Higher rents more likely to come down than lower rents

25 Replies

As the rental market stays hot the rates are increasing quite a bit year after year.   I don't see how that continue.  When that slows or retreats does anyone have an experience, anecdotal or otherwise, as to how that affects various rental price "brackets".    Will an $1800 rental pull back to $1700?  $1650?   While a $1200 rental would pull back to $1150?   The $1200 will always be more affordable and that is where I continue to invest but the $1800 has a higher upside, my concern is just where we are in the market cycle now.

Ive only had rents ever drop on my lower priced rentals, never on my higher priced ones.

Guys like @Russell Brazil have decades of experience and have made it through down-turns. They all seem to say the same thing: rentals in the $700 - $900 range never drop and may actually go up in a bad market. The high-priced rentals will drop when the market turns and people can no longer afford the luxurious. The lower-priced rentals will drop when people are laid off or entire industries shut down. The mid-priced homes are rented by the backbone of society. They are generally stable people with families and won't run when the going gets tough.

Originally posted by @Nathan G. :

Guys like @Russell Brazil have decades of experience and have made it through down-turns. They all seem to say the same thing: rentals in the $700 - $900 range never drop and may actually go up in a bad market. The high-priced rentals will drop when the market turns and people can no longer afford the luxurious. The lower-priced rentals will drop when people are laid off or entire industries shut down. The mid-priced homes are rented by the backbone of society. They are generally stable people with families and won't run when the going gets tough.

 I have not seen rents in those brackets drop much if any what I have seen is them go hundred % vacant and cant refill them because construction came to a screeching halt and the laborers left and many or most laborer's are tenants.. 

this played out in PHX  AZ   Vegas NV   FLA  GA  places with uber new construction .. when it stopped so did the jobs.

this is all dictated in my mind on JOBS.. you have jobs you have rent stability jobs or economy falters people start moving in with relatives or they simply up and leave and go somewhere else.. there is a reason U haul is a billion dollar concern. 

In Portlandia were are see price concession and or free rent etc on some of the new build real high end 2500 dollar elevator buildings on the east side.. this is happening now.

form what a friend of mine who owns a management company with 6k plus doors was telling me at lunch.

a few buildings are stressed right now.

take this scenario.. you buy the land 3 to 5 years ago it takes at LEAST 2 years to get through permitting then another year to build.. cost of building in this time has gone up 10% or more.. land is static .. and your proforma show this ever increasing rent.. you now come on market and your 4 story elevator building now cost you 400 a foot to build.

so your in a new apartment 400k.. you need 2,500 a month just to hit your investor grade 4 to 5 cap.. and now rents start to pull back as they are or lease up is very slow at those values.. so you have full amount of debt on the building and of course everyone these days has max debt.. so debt service and DCR ratios start to go out of wac you have annual reporting and loan covenants .. you no longer meet your covenants and you have a cash call to your lender along with negative cash flow.. this is what I mean by some are stressed..

In my area of the country, if you can give more value for money than an absentee landlord mailing it in or a faceless management company rapaciously intent on maximizing their profit per unit, you're never going to go broke with rentals in the $700-$1100 range, good economy, bad economy, whatever. Write clear, understandable leases with landlord provisions that you stick to, don't be an arrogant jerk flaunting your economic success, communicate often and humbly, reserve judgment when you can. It's not rocket science.

A lot of people who work in this business simply refuse to understand that renters also tend to work together, and on breaks, one of their favorite things to do is complain about their landlords. If your tenant has less to legitimately complain about than the rest of the people s/he works with, sooner or later you're going to end up with a waiting list of future tenants.

Here in SF we have seen rents flatten or drop and this started in late 2016. But it’s no disaster yet. The next leg could be up or down. Rents or home values depend on population growth and jobs. Before we talk about rents, let’s talk about jobs. If jobs are slowing, rents will come down. To me it’s a myth that any thing low price is insulated from a downturn because “people need a place to live”. Fact is lower income people have the lowest barriers to moving from one job to another and from one place to another. There is a reason why Midwest ghost towns got created during the 2008 downturn.

