Do rents ever go down?

32 Replies

Seriously, everyone around here invests like rents are guaranteed to go up forever, do they?

Has anyone ever experienced a declining rent environment? what caused it?

@Will G. ,

Rents can definitely recede for a variety of reasons, e.g. major employer leaves, over supply being built, 2008. If you buy right you should be able to weather a set back in rents. Often it will be temporary, but temporary is relative and may be longer than you want.

@Edward B. agree with you on buying right, it is currently just this side of impossible at the moment. One might ask is buying any multi at record low cap rates and peak rents a good idea? Would you factor in a rent cushion, if so how much?

Rents can - and do - go down. However, you won't see 50% decreases in rent like you would sales prices. It's more likely you'll see a 5 - 10% decline over a period of time. 

If you listen to some of the seasoned pros with decades of experience, they'll tell you rents are least likely to decline in the middle-income bracket. I live in Wyoming and we were impacted by the energy field layoffs of 2015. Rents were going crazy, everything was renting fast, and prices were going up for a couple years. Then the layoffs happened and we were stagnant for one year and then started to decline the next year. I had to reduce prices on about 10% of my rentals just to get them filled and even then it was tough.

This is why it's important to cash-flow on day one. I see many investors saying they are buying properties with no cash-flow or even a negative cash-flow because they predict the market will continue to grow and they'll eventually gain a cash-flow and build equity. All it takes is a 5% downturn and they can lose their shirts.

Yes rents can and do go down for a variety of reasons. I had rents go down at 2 of my units because of development in the area. Lots of new housing units came to market, increasing supply and thus lowering demand. I like to point this out because so many people view development in the area as a plus generally when it can have clear negative consequences.

Originally posted by @Will G. :

@Edward B. agree with you on buying right, it is currently just this side of impossible at the moment. One might ask is buying any multi at record low cap rates and peak rents a good idea? Would you factor in a rent cushion, if so how much?

I don't factor in a rent cushion. I have a cash flow goal for each door that should be more than enough to prevent going negative in the event something unforeseen happens. That's because my cash flow goal is after ALL expenses, including a realistic vacancy, PM whether I use one or not, allowance for repairs and capex, and debt service, etc. I also make sure that I understand the dynamics of the market that I am buying in.

Some investors take the approach to buy properties based on rent income in the bottom 50% of the market range. So if rent for a 2 bed is 800 to 1,000 they are 800 to 900 to start. In this way every year to raise rent 3% the investor tends to stay in the bottom of the market rent levels.

If the investor is paying for a property based on top market rents then that rent market has to keep going up very strong to compensate. The new building then becomes old and if tenants are paying a premium they might move to the newest place again that was just built. In a down turn the tenants look for cheaper rents from top market. This puts pressure on lower market rent properties where they are full to keep raising rents because of demand where top market rent places are keeping rents flat or reducing rents to try and keep occupancy levels up and vacancy down.

There are some markets where rents keep going up as demand outpaces supply but those are few and far between. Even those areas can get overbuilt as the supply catches up to the demand. There is no perfect investment strategy however by buying conservatively the odds can be more in your favor than buying under conditions where everything has to be perfect to do well.

    

@Nathan G. @Russell Brazil @Joel Owens are you guys actively looking at deals? Every broker tells me the same thing.."you can raise the rents"! It really is starting to smell like 05 when agents insisted home prices "only go up"

And Russell stated a rent decline due to development, but what happens to "c"(cheaper rent) properties when "a" (new, top of market rents) vacancies increase? 

Rent goes up and down, but the general trend is up, along with inflation. Unless something major like recession, crash, etc, happen, rent generally goes up.

I don't buy residential I buy commercial properties. I have friends that own hundreds of units. They keep bottom of the market rents and raise rent 3% each year. Whether economy goes up, down, sideways they stay full and cash flow. They do minimal upkeep to older property as tenants know they have a good deal for the market and don't want to (rock the boat).

Conversely if tenants are paying top market they want everything under the sun and then some done to the property and want the best amenities.

I already mentioned if a down turn happens the top market properties can get hit as people want to move to cheaper living arrangements. So those properties can have flattened rent before the next upturn. You buy properties playing defense going in and (what if) strategies. This way you are not surprised if it happens but ready with a plan. 

Jobs! When jobs dissapear, rents fall. I saw this first hand in Silicon Valley in 2001 and then again in 2008 to 2010.

Also, They can fall to zero if your location is impacted by natural disaster or if hard crime takes over the neighborhood. Has happened I am sure in areas like Detroit etc.

That said, I applaud the question because it does seem like people are investing as if rents will never fall.

I usually run my math by running what if scenarios of a 10 or 30% decline in rent and my ability to sustain in an environment.

I pay all cash for my properties so if I have to lower rent for some reason then so be it. Actually I always rent below market rent so I can get a bunch of applicants and choose who I think is the best one.

Short answer yes, and will happen and can happen at any given time...I don't have a crystal ball, but we went from 100% occupied to 70% occupied with rents down at least 100.00 per unit.  I have been in the MN market since 1998.  This was in the mid 2000's.

Past experience was over construction, bad economy and the class A started giving away the farm to avoid losing the farm and all property rents dropped significantly.  We are not there now.....but if you look the massive amount of building, good stock market performance, low unemployment  we are doing well, but change 1 or 2 of those factors in a negative way and you will see changes......almost always goes in cycles.

