strong demand for it. I don't have that part totally figured out, but I'm still not seeing builders offer many incentives to move product. so it really seems that while sales have slowed and affordability has suffered, we still haven't hit some kind of point that would really turn the market.
and, I think what is in your post is exactly why there is so much demand for affordable, rental quality single family rentals, specifically. and this is also why I'm not worried about national "rents" going up or down or sideways. huge demand here. i don't care what luxury apartments in SF or NYC are going for or if they're jumping around.
- Investor · VA · Member since 2015 · 21k+ posts · 19k+ votes3y
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
Great comments here. One thing I want to add to this is most are predicting rental rates to remain flat or decrease over the next few years. If they remain stable, people will think "its ok as long as they do not go down". That is really not the case, as everything else will be getting more expensive - maintenance, capex, property management fees, utilities. If your costs are growing at 3-4% per year and rents are not, that can have a significant impact on your portfolio. This is one of my concerns with a lot of these DSCR loans.
7e investments53 Reviews - 3yDrew SygitBusiness MemberProperty Manager · Royal Oak, MI · Member since 2012 · 12k+ posts · 9k+ votes
they are this time
Logical Property Management4.9458 Reviews - Argyle, TX · Member since 2013 · 76 posts · 21 votes3y
Quote from @Chris Seveney:
Quote from @Carlos Silva:
Do rental rates usually fall when interest rates increase and home values decrease?
Great comments here. One thing I want to add to this is most are predicting rental rates to remain flat or decrease over the next few years. If they remain stable, people will think "its ok as long as they do not go down". That is really not the case, as everything else will be getting more expensive - maintenance, capex, property management fees, utilities. If your costs are growing at 3-4% per year and rents are not, that can have a significant impact on your portfolio. This is one of my concerns with a lot of these DSCR loans.
What's a DSCR Loan?
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