Originally posted by @Sam Josh :

Here in SF we have seen rents flatten or drop and this started in late 2016. But it’s no disaster yet. The next leg could be up or down. Rents or home values depend on population growth and jobs. Before we talk about rents, let’s talk about jobs. If jobs are slowing, rents will come down. To me it’s a myth that any thing low price is insulated from a downturn because “people need a place to live”. Fact is lower income people have the lowest barriers to moving from one job to another and from one place to another. There is a reason why Midwest ghost towns got created during the 2008 downturn.

 ya there were many Bay Area investors who bought 4 plex's through LInda Gurcheck in PHX who learned that one the hard way when the building of new subdivisions came to a screeching halt in 08 to 2012 and many of those clients had 100% vacancies on a 4 plex for year or more.

these sold at the peak these 4 plexs for 300 to 350k  in 2010 I could buy them same exact building vacant of course for under 100k each.

it is a very big misnomer to think that rentals cannot go vacant.. and of course this is HUGELY regional.. and current economics plays a big factor.

Originally posted by @Jim K. :

In my area of the country, if you can give more value for money than an absentee landlord mailing it in or a faceless management company rapaciously intent on maximizing their profit per unit, you're never going to go broke with rentals in the $700-$1100 range, good economy, bad economy, whatever. Write clear, understandable leases with landlord provisions that you stick to, don't be an arrogant jerk flaunting your economic success, communicate often and humbly, reserve judgment when you can. It's not rocket science.

A lot of people who work in this business simply refuse to understand that renters also tend to work together, and on breaks, one of their favorite things to do is complain about their landlords. If your tenant has less to legitimately complain about than the rest of the people s/he works with, sooner or later you're going to end up with a waiting list of future tenants.

I like this post and agree about the water cooler analogy.. when I had a bunch of rentals in one community that were almost all hud the tenants would talk and say hey I want one of those JLH houses.. LOL.. we had a rep.

Although I will say in some areas of the country and this could be yours.. that there simply is no new construction so the inventory is the inventory and you do have supply demand issues and the only real new supply comes form older folks moving on and their house turns from owner occ to an investment home.. or burnt out landlord..  in our market here we build 3 to 4 thousand new apartment doors yearly. that's one city metro.. so this in itself keeps rents from going to nuts.. but the new construction depending on where it is is 100 to 400 a foot to build.. its a 100k to build one on the low end up to 400k for one 2 bd apartment in an elevator building on the higher end..

when you can go to rural US and buy existing homes in some of these small bergs for 50 to 70k and in some small towns in PA for instance I have seen many for 10 to 20k.. does not take much there to be successful renting those out.. cost of acquiring them is more akin to being in the used car business.  So again one size does not fit all … JOBS dictate and its regional.. 

@Jay Hinrichs

It’s funny because those who bought a 4 plex in Phoenix after the crash now have experienced the rebound.

I was late to the game and bought mine in 2014, but I could have bought dozens of them off the MLS for around $150-175k and they are now worth $300-350k. The best part was that the numbers for cash flow were great, so the appreciation was an awesome bonus.

There is a shortage of affordable housing in Phoenix and while there are tons of huge newer complexes, the rents at those places are generally higher.

@Jay Hinrichs

Most of the new MF construction in the Burgh these last few years has been out-of-state money chasing the elusive tech-educated Millennial who's gainfully employed but too stupid to buy a house. Everybody wants some of that money -- but there just aren't enough Millennials, especially the stupid ones, available here. So there are rentals going up in the $1500-$2000 range everywhere here. They're not doing so hot, and many of the out of state investors come in breathing fire and run out in the middle of the night white as a sheet and in quivering fear someone will hear about the shaved Steel City orangutan they woke up next to. Everybody wants the sexy high end of the market, everyone looks down on the low end and how many people are in it.

All you really have to do to succeed in low-cost landlording here is to have the basic skills and time available to keep up the older, well-built properties. You can buy them for a song when the market is right. Control the greed and provide the service. The money keeps coming, the tenants are grateful, retirement is closing in and it looks much better than it did before we got into this.

It's the Burgh. It's weird.

Originally posted by @Anthony Gayden :

Jay Hinrichs

It’s funny because those who bought a 4 plex in Phoenix after the crash now have experienced the rebound.