What is great now is kids hate buying homes and an aging population is moving to rental....at the same time, inventory on the residential market should get interesting as well with these to factors and rising interest rates.....all spec....not an expert.

Originally posted by @Will G. :

Seriously, everyone around here invests like rents are guaranteed to go up forever, do they?

Has anyone ever experienced a declining rent environment? what caused it?

 Major economic shift in a city would cause rents to go down. However more often then not they trend upwards.

@Michael Tempel HOLY COW! 30% vacancy rate? how long did that last? Did you have financing in place on the property and were still able to pay the note?

I appreciate your perspective and have been wondering what will happen to c properties when a's start increasing  in vacancy rates. Sounds like you experienced a lowering tide sank all boats kinda situation?

Agreed, good fundamentals in place, but what do you think of all the folks buying in at record low cap rates and what I suppose is a peak (or near) in rental rates?

I’ve only ever raised rents since I started in ‘12 which is consistent with population and job growth in my area.  Not scared of lowering rents to compete if its ever needed, paid off the properties because I enjoy cash “cow-ing” so much as opposed to having a mortgage and just cash “flowing”.  I just love the monthly income to much to keep mortgages even if there is dead equity.

I have a triplex in South TX where rents have been flat over the past 6 years or so. The population is growing quickly, but many multifamily properties have been built to keep up with the demand. I have great cash low on my place, so an actual decrease wouldn't hurt me too bad if it should happen.

Yes, Rents can go down...

I experience rent going down in following two scenarios...

Connecticut: less demand as population declining, less jobs, high tax. I am charging less rent today than what I was charging in 2008..!!

Texas: oversupply of rental home because of high inventory. last January there were 200 rental homes listed in my zip code... I reduce my rent to attract tenant.

Always better to have $200 positive cash flow when you buy to cover this drop.

@Shital Thakkar @Eric James I appreciate the input, and think this gets largely glossed over in the majority of  discussions here. I suppose 10 years of rents mostly going in one direction may be causing complacency?

In my market, Chicago, there were substantial rent increases for many years.  Last autumn, there was a slowdown in the rental market.  Many landlords made slight adjustments in price to make their units more competitive.  So yes, rents can go down, but generally they will go up at least with inflation.  And they will reflect the scarcity (supply/demand) of a market at any given time.

During a downturn of an economy cycle the tenants will demand a reduction in mortgage or look for a lower priced rental.  This is common.

San Francisco City, for example, landlords are willing to cut the rent by ~15% but there is no downturn. 

There is a difference between an economic recession and a housing crisis and they often don't happen at the same time.  The last housing crisis threw many rentals a life preserver because people had to rent.  The next economic recession (with or without a housing crisis) may be different.

Many investors try to buy properties and in locations that will hold up okay regardless of market conditions.

Originally posted by @Will G. :

@Michael Tempel HOLY COW! 30% vacancy rate? how long did that last? Did you have financing in place on the property and were still able to pay the note?

I appreciate your perspective and have been wondering what will happen to c properties when a's start increasing  in vacancy rates. Sounds like you experienced a lowering tide sank all boats kinda situation?

Agreed, good fundamentals in place, but what do you think of all the folks buying in at record low cap rates and what I suppose is a peak (or near) in rental rates?

This was around the time we had a recession and then home mortgage issues....heck implosion :-(.     

My company mainly focuses on “C” class properties and typically does value add.   Doing this insulates you from major downturns since your highest rent that will be max performa for renovated units is still way lower than class A.    This is changing in Minneapolis.   Buildings you could buy for 45k a unit a few years ago and put in 25k per unit (value add) are selling for 120k a unit now...so you are flirting with disaster following this model.   

.I now work in IA, SD and WI for this reason and am considering following a national emerging market strategy.  

I don’t see anything happening soon, but I do predict something will happen in our market so decided I want to diversify.    

To answer your question: The buildings with 30% vacancies luckily had very low LTV....so it was fine. A 100 rent decrease is a lot, but not when class was offering 1000 + rent decreases/2 months free etc. The buying opportunities in that period were crazy from other less capitalized/experienced owners at that time, one owner got a failed class A for 1/2 the value to build 5 years later for example.

We typically perform very well in down markets, so not to wish harm to anyone, I am excited for the next cycle we’re buying makes much more sense again.   This is also why I am looking nationally and focused on 150 plus portfolios (need to put a team in place to scale out).

In the short term rents fluctuate, long term they rise due to inflation, scarcity of land, etc.

One measure of property that is rarely talked about is what would this property look like as an investment if I had to lower the price to break even, would there be a demand for it?  There is an intrinsic value to residential real-estate, unlike many other asset classes.  Below market there is an almost infinite demand for property.  Would someone be willing to move to a nicer place for less money?  I recently saw an old big box store in the mid-west that would give you the remainder of their lease for a dollar a year.  There were no takers.   

In a catastrophic event, could you lower the rent and stay solvent?  Recession proof!   

I have only seen rents go down on uber luxury stuff when times get tight. The upper middle and below I have not seen rents go down and only sideways even during last GFC in these parts. Good luck! 

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