It is a great time to be a landlord. In fact, landlords have been having a great time enjoying some of the fasted growth in rent rates in recent history. Being aware there is a cap to the growth is now key.
Rental demand continues to remain very strong, which allows landlords to be bullish on rental rates.
The questions investors are now asking are, “How high can they go?” and “For how long can we raise the rates?”
Great questions, and one needs to look deeper into the market you are investing in to answer that.
Rising rents are a trend, but how high will they go?
There are a larger number of new apartment buildings being built to address the need for more rentals.
Everything I read and study suggests rents will rise through 2015 but at a slower pace than in the past.
While rental demand continues to be very strong, there are a larger number of new apartment buildings being built to address the needs for more rentals which will change the balance of rental supply and demand.
While it will most likely take the balance of this year to get these rental units built, the rental demand will remain in favor of the landlord through the end of the year and into 2016. According to Reuters, the national vacancy rate closed out 2014 at 4.2% which is a very low national number.
Local markets, however, vary on rent
I always enjoy looking at national numbers, as I believe they are helpful to determine an average or a benchmark to compare against.
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 should be local in nature and not relying on national statistics. I see too often local rent information misinterpreted for this reason. Diligence of course means nothing unless it is providing you accurate information.
Three big things you need to know before you raise the rent
You want to consider what is going on in your local rental market in order to know whether you can increase rent and what your rental future will look like.
1. Affordability
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 local Housing Portal to determine fair market rents for a particular area. Rents can only rise until affordability peaks. Another great way to determine this is to establish the area’s median income. Affordability is best when a monthly rent payment is around one-third of the median take home pay. Once it gets beyond this point investors may experience vacancies and or late rent coming in, as affordability has peaked. Investing where peak rent is needed to be a sound investment may warrant deeper consideration as sustainability is threatened. Another great tool is Rentometer. This is a cool tool that will tell you what other homes have recently rented for in your area. Also this tool is a great asset when buying property to make sure your anticipated rents are in line with the market.
2. Housing availability
While bigger cities tend to be building more housing 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.
3. Renter-to- population ratio
It goes without saying that markets with a higher ratio of renters is a better safe haven for investors, as they have a larger pool of tenants to choose from. This also puts the leverage in favor of the landlord. Knowing your investment markets renter ratio is important for all investors to know. If you do not already know what your investment market ratios are, this interactive map from the U.S. Commerce Department is a valuable resource.
Pigs get fat, hogs get slaughtered
I always share this sentiment with 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 investor must decide what is best from a big picture standpoint.
A larger increase to monthly rent may be great as long as it does not inspire tenants to start to compare their current rents with the prospect of moving on.
We investors 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.
Visit Larry’s site here.
0 Comments