I was late to the game and bought mine in 2014, but I could have bought dozens of them off the MLS for around $150-175k and they are now worth $300-350k. The best part was that the numbers for cash flow were great, so the appreciation was an awesome bonus.

There is a shortage of affordable housing in Phoenix and while there are tons of huge newer complexes, the rents at those places are generally higher.

 did you buy in PHX or are you talking about  Omaha.. the same thing happened in Vegas friend of mine was buying 4 plexs there in 2011 2012 for 140 to 160k he had to put in usually about 7 to 10k a door because they were kind of trashed.. and now they are approaching the 300k range and climbing.. its all about JOBs and blue collar jobs you have those you have your 600 to 1000 dollar renter without them ( that labor force) things start to go downhill.

and this is one thing I have been mentioning those that jumped into the game 5 years ago the rising tide raised all boats.. it was a slice in time.. so now we since this continual whining on BP hey there are no deals..  No deals compared to what.. buying homes right after the great melt down in US real estate history ? or second worst.. depending on who you talk to .. my banker thinks it was worse than the 30s depression.. but anyway.. we are now coming back into balance.. and unless we have a Credit freeze again were is this distressed inventory going to come from.. ???  are you going to panic and sell ??

the only way you see things eroding is if jobs pull out and people stop renting.. can it happen sure.. will it who knows depends on the area but if your in a one horse town and the horse leaves could happen.. diversified economies are good for a region.. 

Originally posted by @Jim K. :

@Jay Hinrichs

Most of the new MF construction in the Burgh these last few years has been out-of-state money chasing the elusive tech-educated Millennial who's gainfully employed but too stupid to buy a house. Everybody wants some of that money -- but there just aren't enough Millennials, especially the stupid ones, available here. So there are rentals going up in the $1500-$2000 range everywhere here. They're not doing so hot, and many of the out of state investors come in breathing fire and run out in the middle of the night white as a sheet and in quivering fear someone will hear about the shaved Steel City orangutan they woke up next to. Everybody wants the sexy high end of the market, everyone looks down on the low end and how many people are in it.

All you really have to do to succeed in low-cost landlording here is to have the basic skills and time available to keep up the older, well-built properties. You can buy them for a song when the market is right. Control the greed and provide the service. The money keeps coming, the tenants are grateful, retirement is closing in and it looks much better than it did before we got into this.

It's the Burgh. It's weird.

ya know maybe they ( millennials ) read the articles  … and think they should rent.. and I do know that homeownership East of the Mississippi in general is not coveted as much as on the coasts .. were even here in Portlandia Millennials buy most of the starter housing.. but they also buy condo's down town and rent.. but agreed.. first thing anyone should do in IMHO is buy them selves a home if they plan on living in a community any length of time. and in lower priced areas go ahead and buy it anyway.. get in for the lower down and better interest and if you move wa la you have a rental already bought.. paying rent is a fools errand..   

I see an undertone in many discussions here on BP that the next downturn will be as severe or worst than 2008 and housing will behave similar to how it played out in 2008. I wonder how realistic that scenario is. In my 20 years of investing I have only seen 2008 as the one period where housing got kicked in the pants with a pointed shoe. That I believe was not something that happens in every downturn.
But I wonder what veterans think of the pain housing will endure in the next downturn?

Originally posted by @Sam Josh :

I see an undertone in many discussions here on BP that the next downturn will be as severe or worst than 2008 and housing will behave similar to how it played out in 2008. I wonder how realistic that scenario is. In my 20 years of investing I have only seen 2008 as the one period where housing got kicked in the pants with a pointed shoe. That I believe was not something that happens in every downturn.
But I wonder what veterans think of the pain housing will endure in the next downturn?

Bay area suffered /  NOrthern CA suffered some pretty severe down turn in 1989 to 1992.. and it was not until about 97 that values got back to where they peaked.. then they shot up until dot com bubble and that was a blip.. then screamed up until 08 like everywhere else. 

So its happened.. what created the 89 down turn was the war and the earthquake.. I was HML in Oakland at the time and we had some pretty bad devaluation go on.. One home on Green street In SF I had to foreclose on peaked at 2 mil in 88 by the time we went to trustee sale no one bid it at opening bid of 925k.. today probably 5 mil easy if not more.. and by 97 ish back to 2 mil..

who knows what will trigger the next one.. but  when credit froze in 08 there was nothing we could do if you did not have cash .

here are some areas I worked in   in those days and the crash.

