I just closed on my first cash flow property a few weeks back and I am very excited. My question is in regards to the future of rental prices. As a cash flow investor, current rental rates are very appealing. However, what is the expected future of rent? It almost seems eventually these rent prices have to go down since they are so high historically. I am worried I invest in 6-7 properties only for my monthly cash flow to be cut due to a dramatic drop in rent prices.
Congratulations on your first CF property! Rent rates are a factor of supply and demand. Are macro factors like job growth and population growth outpacing the rate of new apts/rentals being built or coming on the market? In my area hundreds of new-build units are coming on the market after years of under-supply. I am not buying the same type/style/location/price range of these new units. Hopefully employment and population growth exist near your rentals. In the meantime be a rockstar property manager, keeping your property up and take care of your tenants. It's good you recognize you have a good thing going. Work hard to keep it. Happy tenants don't look for new places to live as much!
Thanks for the advice! I am going to be investing in more low income communities and most likely will be renting out to Section 8 tenants. Low income housing provides me the entry price which I can afford. In these areas, the job market is normally underwhelming. Should I still be looking at the same factors given my strategy when looking into future rent rates?
I recommend whatever properties you look at have at least a high enough return that you could lose 10-15% in rent and still have an acceptable return on investment. In my area I typically look for a positive $350+/month cash flow out of a single family house which gives me some flexibility should the rents drop some.
Rents have gone up several hundred dollars per month in the past two years and I doubt that it will sustain this level in the future. If you feel like rents in your area are stagnant or are dropping be selective in your choice of properties but there are always deals out there to be found.
A target renter market of Section 8 folks would change the need for job growth I would imagine. Factors for sustaining rent rates would be population trends and government funds (HUD) availability. HUD funding here has decreased a little over the last couple of years with the sequester and stuff. The percentage paid by HUD dropped a few % and they sent a letter to LLs requesting minimal/no rent increases. I don't see the funding dropping like a rock, just a little maybe. If you are buying with a cushion as @Christopher Gilbert suggests, it won't hurt that much I wouldn't think.
Our low income rents move up and down quarter by quarter, but overall are very flat to when we started. In low income areas part of it is supply and demand; if you don't get enough applications to choose a tenant that lets you sleep at night, you have to drop rent. But in low income areas rents will stay high due to all the damage that the tenants due to the units; landlords have to keep a minimal profit or they will flee, so there is a bottom that prices don't drop below. I find that there is much more volatility in deposits; in tough times the applicants don't have the deposit money, so the going rate gets scarily low. In our experience they have ranged from half of one months rent to one months rent, rarely higher. HUD rates can change, but they often change back in a year or two, and you always have the option to get non-section 8 tenants if market rates are higher than HUD rates. Hope that provides some perspective.
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