Why don’t rent prices boom along with property prices?
Tallahassee, FL · Member since 2017 · 14 posts · 0 votes
I bought my first property in 2013. I paid $65k for a townhouse and rented it for $780 at the time. This was an average deal bought off of the MLS in a C neighborhood.
Today, the price to purchase the same property would be $85-90k. The rent on the other hand only increased from $780 to $840. I am confident the townhouse has rented at market value both then and now.
In the 6 years that I have owned it, the property value saw a 35%-40% increase while the rent only went up by 7.5%. My other properties have followed a similar trajectory.
I am wondering why rent rates do not seem to follow the pace of property value increases. Have increased rent rates historically trailed property value increases? I struggle to understand the dynamics of the the real estate market.
It's the law of supply and demand.
There is the supply and demand for real estate, and a separate one for rentals. I bought a property in foreclosure, sold at auction for $200K in 1993. Market price is $325K. The 3BR/2ba unit at the time rents for $1,700, and the 2BR/1ba unit rents for $650.00. It was at the bottom of the market crash to buy real estate, and demand was slow.
But that does not mean people aren't looking for rentals? In 1993, there are still plenty of people looking to rent, in fact more, as people are nervous about buying real estate in a crash. So the supply and demand is separate for the purchase and sale of real estate, and the demand to rent is actually higher.
Fast forward to 2019. The property appreciated to $1.275 million. The 3BR/2Ba unit would rent at $2,700 and up, though I occupy it. The 2BR/1ba unit now rents for $1,700, which is what my tenant is paying. The rents have doubled from 1993, market valued quadrupled, and compared to what I paid for it, sextupled from auction prices.
OK, prices quadrupled, and rents doubled. Can I rent the apartment in question for $3,400? No, that would be twice the market. Why is the property $1.275 million? It's a combination of foreign money, mainly from Asia, where buyers pay cash in a hot area. So the GRM has greatly gone up. In cash flow real estate areas, this would be a big deal. In areas where folks pay 100% cash, who cares what the GRM is, if they know, or care to know what it is.
When I started investing in real estate in the early 80's, I bought properties with a GRM of 6 or below. Now, I'm looking at 15 to 20 if I'm in the market to buy.
An investor, who teaches real state courses at NYU invests heavily in Westchester county whereas his real estate office is in NYC where he handles leasing for his family real estate business. Ask why Westchester? His answer "Crazy people from overseas are grabbing properties in NYC, throwing cash at it left and right, but not yet in Westchester". Someone raised his hands and asks "why?". His short answer "they haven't heard of Westchester yet in Hong Kong, or Shanghai". Then he added "maybe someday, they will."
That is how it works especially when interest rates are so low for so long. think back to the 80s and 90s when a mortgage for 10% was not unheard of and why would anyone buy a rental with a 9% cap rate. Fast forward to when mortgages are 4% and ask the same question.
It's the law of supply and demand.
There is the supply and demand for real estate, and a separate one for rentals. I bought a property in foreclosure, sold at auction for $200K in 1993. Market price is $325K. The 3BR/2ba unit at the time rents for $1,700, and the 2BR/1ba unit rents for $650.00. It was at the bottom of the market crash to buy real estate, and demand was slow.
But that does not mean people aren't looking for rentals? In 1993, there are still plenty of people looking to rent, in fact more, as people are nervous about buying real estate in a crash. So the supply and demand is separate for the purchase and sale of real estate, and the demand to rent is actually higher.
Fast forward to 2019. The property appreciated to $1.275 million. The 3BR/2Ba unit would rent at $2,700 and up, though I occupy it. The 2BR/1ba unit now rents for $1,700, which is what my tenant is paying. The rents have doubled from 1993, market valued quadrupled, and compared to what I paid for it, sextupled from auction prices.
OK, prices quadrupled, and rents doubled. Can I rent the apartment in question for $3,400? No, that would be twice the market. Why is the property $1.275 million? It's a combination of foreign money, mainly from Asia, where buyers pay cash in a hot area. So the GRM has greatly gone up. In cash flow real estate areas, this would be a big deal. In areas where folks pay 100% cash, who cares what the GRM is, if they know, or care to know what it is.
When I started investing in real estate in the early 80's, I bought properties with a GRM of 6 or below. Now, I'm looking at 15 to 20 if I'm in the market to buy.
An investor, who teaches real state courses at NYU invests heavily in Westchester county whereas his real estate office is in NYC where he handles leasing for his family real estate business. Ask why Westchester? His answer "Crazy people from overseas are grabbing properties in NYC, throwing cash at it left and right, but not yet in Westchester". Someone raised his hands and asks "why?". His short answer "they haven't heard of Westchester yet in Hong Kong, or Shanghai". Then he added "maybe someday, they will."
The most interesting "crazy" ideas I've read in the forums recently is the notion that GRM is not relative but absolute to price. That low priced Midwestern property is not low GRM directly because of location & demand, but a secondary effect because of the low prices those cause. This was expressed as "high priced properties don't cashflow". It seems true, but it might be inverse, that rents can only go so low no matter how cheap the property. This is how some of those places that sell for $20k are renting for $500. Insane to us in the NY area!
I don't have any data but my gut feeling is that it's because there's a lot of $ available to borrow for a mortgage. The increased/inflated supply of money leads to larger/higher prices - sort of like how increased air in a balloon leads to a larger balloons - as people can "afford" to borrow and therefore "afford" to pay more.
On the other hand, there's not much money at all available to borrow to rent! Thus the market for rent is set by what people can afford to pay without being able to access credit and borrow.