Does Multi-family Rents appreciate?

Question

Hi, I am a new investor and have long wondered about rental appreciation rates. Specially rental appreciation rates on lower income multi-family properties (4plexs)... I know rental rates don't follow along with single family home appreciation rates, but I was hoping somebody could shed some light on this topic for me. Thank you.
Taylor Green

Taylor Green · Answer

Thanks for the link Sharon, that is a good read.

Sharon Tzib · Answer

Taylor, Paula Pant just wrote an excellent blog on this topic:

http://www.biggerpockets.com/renewsblog/2013/07/24/adjust-rent-for-inflation/

Read the comments - lots of different opinions but will probably help you answer how you want to do things.

Johann Jells · Answer

I've wondered what the best metric to track rents is. I've looked at CPI, and I've followed the HUD Fair Market Rents (used for section 8) to get an idea of movements.  Why Doesn't Rentometer publish history graphs?  According to HUD it went up 2.7% here 2012-2013 for 1br's. 4 br, of which I have 2 railroads style, went up 12.4%!!!  Hard to believe.

Jeff Greenberg · Answer

Taylor Green take a look at your competition.  What are they offering? Is your property a + or - from theirs on key aspects: location, unit size, floor plan, school district, public transportation, amenities, allbills paid,etc.  If you are at 100% your rents are to low.  It is good to always include a nuisance increase every year.  A $10 increase every year is easier than a $50 increase in 5 years.  Even though the increased NOI may not increase the property value as it does in CRE, it still could help the sale down the road.

Al Williamson · Answer

Taylor Green I recommend you take in all the intangible factors when considering an increase. You gotta use your best judgment at the time.

It's art - not science. Keep those units filled!

Taylor Green · Answer

Thanks Al. That's a good idea... Do you recommend a small increase in rent every year or only try and boost rents when there is a vacancy? If unemployment rates and other factors remained the same...

Taylor Green · Answer

Thanks for responding Joel. Do you factor in the 2.5-3% rental projection when your analyzing a multi-family.... Or do you stick to just the cash flow analysis? Thanks.

Al Williamson · Answer

Hey Taylor Green I'll take a stab at your question. I always pay close attention to the unemployment stats as an indicator for the ability to bump up rates. The more unemployment rates drop in Phoenix the more you'll be able to advertise higher rental rates and still get calls.

Now there are many other factors you want to pay attention to as well, such as positive/negative changes in your neighborhood, your competition, and the general sentiment in your part of Phoenix.

If you're feeling the need for more income, please open yourself up to the idea that you may be able to help your tenants cooperate and reduce their individual expenses. You would, of course, charge a coordination fee, but they might still see a 50%+ savings.

That's the general idea - see what you can apply the concept to.

Joel Owens · Answer

It's market specific.

Some say do not count on rent increases at all and others if the market is going up like crazy 5% a year then they will plug that number in.

You have to look at the property you are wanting to purchase rent history and turnover and what rent increases they have been able to get each year while still maintaining 90% occupancy or better.

Even if a market is hot I like to use 2.5% to 3% a year for projections.