1. parts of Atlanta I made loans on houses that were worth 150k my loans were 90k   sold this 97 build for 36k in 09. OUCH

2. I was buying court house steps in fort Meyers  new or near new homes for 30 to 40k cash at the steps in 09

3. my well documented clients in PHX AZ losing 4 plexs they paid 350k for in 05 and having them go vacant and they let them go to foreclosure thereby ruining their credit and losing whatever cash they had in them.. 2010 they were selling for 100k or less and still vacant.

so on and so forth.

As long as credit does not freeze the values have been reset .. those that were lucky or smart enough or came of age to be investors and bought in the trough historic low price points historic low interest  many paid cash as financing was still tough.. so as long as they don't drink the cool aid and refi out and leverage up you have the makings of a very strong asset base.. plus all the foreigners who paid cash there were literally hundreds of thousands of homes paid for in cash by Off shore folks.. then add in the half a million or more that were bought by hedge funds.. 

I have mentioned this many times before but what do you think would happen to the auto industry if all vehicles had to be paid for in cash like many foreign countries.. that's why there are so few cars in many of those countries.. 

and what would happen to private aviation where light aircraft enjoy 90% financing for 20 years at 4 to 6% interest and there are tax benefits but they start at 400 k  and light jets that start at 3 million or light turbo props at 2 million.. yet hundreds of these are sold each year .. all because of credit.

and just like commercial airliners many are leased and those leasing companies are buy 50 million dollar or 100 million dollar planes with credit not cash then leasing them to the airline.s   bottom line credit freeze's we see what happened.  We become like a third world country that is cash and carry.

@Jim K. There’s even more of that out here in Raleigh. The only new build apartment complexes I see are these millennial type complexes that rent for 1100-1500.

The difference here is I think there’s actually a strong market for them. One near where I work just finished and started leasing and I already see lots of cars there.

I could live in a place like this but I reallt don’t need the extra space right now. I’ll probably live there when I’m older but before I have kids.

Originally posted by @Jay Hinrichs :
Originally posted by @Sam Josh:

I see an undertone in many discussions here on BP that the next downturn will be as severe or worst than 2008 and housing will behave similar to how it played out in 2008. I wonder how realistic that scenario is. In my 20 years of investing I have only seen 2008 as the one period where housing got kicked in the pants with a pointed shoe. That I believe was not something that happens in every downturn.
But I wonder what veterans think of the pain housing will endure in the next downturn?

Bay area suffered /  NOrthern CA suffered some pretty severe down turn in 1989 to 1992.. and it was not until about 97 that values got back to where they peaked.. then they shot up until dot com bubble and that was a blip.. then screamed up until 08 like everywhere else. 

So its happened.. what created the 89 down turn was the war and the earthquake.. I was HML in Oakland at the time and we had some pretty bad devaluation go on.. One home on Green street In SF I had to foreclose on peaked at 2 mil in 88 by the time we went to trustee sale no one bid it at opening bid of 925k.. today probably 5 mil easy if not more.. and by 97 ish back to 2 mil..

who knows what will trigger the next one.. but  when credit froze in 08 there was nothing we could do if you did not have cash .

here are some areas I worked in   in those days and the crash.

1. parts of Atlanta I made loans on houses that were worth 150k my loans were 90k   sold this 97 build for 36k in 09. OUCH

2. I was buying court house steps in fort Meyers  new or near new homes for 30 to 40k cash at the steps in 09

3. my well documented clients in PHX AZ losing 4 plexs they paid 350k for in 05 and having them go vacant and they let them go to foreclosure thereby ruining their credit and losing whatever cash they had in them.. 2010 they were selling for 100k or less and still vacant.

so on and so forth.

As long as credit does not freeze the values have been reset .. those that were lucky or smart enough or came of age to be investors and bought in the trough historic low price points historic low interest  many paid cash as financing was still tough.. so as long as they don't drink the cool aid and refi out and leverage up you have the makings of a very strong asset base.. plus all the foreigners who paid cash there were literally hundreds of thousands of homes paid for in cash by Off shore folks.. then add in the half a million or more that were bought by hedge funds.. 

