Do you believe rent can keep up?

Question

Hi All,

I'm new to BP and the Real Estate world in general. My question is impossible to answer, and I know that. BUT- nonetheless, I am interested to hear others' opinions on it. With the price of real estate absolutely booming, how many of you are continuing to buy properties? Looking at some of the markets that I am familiar with (meaning places I have lived in the past 10 years - and there are several), home prices seem to be significantly higher, even when looking back only 3-4 years, well after the housing bubble recovery.

I know that RE tends to increase in value over time. I have no problem with that. And were I an appreciation investor, I'd be happy to get in right now, and sell a few years down the line. My question though, is about rental income, and renters in general... Do we believe that those who aren't in positions to buy RE (renters) are going to be able to pay the increased rents that are required to make these high purchase price properties cash flow? If so, why? With prices of goods and services increasing, but wages stagnating, or worse, the unemployed staying home receiving COVID benefits, why do we expect these people to be able to pay increasing rents?

I would love to hear your thoughts and opinions. Again, I know none of us have a crystal ball, and in a sense your guess is as good as mine.

Evan Polaski · Answer

@Ryan Daniels, I am not buying small rentals (SFR and small multi's) not because I think renters won't be able to afford it, but because as you noted, prices are growing faster than rent, assuming there is not forced appreciation (read: renovate units and increase rents).  Each year, the equity in the deal is growing faster than income, and therefore you are earning a lower ROE.

Now, not to say equity growth isn't a significant part of the overall return, but if you are playing in the value-add space and graph where cumulative returns are happening in life-cycle of the deal, you quickly realize it makes the most sense to sell as close to stabilization as possible, as you have hit the point of diminishing returns on the yield curve.Capitalize and reinvest in the next deal.

Theresa Harris · Answer

Most renters don't buy for a few reasons: they don't have the down payment, poor credit, or they don't want the responsibility of owning.  Most of them if they could get a down payment would have lower housing expenses with the mortgage than they would renting.

Wages do go up.  Where I am minimum wages keeps increasing and I think it is now over $15/hour.

Michael Dumler · Answer

@Ryan Daniels Simple economics. I don't see a scenario where rents don't rise, unless we somehow see an influx of supply. With the way the market is heading, it's inevitable. Nonetheless, rent growth will vary by submarket. I think it also depends on the landlord and their situation. Some investors would rather have an excellent tenant that pays on time where rent is set below market value, then to have a poor tenant who is not paying on time where rent is at market.

At the end of day, there's numerous variables to take into consideration. My prediction, the government will roll out another program to subsidize rent (throwing money at the problem without solving the real issue at hand).

Jody Sperling · Answer

You said toward the end of your post that wages are stagnating, but they aren't. The majority of employers across the country have raised their entry level hourly pay from $7.50 to $15.00 in just a few short years. In my lifetime, 36 years, I worked for $5.15 minimum wage: 1/3 the pay of someone doing the same job today.

All signs point toward renting becoming the dominant way to live going forward. Some of the most successful real estate investors including Grant Cardone are all-in on rental property because homeownership has lost its glow.That bodes well for people whose wealth is in rental property.

And perhaps most importantly, the way we work is changing. The reality is, $15hr. can't support a life. $30hr barely can. But so many people are supplementing full-time work with gig work such as driving for Uber or creating online revenue through drop shipping.

Doom forecasting and speculation is nothing but demotivation to do the hard work. A bad deal today is a bad deal yesterday and will be a bad deal tomorrow. Focus on acquiring good deals and the rest will take care of itself. Keep buying until you lose the joy, but don't try to outsmart the market.