Rents have been increasing and it is a great time to be a landlord. In fact, landlords have been enjoying some of the fastest growth in rental rates in recent history. But you need to be aware there is a cap to that growth.
Rental demand continues to remain very strong, which allows landlords to be bullish on rental rates.
The questions investors are now asking about rents are:
- “How high can they go?”
- “For how long can we raise the rates?”
Great questions, and one needs to look deeper at the market in which you are investing to find the answers.
Rising rents are a trend, but how high will they go?
Everything I read and study suggests rents will rise through 2016 but at a slower pace than in the past. While rental demand continues to be very strong, there are larger numbers of new apartment buildings being built to address the needs for more rentals.
This can change the balance of rental supply and demand.
While it most likely will take the remainder of this year to get these rental units built, the rental demand will remain in favor of the landlord through year’s end. The national vacancy rate closed out 2015 at 4.2%, which is a low national number, but rose to 4.5% in the first quarter of 2016 according to REIS.
Nationally rents are slowing with the average increase 4.1% in the first quarter of 2016 to $1,248 per month, compared to a 5% increase in the first quarter of 2015, according to Axiometrics.com. And demand for new apartments has been declining according to MPF Research.
“The past few years everything you touched was gold in the apartment industry, and that’s not going to be the case” this year, said Jay Parsons, vice president for MPF Research, told the Wall Street Journal.
However remember local markets vary
I always enjoy looking at national numbers, as I believe they are helpful to determine an average or a benchmark against which to compare.
I do, however, always say there is no such thing as a national real estate market, as each market is local in nature and different in size, economic strength, percentage of renters to homeowners, etc.
As a landlord doing your diligence you will always want to be aware that your research into this information is local in nature rather than based on national statistics. Too often I see this information being misinterpreted because of this. Diligence, of course, means nothing unless it is providing you accurate information.
4 things to go know before raising rents
You want to consider what is going on in your local rental market in order to know whether you can raise rents and what your rental future will look like.
1. Affordability of the market
One of the first things you want to determine is your local affordability for housing. This can be obtained from a local property management company or a Realtor; you can also find information on sites like HUD’s local housing portal to determine fair market rents for a particular area.
Rents can only rise until affordability peaks and a great way to determine this is to establish the area’s median income.
Affordability based on national averages is when a monthly rent payment is around one-third of what the average person’s monthly gross income would be. Once it gets beyond this point it may be getting to high. This is when apartment owners, managers and investors may experience vacancies and/or late rents suggesting that affordability has peaked. If you are evaluating property where you need high rents you may want to look deeper as sustainability of cash flow may be threatened.
2. Know what your competitors are charging (your tenants know)
An interesting thing happens when the landlord market is hot.
Landlord raise rents every time a unit becomes available.
How easily we slip into complacency, we think this rise will continue forever.
Before you know it, the market takes a swing and suddenly it becomes harder to rent and as a landlord you wonder why.
Do what you know your tenants are doing, they shop the competition so you will should to. Here is a great tool to do just that,rentometer.com which will tell you what other homes have recently rented for in your area.
Also, this cool tool is a great asset when buying property to make sure your anticipated rents are in line with the market.
3. Housing availability
While bigger cities tend to be building more houses and apartment complexes to help fulfill the needs of renters, this is not the case everywhere.
Most local newspapers display building permit activity; I always suggest you watch this for insights.
Talking to Realtors can also provide information.
4. Renter-to-population ratio
It goes without saying that markets with a higher ratio of renters is a better safe haven for apartment owners, managers and investors, as they have a larger pool of tenants from which to choose.
This also puts the leverage in favor of the landlord.
Knowing your investment market’s renter ratio is important for all owners and investors to know.
If you do not already know what your investment market ratios are, this information and chart from the National Multifamily Housing Councilis a resource.
Pigs get fat, hogs get slaughtered
I always share this sentiment with owners, managers and investors who are looking to raise rents.
I am a firm believer in maximizing profits. I like to raise rents each year even if it is just a few dollars because, quite simply, I like to set the boundaries up front for the tenant to expect a rental increase at each anniversary date. This way they are not surprised or upset when it happens.
First and foremost, I look at what changes may have happened to my expenses and of course adjust rents accordingly. When the market will bear more, I believe each owner, manager or investor must decide what is best from a big-picture standpoint.
A larger increase to monthly rent may be warranted as long as it does not inspire tenants to start to compare their current rents with the prospect of moving on.
We all know how costly tenant turnover can be and this will quickly consume the increased rents that you may have obtained.
So to that tune, remember: pigs get fat, and hogs may get slaughtered.