I have mentioned this many times before but what do you think would happen to the auto industry if all vehicles had to be paid for in cash like many foreign countries.. that's why there are so few cars in many of those countries.. 

and what would happen to private aviation where light aircraft enjoy 90% financing for 20 years at 4 to 6% interest and there are tax benefits but they start at 400 k  and light jets that start at 3 million or light turbo props at 2 million.. yet hundreds of these are sold each year .. all because of credit.

and just like commercial airliners many are leased and those leasing companies are buy 50 million dollar or 100 million dollar planes with credit not cash then leasing them to the airline.s   bottom line credit freeze's we see what happened.  We become like a third world country that is cash and carry.

Boy, no kiddin’, Jay.  I remember selling my house in MD (close to Washington DC) in 2009 for career movement purposes back to GA, and I suffered quite the whipping to the tune of six figures (all lost equity) on a House I had owned for ~ 5 years.  And this was no short sale or foreclosure either.  I remember talking with my mortgage servicer (Chase) at the time about a new loan on a house we had identified in GA when we moved.  They told me to basically take a walk, saying “Oh so sorry...you might wanna talk to Quicken Loans, etc”.  Talk about credit lockdown...

There are online sites for landlords (such as BiggerPockets) and online sites for renters (Google "apartment ratings" and pretend you are a renter looking for a place to live). You can take the ratings and comments with a grain of salt, but if many people are saying the same thing about an apartment, there might be a grain of truth to it. The water cooler discussion has moved online.

Also, when rental markets soften, the move-in specials increase. I got a couple hundred dollars off my first full month of rent as a sign-up bonus. When the economy softens, tenant screening standards drop. Rather than let a rental property sit vacant, some landlords are willing to take a greater risk of having to evict someone. A long-time resident at where I'm now living told me when a previous owner (that went bankrupt) started accepting HUD tenants, "that's when the drugs came in" (I wasn't living here then to be able to confirm this assertion, but I have no reason to doubt it).

The same reaction happens in business ("street fighting" and "lifeboat ethics"). During the severe chip recession of the 1980s, for example, we had instructions from top management to accept all orders over variable cost. The idea was that direct material and labor would be covered and any gross profit would contribute something to cover the overhead. I didn't feel comfortable working in this survival-oriented environment (the bottom rung of Maslow's hierarchy of needs), but I had a hungry mortgage to feed every month.

Those times made me yearn for financial independence where I would more than cover my living expenses with investment income and not have to be concerned with the price of gasoline or the chip industry's "book to bill" ratio.

@Erik Sherburne Thats a tough question to answer, it might be best to reach out to a specialist in the area that you invest in as they can provide historical data and possibly help to guide you toward formulating your projection on where the market will end up. A local Realtor or Property manager can help you with comps but you should also look up Real Estate analysts in the area where you hold your properties, they may be able to provide a look at the Macro Economics of the region which could prove helpful 

At least for the markets I’m in, I like staying in that 750-1100 range because these are less likely to drop in a recession

While the bottom fell out of the housing market in Mississippi rents did not go down, if anything they went up. But I noticed the opposite happened where my mother lived in California, especially in vacation places spots like Tahoe. 

I believe the prudent move is to always play in the middle.  When the going is good, people tend to move on up, when the going goes bad people tend to move on down.  Either way you will be getting the better choice in tenant.  That's our strategy anyways.

Stick with what you know.  There will always be demand for median housing in decent locations regardless of the cycle.

  1. Good location
  2. Add value
  3. Cash flow
  4. Prudent debt
  5. Reserves

Here's more or less my philosophy: if I can still make money at 50% of my current rental rates, and if my current rental rates are at or slightly below market, I'm going to be in pretty good shape irrespective of what happens in the broader economy. That is one of the advantages of owning property outright - yes, the return might suck, but I have homes that will cash flow, accounting for maintenance, insurance, taxes & capital expenses, at $300 per month. If I can't get those kinds of rents then the economy is so bad it's really not going to make any difference anyway.